SCOTUS Declines to Review Independent Contractor Case While Biden-Era Rule in Limbo

The United States Supreme Court declined to review a case that could have shed light on when employees count as independent contractors. The case involved a Fifth Circuit decision affirming the dismissal of a welding inspector’s claim that he was actually an employee and not an independent contractor. The Fifth Circuit also rejected his claim he was entitled to unpaid overtime under the Fair Labor Standards Act (FLSA).

Meanwhile, the current administration’s Department of Labor (DOL) has not addressed the still on-the-books “Biden rule,” which made it harder for employers to classify workers as independent contractors and was strongly supported by organized labor groups.

In many ways, the rejection of the case is not surprising. In its opinion in Guillermo Gray v. Killick Group LLC, the Fifth Circuit followed its “economic-realities test”, which looks at multiple factors to determine if a worker is in business for themselves or a misclassified employee, opening the door to FLSA liability.

The five factors considered are:

1. The degree of control exercised by the alleged employer
2. The extent of the relative investments of the worker and the alleged employer
3. The degree to which the worker's opportunity for profit or loss is determined by the alleged employer
4. The skill and initiative required in performing the job
5. The permanency of the relationship

In affirming the District Court’s grant of summary judgment against Gray, the Fifth Circuit noted that:

• Gray had his own independent business and marketed his services to the public.
• Gray supplied his own vehicle and tools and paid for his own certifications and expenses.
• Gray negotiated his hourly rates for services provided to Killick, his tax returns classified money earned as business profits rather than wages, and he performed work for at least one other company.

While the company in this case prevailed, the issue of misclassifying workers as independent contractors can result in serious liability for employers under the FLSA. Employees can seek recovery of back wages, and these impacts can multiply in collective actions dealing with large numbers of similarly situated individuals. It can also involve civil and criminal liability for nonpayment of payroll taxes for employees under the Internal Revenue Code.

However, employers face some uncertainty over how to make that call. In 2024, the Biden administration’s DOL made it harder to treat workers as independent contractors. The 2024 rule replaced a 2021 rule under the first Trump administration, that was considered more employer-friendly and more amenable to finding an independent contractor relationship.

After the election, commentators anticipated that the Trump DOL would quickly rescind the 2024 “Biden Rule.” But so far, that has not happened. While it is still widely expected to be eliminated, it is less clear what, if anything, will replace it. The DOL may reinstate the 2021 rule, or it may not replace the rule with anything. This would be in line with the U.S. Supreme Court’s recent Loper Bright decision, which held that courts need not defer to an administrative agency’s interpretation of a law. In that case, courts would rely on their existing precedent.

Further complicating things is the fact that the new U.S. Secretary of Labor Lori Chavez-DeRemer has long been seen as a supporter of organized labor, which strongly supported the Biden rule. In addition, other federal and state laws have their own independent contractor standards.

In the meantime, employers should proceed with caution. When deciding to classify a worker as an independent contractor, employers should consider some basic principles to determine if they are indeed running their own business:

• What degree of control does the worker have over the services provided? Do they set their own schedule and pricing, which is indicative of an independent contractor, or is it determined by the employer?
• What is the worker’s investment in equipment and other business-related expenses? Do they hold themselves out as a business, either through advertising or by formation of a business entity? Do they have the opportunity for profits or losses based on their efforts, as opposed to guaranteed wages from the employer?
• Is the work they do integral to the company’s core business? Someone hired to paint the lunchroom at a widget factory is most likely an independent contractor, whereas someone involved in the widget-making process is most likely an employee.
• Is it a non-exclusive relationship? If the worker performs services for other companies, it is supportive of independent contractor status, as opposed to performing work exclusively for one business?

Even utilizing these factors, making this determination can still result in gray areas where the distinctions are blurred. Before making any decisions in uncertain situations, employers should consult with legal counsel.

Contact Mark Fijman or any member of the Phelps labor and employment team with questions.