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Independent Contractor Regulation Update: DOL Withdraws Opinion Letters, Delays Regulation Effective Date

March 1, 2021
INDEPENDENT CONTRACTOR REGULATION UPDATE: DOL WITHDRAWS OPINION LETTERS, DELAYS REGULATION EFFECTIVE DATE

Recently, on February 19, 2021, the U.S. Department of Labor (DOL) withdrew for the third time in three weeks an opinion letter - FLSA2019-6 - addressing the issue of whether workers are independent contractors. 

Earlier, on January 26, 2021, DOL withdrew two opinion letters - FLSA2021-9 and FLSA2021-8 - in which DOL concluded the workers in question were independent contractors.  DOL had issued FLSA2021-8 and FLSA2021-9 on January 19, the last full day of the Trump administration, and relied on its new independent contractor regulation to draw its conclusions.  At the time the two letters were issued, however, that new independent contractor regulation, which was announced in November 2020, was not yet effective since the effective date was set for March 8, 2021.  Indeed, DOL withdrew FLSA2021-8 and FLSA2021-9 soon after inauguration day on the grounds that “[t]hese letters were issued prematurely because they are based on rules that have not gone into effect.”

We covered the new independent contractor regulation in our February 5 GovCon Video Blog.™  As we mentioned, and as DOL itself has acknowledged, that new regulation is the first generally applicable regulation that DOL has ever issued setting forth criteria for determining whether workers are employees or independent contractors under the Fair Labor Standards Act (FLSA).  The new regulation adopts a five-factor “economic reality” test for making the determination, and a number of commenters have suggested that the new regulation will make it easier for employers to classify workers as independent contractors.  (For more on the new regulation, see our vlog here.)  This notion is seemingly borne out by DOL’s reliance on the new regulation in FLSA2021-8 and FLSA2021-9 to conclude workers were independent contractors. 

At the time of our vlog, the new administration had implemented a freeze on pending new regulations that had not yet taken effect.  Since then, on February 9, DOL proposed to move the effective date of the new independent contractor regulation from March 8 to May 7.  According to DOL, the new regulation “would adopt a new legal standard for determining employee and independent contractor status under the FLSA.”  Moreover, delaying the effective date would allow DOL

"more time to further review and consider, among other important issues, the legal, policy, and/or enforcement implications of adopting that standard, such as: Whether the rule effectuates the FLSA’s purpose, recognized repeatedly by the Supreme Court, to broadly cover workers as employees; the costs and benefits attributed to the rule, including the assertion that workers as whole will benefit from the rule; and/or whether the rule’s explanation of the standard provides clarity for stakeholders and for the purposes of WHD enforcement, as was intended.”

In its announcement of the delay, DOL also instructs employers, in the meantime, to look to existing guidance in DOL's Fact Sheet #13 and to the legal analysis in current federal court decisions for the standards that DOL and courts will apply.

Thus, DOL’s proposed delay makes it clear that the new independent contractor regulation will undergo renewed and intense scrutiny that may ultimately lead to its withdrawal, and that any regulatory standard for determining whether workers are contractors or employees, if it is ever issued, will likely be re-formulated from the new regulation.

DOL’s nearly immediate withdrawal of the two “last minute,” and yet premature, opinion letters under the prior administration that concluded workers were independent contractors is not surprising in light of the status of the new regulation that the letters relied on when they were issued, and given DOL’s subsequent decision to subject the new regulation to a fresh new look.

More perplexing, however, is DOL’s recent decision to reach back to April 2019 to withdraw its FLSA2019-6 opinion letter in which it had also concluded that workers were independent contractors.  DOL withdrew that letter after it announced its decision to delay implementation of its new regulation on the grounds that it “addressed the same issue under consideration by the Department—independent contractor status under the FLSA.”  But that April 2019 opinion letter purportedly relied on the formulation of the economic reality test for determining independent contractor status that is currently applied by the Supreme Court and federal courts and that DOL now points employers to for guidance.

In any event, as we mentioned in our vlog, given how much subcontracting takes place in federal contracting and given that the line between independent contractor and employee status may be further blurred by the prevalence of remote working during the Covid-19 pandemic, government contractors should remain alert to any further developments. 

To read or obtain a copy of DOL's announcement of its proposed delay of the new independent contractor regulation go here.

To read other articles from The GovCon Bulletin™ go here.

Independent Contractor Regulation Update: DOL Withdraws Rule

April 23, 2021
INDEPENDENT CONTRACTOR REGULATION UPDATE: DOL WITHDRAWS RULE

As we discussed in our article last month (here), in February the U.S. Department of Labor (DOL) decided to delay until May 7 the implementation of its new independent contractor regulation, which was released in November 2020 under the prior administration.  The new regulation adopts a five-factor “economic reality” test for making the determination of whether a worker should be classified as an employee or an independent contractor under the Fair Labor Standards Act (FLSA), and two of the factors are designated as “core factors” that carry greater weight.  The first core factor is the nature and degree of control over the work performed by the worker and the second core factor is the worker's opportunity for profit or loss.  (For more on the new regulation see also our video blog.)

More recently, however, on March 12, 2021, DOL announced in a notice of proposed rulemaking that it was withdrawing the new independent contractor regulation.  Given that DOL withdrew two opinion letters that relied on the new regulation shortly before it announced in February the delay of the regulation’s implementation, DOL’s more recent decision to withdraw the regulation altogether is not unexpected.  More surprising, perhaps, is DOL’s detailed analysis setting forth the reasons for the withdrawal - a few of which we discuss below - that amounts to a thorough take-down of its own regulation.

In its withdrawal announcement, DOL concluded that the formulation of the economic reality test under the new regulation had never been used by any court or by DOL itself, and that it was not supported by the text of the FLSA or case-law applying the FLSA.  DOL expressed concern that the new regulation’s elevation of the “control” and “opportunity for profit or loss” factors would, in situations in which the two core factors aligned, largely render the remaining factors inconsequential except in rare circumstances.  DOL asserted that the new approach was inconsistent with the position expressed by the Supreme Court and other federal courts that no single factor should be dispositive.  DOL also decided that weighing the “control” factor more heavily than other factors was inconsistent with the Supreme Court’s analysis of the term “employ” in the FLSA that lead the Court to conclude that the scope of employment under the FLSA is broader than under a common law control analysis.

DOL’s withdrawal of the new regulation also rose out of a concern that the changes under the new regulation would not clarify how to distinguish between employers and independent contractors under the FLSA, as intended, but instead would cause confusion or lead to inconsistent outcomes.

DOL also reasoned that withdrawing the rule would cause no disruption since the rule has not yet taken effect.  According to DOL, no courts have applied the rule to decide any cases.  DOL also cited its earlier withdrawal of the two opinion letters relying on the new rule and the, otherwise, lack of any implementation of the rule on its part.  Lastly, DOL pointed to its primary guidance in DOL Fact Sheet #13 - Employment Relationship Under the Fair Labor Standards Act (FLSA) - which still remains and does not contain the new regulation’s analysis for determining whether a worker is an employee or independent contractor.

To read or obtain a copy of DOL's notice of rulemaking announcing its proposed withdrawal of the new independent contractor regulation go here.

To read other articles from The GovCon Bulletin™ go here.

FAR Update: Final Rule Limits Use of LPTA Criteria By Civilian Agencies

February 10, 2021
FAR UPDATE: FINAL RULE LIMITS USE OF LPTA CRITERIA BY CIVILIAN AGENCIES

Last month, on January 14, 2021, DoD, GSA and NASA issued a final rule that sets out new criteria, as well as limitations, on the inclusion of lowest price technically acceptable (LPTA) source selection criteria in solicitations by civilian agencies.  Initially proposed in October 2019, the final rule makes no changes and only a few minor edits to the October 2019 proposed rule, and is set to become effective on February 16, 2021.

The new FAR rule is similar to a final rule that DoD issued in October 2019 implementing in DFARS 215.101–2–70 restrictions on the use of LPTA criteria by defense agencies.  (That DoD final rule can be found here.)

In particular, the final FAR rule amends FAR 15.101-2 to require the use of the LPTA selection process only when six (6) conditions are satisfied:

(1) An agency can comprehensively and clearly describe the minimum requirements expressed in terms of performance objectives, measures, and standards that will be used to determine acceptability of offers;
(2) An agency would realize no, or minimal, value from a contract proposal exceeding the minimum technical or performance requirements set forth in the request for proposal;
(3) The agency believes technical proposals will require no, or minimal, subjective judgment by the source selection authority as to the desirability of one offeror's proposal versus a competing proposal;
(4) The agency has a high degree of confidence that reviewing technical proposals of offerors other than the lowest bidder would not result in the identification of factors that could provide value or benefit to the agency;
(5) The contracting officer has included a justification for the use of an LPTA evaluation methodology in the contract file; and
(6) The agency has determined that the lowest price reflects total cost, including for operations and support, of the product or service being acquired.

The new FAR rule also amends FAR 15.101-2 to instruct contracting officers to avoid using the LPTA selection process, to the maximum extent practicable, in procurements that are predominantly for the acquisition of:

(1) Information technology services, cybersecurity services, systems engineering and technical assistance services, advanced electronic testing, audit or audit readiness services, health care services and records, telecommunications devices and services, or other knowledge-based professional services;
(2) Personal protective equipment; or
(3) Knowledge-based training or logistics services in contingency operations or other operations outside the United States, including in Afghanistan or Iraq.

The additional criteria and restrictions, predictably, may lead to an increase in the number of protests challenging a civilian agency’s use of LPTA procedures in its procurements. 

To read or obtain a copy of the final rule go here.

To read other articles from The GovCon Bulletin™ go here.

FAR Update: Final Rule Implements New Buy American Requirements

January 21, 2021
FAR UPDATE: FINAL RULE IMPLEMENTS NEW BUY AMERICAN REQUIREMENTS

Earlier this week, on January 19, 2021, the U.S. Department of Defense, General Services Administration, and National Aeronautics and Space Administration issued a final rule that amends “Buy American” regulations under the Federal Acquisition Regulations (FAR).  The final rule makes two significant changes first, it increases the “domestic content” requirement under the regulations; second, it increases the price preference for domestic products.

As reflected in FAR, “Buy American” restrictions generally are not a flat-out ban on the acquisition of foreign products.  Rather, when applicable to a procurement, the Buy American restrictions impose a pricing penalty to foreign products when a contracting officer evaluates prices from bidders and offerors.  Thus, “domestic” items in comparison are given a pricing preference. 

Prior to the final rule, under FAR, a manufactured item was “domestic” if the item met two requirements a manufacture requirement and a component/content requirement.  More specifically, a product was “domestic” if it was manufactured in the U.S. and if more than 50 percent of its component parts (determined by cost of the components) was also mined, produced or manufactured in the U.S.

Bids for items that did not meet these requirements – i.e., bids of “foreign” items – were subject to a price penalty or increase (for evaluation purposes only).  If the lowest domestic offer was from a large business, the evaluation price of a competing foreign item was increased by 6 percent.  If the lowest domestic offer was from a small business, the evaluation price of a competing foreign item was increased by 12 percent.

Now, as amended by the final rule, the U.S. domestic content threshold for determining if an item is foreign or domestic is raised from 50 percent to 55 percent if the item is not wholly or predominantly iron or steel.  For items that are wholly or predominantly steel, iron or a combination of both, the threshold is raised to 95 percent – i.e., the cost of the iron or steel not produced in the U.S. must constitute less than 5 percent of the cost of all of the components.

Also under the final rule, the pricing penalty or enhancement for foreign items has been raised significantly.  If the lowest domestic offer is a large business, the evaluation pricing of a foreign item is increased now by 20 percent; if the lowest domestic offer is from a small business, foreign item evaluation pricing is increased by 30 percent.

Lastly, under the final rule, commercially available-off-the-shelf (COTS) products, other than products consisting wholly or predominantly of iron, steel or both, remain exempt from the domestic content requirement.  However, iron and steel COTS products, other than iron and steel fasteners, are now subject to the 95 percent domestic content requirement.

Although the final rule is effective as of January 21, 2021, it will not be implemented into new solicitations until February 22, 2021. 

To read or obtain a copy of the final rule go here.

To read other articles from The GovCon Bulletin™ go here.