Few federal regulations over the past five years have produced more needless concern by stakeholders than the independent contractor rules under the federal Fair Labor Standards Act (FLSA) issued by the different administrations. One administration’s Labor Department issues regulations and the next administration changes them; and the new Trump Administration is likely to change them once again. None of these rules change the law itself. They simply offer alternative interpretations of decisions rendered by the courts over the past several decades. This type of administrative ping-pong match is little more than “white noise.” It should not distract businesses from taking the types of steps noted below to enhance their IC compliance, which will minimize the likelihood of being sued and better position themselves to survive any legal challenge to their IC business model.
Among the legal developments we summarize below, the one that received the most attention in January arose from an appeal to the U.S. Court of Appeals for the Fifth Circuit. That court recently granted the Trump Administration’s request to pause for 60 days its consideration of an appeal filed by a number of private litigants who had sued the Labor Department during the Biden Administration, seeking to strike down the Biden rule governing IC status. A federal district court had previously denied the challenge. In its request for short stay of the appeal, the Trump Administration did not state it was withdrawing the Biden regulation, but did note that the new Labor Department leadership needed 60 days to familiarize itself with the issues and decide how to proceed. It is widely anticipated that the new administration soon will announce that it plans to withdraw the Biden Administration’s IC regulations, thereby rendering moot the Fifth Circuit’s appellate review.
As we have stated in prior blog posts, the Labor Department has absolutely no power to find that a company or a worker has been classified or misclassified as an IC. Only the courts can do so. To that point, no federal court has ever relied upon or even cited to either the prior Trump or current Biden regulation on IC status to decide if a single worker has or has not been properly classified as an IC. Courts do not need administrative agencies to interpret judicial decisions; they are perfectly adept at applying their own judicial decisions and affording parties an opportunity to brief the issues and relevant cases. The competing regulations do little more than “argue” about the meaning of court cases, much like parties do in their legal briefs to the courts.
Rather than wondering which administration’s IC regulation ultimately will be given effect at any particular time, businesses would be wise to simply disregard the “noise” and focus on enhancing their compliance with all applicable federal and state laws and all competing regulations, regardless of which administration occupies the White House. Many companies have sought to do so by use of a process such as IC Diagnostics (TM), which is designed to maximize IC compliance in a customized and sustainable manner under a host of applicable federal and state laws. Many state law tests for IC status not only vary considerably from both the Biden and Trump Administration regulations under the FLSA, but the test for IC status under the FLSA even varies from the tests under other federal laws — as noted in the first legal development summarized below.
In the Courts (5 cases)
ADULT CLUB UNABLE TO DISMISS EXOTIC DANCER’S HOSTILE WORK ENVIRONMENT CLAIM UNDER THE “HYBRID” TEST FOR IC STATUS. A federal district court in Florida denied summary judgment to an adult entertainment club in a claim by an exotic dancer classified as an IC who alleged that Tootsie’s Cabaret Miami violated Title VII of the Civil Rights Act of 1964 for sexual harassment due to a hostile work environment. The court applied to the Title VII claim a test for IC status that is commonly referred to as a “hybrid test,” which combines the economic realities test used under the FLSA with the common law test used in claims brought under ERISA. The court noted, “Under the hybrid approach, [a court] look[s] at the common-law agency test, tempered by a consideration of the economic realities of the hired party’s dependence on the hiring party.”
The court considered 11 factors, finding that five favored IC status, five favored employee status, and one was neutral. It then separately considered the employer’s right to control performance of the services. Although the plaintiff dancer could choose what outfits to wear, what dances to perform and with whom, the club regulated her behavior, minimum fees, clocking in and out, and stage rotations. Finding there was a genuine dispute of material facts bearing on the question of whether the dancer was an employee or IC, the court denied summary judgment sought by the club and set the case down for trial. Doe v. Miami Gardens Square One Inc., No. 1:23-cv-23497 (S.D. Fla. Jan. 13, 2025). In the past, exotic dancers have generally succeeded in establishing that they had been misclassified as ICs, but most of those cases have applied the stricter economic realities test. Regardless of which test is used, though, we have noted in a prior blog post that even strip clubs can successfully sustain an exotic dancer’s status as an IC if they use an IC compliance tool such as IC Diagnostics (TM).
BIDEN IC RULE IS SUSTAINED BY ANOTHER COURT BUT TRUMP’S LABOR DEPARTMENT IS POISED TO WITHDRAW IT ANYWAY. Two case developments last month pertained to the Biden Administration’s regulation on whether a worker is an IC or an employee under the FLSA. In New Mexico, a federal district court judge rejected a trucking company’s request to strike down the Biden Administration’s IC rule. The plaintiff, Colt & Joe Trucking LLC, did not convince the judge that it had suffered harm as a result of the Biden rule, concluding the plaintiff therefore lacked “standing” to pursue its legal challenge. The court also concluded that even if the plaintiff had standing to sue, the rule was neither arbitrary nor capricious under the Administrative Procedure Act. Colt & Joe Trucking LLC v. U.S. Department of Labor, No. 24-cv-00391 (D. New Mex. Jan. 9, 2025). This lawsuit is but one of several legal challenges to the Biden IC rule. Thus far, none has been successful.
As noted above, the Fifth Circuit delayed oral argument in a case where a transportation company has also challenged the Biden Administration’s IC rule, affording the Trump Administration 60 days to inform the appeals court of its position. Commentators fully expect the Trump Administration to inform the appeals court that it plans on rescinding or withdrawing the Biden regulation, likely rendering moot the court case. Frisard’s Transportation, L.L.C. v. U.S. Department of Labor, No. 24-30223 (5th Cir. Jan. 24, 2025). In the event the Trump Administration thereafter issues a new IC regulation, it too will likely have little impact on the law yet, like each of the prior IC regulations, will generate a great deal of news and commentary.
ANOTHER GIG STAFFING COMPANY CONSENTS TO A JUDGMENT IN IC MISCLASSIFICATION CASE BY SAN FRANCISCO’S CITY ATTORNEY. San Francisco City Attorney David Chiu announced that another gig staffing company, GigSmart, has consented to a judgment remedying the alleged IC misclassification of its workers. Through its app, GigSmart, a temporary staffing company, provides clients with workers who are engaged and paid by GigSmart to fill open shifts as general laborers, package handlers, event staff, and merchandisers. The complaint by the city alleged that the company violated California law by misclassifying its shift gig workers as ICs and by failing to provide overtime compensation premiums, making unlawful deductions from wages, and failing to provide business expense reimbursements, meal breaks, and paid sick leave.
According to a news release issued by the City Attorney’s Office on January 17, 2025, a San Francisco Superior Court judge approved the final stipulated judgment and injunction on January 16, 2025, requiring GigSmart to pay its California workers $703,000 in restitution and to reclassify as employees its workers in California. People of the State of California v. GigSmart, Inc., Case No. CGC-24-620547 (Super. Ct. San Francisco County, Cal. Jan. 16, 2025). As we reported in a blog post last month, another gig staffing company, WorkWhile, agreed to a consent judgment with Chiu requiring it to pay $1 million to workers in California that it had classified as ICs and reclassify them as employees instead of ICs. And a year ago, we reported in a post that Qwick, Inc., another gig staffing company, settled an IC misclassification case brought by the San Francisco City Attorney, agreeing to pay $2.1 million and reclassify as employees its hospitality workers in California.
GIG COMPANIES SUED FOR UNFAIR COMPETITION BY A STAFFING COMPANY PROVIDING HOSPITALITY WORKERS CLASSIFIED AS EMPLOYEES. A hospitality staffing company has sued several competitors in California asserting unfair competition due to their alleged misclassification of workers as ICs and not employees. The plaintiff, Party Staff, Inc., provides its clients with catering and dining services workers, classifying them as employees, paying them minimum wage and overtime compensation, remitting payroll taxes, and maintaining workers’ compensation insurance for such workers.
In its complaint brought under California’s Unfair Competition Law, Party Staff claims that it has been significantly undercut by the rival companies it sued, Qwick, Instawork, and Tend, because they allegedly misclassify their workers as ICs. Party Staff contends that misclassification enables those companies to offer lower prices and thereby gives them an unfair competitive advantage. Party Staff asserts in its complaint that the defendants cannot satisfy Prongs A and B of the California ABC test for worker classification because, among other things, they exercise a high degree of control over the performance of the hospitality workers’ tasks by using a comprehensive system of standards, rules, and requirements, and the workers provide services within the usual course of the defendants’ staffing businesses. The Party Staff v. Qwick, Inc., No. CGC-25-621259 (Super. Ct. San Francisco County, Cal. Jan. 8, 2025).
Regulatory and Administrative Developments (3 matters)
BIDEN ADMINISTRATION’S FTC ISSUES LAST MINUTE POLICY STATEMENT THAT IC’S ARE NOT SUBJECT TO ANTITRUST LIABILITY WHEN BARGAINING FOR WAGES. The Federal Trade Commission, in the final week of the Biden Administration, issued a Policy Statement that ICs are shielded from antitrust liability when engaging in labor bargaining and organizing activities. The Policy Statement clarified the FTC’s view that “the labor exemption’s application does not turn on whether a worker is formally classified by a firm as an independent contractor under the Fair Labor Standards Act (‘FLSA’), the National Labor Relations Act (‘NLRA’), tax law, state common law, or any other law.” The Policy Statement continued: “Rather, workers’ organizing and collective bargaining activity may be protected from antitrust liability when what is at issue is the compensation for their labor or their working conditions.” Lack of a formal employer-employee relationship, according to the FTC, does not place the worker outside the scope of the labor exemption in those instances.
In its January 14, 2025 news release issuing the Policy Statement, FTC Chair Lina M. Khan stated: “Categorically excluding all independent contractors from the protections of the labor exemption would give employers both the incentive and opportunity to exploit asymmetries in antitrust liability protection between workers….For example, businesses would have an opportunity and incentive to classify (or misclassify) their workers as independent contractors to suppress wages and to gain an unfair advantage against competitors who provide better compensation and job conditions to workers.” The news release focused on the gig economy, stating: “Companies increasingly rely on gig workers and independent contractors. As more of these workers consider unionizing to secure better pay and conditions, the FTC is making clear that the antitrust laws do not stand in the way of their efforts to collectively organize or bargain.” This Policy Statement does not have the force and effect of law, and is likely to be rescinded or ignored by the Trump Administration’s FTC.
IRS ISSUES NEW SECTION 530 SAFE HARBOR GUIDANCE IN WANING DAYS OF BIDEN ADMINISTRATION. In the last weeks of the Biden Administration, the IRS issued Revenue Ruling 2025-3 and Revenue Procedure 2025-10, both of which provide interpretations, clarifications, and revisions to Section 530 of the Revenue Act of 1978. Section 530, commonly referred to as “safe harbor” provisions, provides that an employer will not be liable for federal employment taxes as well as any related interest or penalties pertaining to one or more workers incorrectly classified by an employer as non-employees, provided certain requirements are met. Essentially, Section 530 relief is a free pass for companies that the IRS may otherwise have found to have misclassified one or more workers as ICs, but only if the companies acted consistently in issuing 1099s to such workers, treated all similar workers in the same manner, and had a reasonable basis to treat such workers as ICs. In addition to adding some useful clarifications of certain provisions in prior IRS documents and incorporating statutory changes to Section 530 since it was enacted in 1986, the thrust of the two IRS publications is to limit somewhat the availability of Section 530. Revenue Ruling 2025-3 includes the IRS’s view of the application of Section 530 to five factual scenarios. Whether the incoming Administration’s IRS leadership will rescind, withdraw, or reissue a new Section 530 Revenue Ruling and Revenue Procedure is unclear at this time, but would not be surprising if it did.
ILLINOIS ON-DEMAND STAFFING COMPANY AGREES TO PAY DAMAGES TO MISCLASSIFIED WORKERS AND RECLASSIFY THEM AS EMPLOYEES. On-demand labor marketplace company Veryable Inc. has agreed to pay $320,000 in a settlement agreement with Illinois Attorney General Kwame Raoul resolving allegations that the company misclassified ICs who were referred to customers seeking labor through the company’s online platform. Veryable identifies itself as an on-demand labor marketplace designed for manufacturing, logistics, and warehousing that empowers businesses to match headcount to demand on a daily basis through the concept of a labor pool. Its website describes a labor pool as a network of independent workers familiar with a businesses’ operation who are available to work on an as-needed basis. According to a news release issued by the Office of the Attorney General on January 15, 2025, an investigation had been conducted that revealed workers placed through the company’s on-line platform had been misclassified, were paid at a regular hourly rate of pay without any overtime compensation when applicable, were not paid for a four-hour minimum when being placed in jobs that were canceled, and were not engaged by a registered day and temporary service provider. The news release states that the settlement provides damages to more than 870 eligible workers covering unpaid wages and requires that requires the company to classify as employees all future workers who receive assignments through the company’s platform.
