Navigating The Perfect Storm

What is the 2021 update?

A new year and a new administration in Washington, DC mean more changes on the labor compliance front. 2021 promises to be a busy year with continuing developments on the federal and state level when it comes to worker classification between W-2 employees and 1099 freelance contingent workers.

Prior to the change in administration, on January 6, 2021, the United States Department of Labor (U.S. DOL) announced a final rule clarifying the standard for employee versus independent contractor (“1099s’”). Under the Fair Labor Standards Act (FLSA), the DOL reaffirmed an “economic reality” test to determine whether an individual is in business for him or herself (independent contractor) or is economically dependent on a potential employer for work (FLSA employee).

Under this final rule, 2 core factors are integral to determining whether someone is an independent contractor:

  1. The nature and degree of control over the work

  2. The worker's opportunity for profit or loss based on initiative and investment

  3. Other factors that may serve as additional guideposts in the analysis are:

    1. Whether the work is part of an integrated unit of production

    2. The amount of skill required for the work

    3. The degree of permanence of the working relationship between the worker and the potential employer

The final rule provides 6 fact-specific examples applying the factors, including an example using a business that provides opportunities through an independent contractor model, like rideshare companies Uber and Lyft.

When will this go into effect and what can we expect?

The effective date of the final rule is March 8, 2021 unless it is undone by the new administration, as many expect. The final rule simplifies the DOL’s approach to determining whether workers are employees or independent contractors and generally is perceived to be business friendly. However, even though the final rule provides employers some clarity when using independent contractors, it is limited in its application. Keep in mind that this rule only applies to employee versus independent contractor determinations under the FLSA.

Overall, we expect more aggressive enforcement of employment regulations from the federal government under the Biden administration, including on worker classification issues. 2021 is likely to be filled with non-stop legislation, regulatory and executive actions.

What does this mean for me and my business?

Will the final rule really become effective on March 8, 2021? Probably not. The Biden administration is likely to rescind or revise the final rule. Before employers make changes to their worker classification practices, they should see how the incoming administration approaches this issue. Specifically, here are some data points to consider:

  • According to Biden’s Plan for Strengthening Worker Organizing, Collective Bargaining, and Unions, Biden will work with Congress to establish a federal standard modeled on the ABC test for all labor, employment, and taxes.

  • Currently, the rule is unlikely to have a significant impact to employers given the likelihood that the Biden administration will take steps to undo the final rule. Also, keep in mind that the DOL’s FLSA test is just one of several standards and risk issues employers need to consider in evaluating worker misclassification.

  • Even with this DOL rule, employers remain subject to classification standards set by the IRS, other federal laws (FMLA, OSHA, ERISA) and state laws. These standards are not consistent and they change frequently.

  • Employers approach misclassification differently depending on their work locations, industry, and overall risk tolerance. Risk-adverse employers with employees in multiple jurisdictions generally have processes to ensure that the independent contractors they use qualify under the most stringent applicable standards.

What’s going on in California?

California has been a hotbed of activity related to employee and independent contractor status and has been the focus of national attention. In 2018 California enacted AB 5, a law establishing a new strict “ABC test” to identify workers as employees or independent contractors. AB 5 created a presumption that workers are employees, but also included several exemptions. In 2020, California enacted AB 2257 which exempted additional industries and occupations from the strict ABC test. Currently, approximately 75 occupations are exempt from AB 5. For more information, see

In November 2020, California voters approved Proposition 22, the ballot initiative that classifies drivers for app-based transportation and delivery companies as independent contractors and requires app companies to provide those workers certain benefits. This is significant because it creates a new class of worker in between an independent contractor and employee. This hybrid approach – an independent contractor with benefits – will be pursued by rideshare companies in other jurisdictions and may be the start of a trend. On January 12, 2021, CA rideshare drivers filed a lawsuit to overturn Prop 22.

What’s next?

How gig workers should be treated under federal labor law is a major issue debated among regulators, labor unions, workers, and the business community. That debate will continue in 2021 and will likely result in changes by the new administration.

In the past, the Trump administration and many businesses have generally supported policies to keep these workers classified as independent contractors rather than employees under state and federal laws. The FLSA deals mainly with minimum wage and overtime protections while the National Labor Relations Act (NLRA) deals with unionization rules. Both apply only to employees. Workers classified as independent contractors generally aren’t eligible for paid leave, workers’ compensation, and unemployment insurance. Rideshare companies will likely pursue a hybrid approach in other jurisdictions, and it is possible this approach will be extended to other industries. This will be an area that will require on-going monitoring in 2021 and years to come.

Compliance Resources

ADP maintains a staff of dedicated professionals who carefully monitor federal and state legislative and regulatory measures affecting employment-related human resource, payroll, tax and benefits administration. This information is provided as a courtesy to assist in your understanding of the impact of certain regulatory requirements and should not be construed as tax or legal advice. Such information is by nature subject to revision and may not be the most current information available. ADP encourages readers to consult with appropriate legal and/or tax advisors. Please be advised that calls to and from ADP may be monitored or recorded.

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