Labor & Employment Law Daily Wrap Up, EMPLOYEE STATUS—D.N.M.: Trucking company fails in challenge to DOL’s 2024 Rule regarding independent contractor status, (Jan 13, 2025)

By Ronald Miller, J.D.

The court rejected the employer’s contention that the Supreme Court’s decision to overturn Chevron’s deference for agency actions in Loper Bright Enterprises v. Raimondo extends to the court’s arbitrary and capricious review.

A federal district court in New Mexico found that a trucking company did not have standing to challenge the Department of Labor’s 2024 Rule that replaced its 2021 Rule—which attempted to clarify the differences in a worker’s status as an employee or independent contractor under the FLSA—in favor of an “economic reality test” because it had not suffered an injury-in-fact yet. At any rate, the court declined to find that the 2024 Rule was unlawful as arbitrary or capricious. The 2024 Rule more than satisfied the U.S. Supreme Court’s requirements that it was “permissible under the [FLSA], that there are good reasons for it, and that the agency believes it to be better” (Colt & Joe Trucking, LLC v. Department of Labor, No. 24-cv-00391-KWR-GBW (D.N.M. Jan. 9, 2025)).

Employee versus independent contractor. In January 2021, the DOL issued a rule attempting to clarify the differences in a worker’s status as an employee or independent contractor under the FLSA (the 2021 Rule). The 2021 Rule created a five-factor analysis, designating two of the five factors as “core factors.” The two core factors were: (1) the nature and degree of control over the work, and (2) the worker’s opportunity for profit or loss (which included the worker’s initiative and investments). The three remaining factors were (3) the amount of skill required for the work, (4) the degree of permanence of the working relationship, and (5) whether the work is part of an integrated unit of production.

2024 Rule. In October 2022, the DOL announced rulemaking to rescind and replace the 2021 Rule. The 2024 Rule again “addresses how to determine whether a worker is properly classified as an employee or independent contractor.” The 2024 Rule eliminated the two “core factors” set forth in the 2021 Rule in favor of an “economic reality test” focusing on “whether the worker is either economically dependent on the potential employer for work or in business for themself.” The test involves six factors meant to “guide an assessment of the economic realities of the working relationship and the question of economic dependence.”

Economic realities test. Those six factors are: (1) “opportunity for profit or loss depending on managerial skill”; (2) “investments by the worker and the potential employer”; (3) “degree of permanence of the work relationship”; (4) “nature and degree of control”; (5) “extent to which the work performed is an integral part of the potential employer’s business”; and (6) “skill and initiative.” Additional factors may be relevant if they “indicate whether the worker is in business for themself, as opposed to being economically dependent on the potential employer for work.” Unlike the 2021 Rule, no one factor should receive any predetermined weight.

The employer in this dispute is a family-run trucking business with 12 employees and is regulated by the FLSA. The employer routinely hires drivers as independent contractors. According to the employer, because of the changes in the 2024 Rule, it “must spend more time and resources analyzing whether drivers with whom it contracts are properly classified as independent contractors or employees.” The employer further alleged that, after the working relationship between it and one of its four independent drivers ended, it has been unable to hire a replacement driver “in part due to greater uncertainty and regulatory burdens created by the 2024 Rule.”

APA action. On April 25, 2024, the employer filed a complaint seeking declaratory, injunctive, and other relief, asking the court to set aside the 2024 Rule as unlawful. However, a complaint was not the proper method for requesting review of a final APA action. But the parties later agreed to proceed as if it properly had been filed as a petition for review of agency action. The employer subsequently filed a motion for summary judgment requesting that the court vacate the 2024 Rule in its entirety. The Department of Labor filed a cross-motion to dismiss or in the alternative, for summary judgment.

Standing. As an initial matter, the court found that the employer had not sufficiently demonstrated that it had Article III standing to challenge the 2024 Rule. Article III of the Constitution limits the jurisdiction of federal courts to cases and controversies. A plaintiff has standing when (1) they have suffered an injury in fact, (2) there is a causal connection between the injury and the conduct complained of, and (3) it is likely that the injury will be redressed by a favorable judicial decision.

“An APA plaintiff does not have a complete and present cause of action until she suffers an injury from final agency action....” An “injury in fact” is an invasion of a legally protected interest that is concrete, particularized, and actual or imminent, not conjectural or hypothetical.

Injury-in-fact. Here, the DOL argued that the employer has not suffered an injury-in-fact yet. For its part, the employer argued it has “self-evident standing as a regulated employer to challenge a regulation that expands the definition of FLSA employee.” The court, however, found that the employer failed to carry its burden of alleging the requisite concrete and particularized injury.

Merely alleging that a regulation creates a chilling effect is not sufficient to give rise to standing. “Allegations of a subjective ‘chill’ are not an adequate substitute for a claim of specific present objective harm or a threat of specific future harm.”

Concrete efforts to avoid litigation, on the other hand, may demonstrate injury sufficient to establish standing. The employer, however, had not properly alleged concrete efforts to avoid litigation, only that the 2024 Rule may have subjectively chilled its business practices.

The employer’s only evidence was an assertion that it “has not entered into a relationship with a new independent owner-operators in part due to regulatory uncertainty and burdens created by the 2024 Rule.” However, that was insufficient at the summary judgment stage. The court therefore found that the employer did not have Article III standing to challenge the 2024 Rule.

Arbitrary and capricious rule. Next, the court declined to find that the 2024 Rule was unlawful as arbitrary or capricious. The employer’s main contention was that the DOL acted arbitrarily and capriciously when it promulgated the 2024 Rule.

As an initial matter, the court rejected the employer’s contention that the Supreme Court’s decision to overturn Chevron’s deference for agency actions in Loper Bright Enterprises v. Raimondo, 144 S. Ct. 2244 (2024), extends to the court’s arbitrary and capricious review. While Loper Bright did overturn judicial deference to an agency’s reasonable interpretation of an ambiguous statute, it did not overturn the APA’s “mandate that judicial review of agency policymaking and factfinding be deferential.”

“Faulty legal premise.” Next, the court determined that the DOL did not act from a “faulty legal premise” in promulgating the 2024 Rule. In the 2021 Rule, the DOL concluded that control over work and opportunity to work for profit and investment were the two “most probative” factors in distinguishing employees from independent contractors. In the 2024 Rule, the DOL changed its position and found that a test that focuses on two factors, rather than the totality of the circumstances, “did not fully comport with the FLSA’s text and purpose.”

It is true that an agency that relies solely on faulty grounds may act arbitrarily or capriciously in rescinding a regulation and promulgating a new one. However, where the agency acts on legitimate grounds and still elects to change a policy, it need not demonstrate “that the reasons for the new policy are better than the reasons for the old one.” Rather, the agency need only show that “the new policy is permissible under the statute, that there are good reasons for it, and that the agency believes it to be better.”

“Totality of the circumstances” test. It is not clear that the FLSA even permits a test that emphasizes two factors. The Supreme Court routinely emphasized that “no one factor is controlling” in creating the economic realities test. The Tenth Circuit similarly has favored a totality of the circumstances test and does not give one factor more weight than the others.

While the employer correctly noted that the Supreme Court never overtly prescribed a specific test, that did not mean that a two-factor test is the only option available. All that the Supreme Court mandates is that the DOL show that the 2024 Rule is “permissible under the [FLSA], that there are good reasons for it, and that the agency believes it to be better.” The 2024 Rule more than satisfies those requirements.

Factor analysis. Finally, the DOL’s analysis of the relevant judicially created factors in promulgating the 2024 Rule was proper under the APA. The court must uphold the agency’s action if it has articulated a rational basis for the decision and has considered all relevant factors.

The court could not find that the DOL’s interpretation of the control factor was arbitrary and capricious where the interpretation was reasonable, in line with appellate precedent, and clearly discernible in the final text of the 2024 Rule. Further, courts use the term “integral,” focusing on the worker’s work and its integrality to the business, not just the worker’s integration into the business itself. Thus, the court could not upend the DOL’s decision where it clearly complied with these requirements.

Next, the court rejected the employer’s objection to the DOL’s decision to break “investments” and “opportunity for profit or loss” into separate factors and to consider a worker’s investments “on a relative basis with the potential employer’s investments in its overall business.” It was not improper for the DOL to separate the two where the Supreme Court has not expressly required that they be analyzed together and where federal appellate courts analyze them separately.

Permanence. Finally, the court rejected the employer’s objection to the DOL’s decision to conclude that a worker is more likely to be an employee “when the work relationship is indefinite in duration, continuous, or exclusive of work for other employers,” but that impermanence “is not necessarily indicative of independent contractor status” where “a lack of permanence is due to operational characteristics that are unique or intrinsic to particular businesses or industries and the workers they employ.” The court must only ascertain whether the DOL acted reasonably, and their rationale is easily determinable and connected to the record. The DOL’s analysis was both clearly discernible and at least consistent with Tenth Circuit case law.

Accordingly, the court denied the employer’s motion for summary judgment and granted the DOL’s cross-motion to dismiss, or in the alternative, for summary judgment.

The case is No. 24-cv-00391-KWR-GBW.

Judge: Riggs, K.

Attorneys: Debashree Nandy (Brownstein Hyatt Farber Schreck) for Colt & Joe Trucking LLC. John T. Lewis, U.S. Department of Justice, for U.S. Department of Labor.

Companies: Colt & Joe Trucking, LLC

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