Proposed Rules for ‘Independent Contactor’ Status Troubling

Industry News,

Originally Published by: Kent Pagel, Pagel, Davis & Hill — October 18, 2022
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Largely because of Congressional deadlock, President Biden has turned to the federal rulemaking process to achieve his key policy aims in the areas of immigration, climate, health and more.  In that vein this past week, the U.S. Department of Labor (DOL) proposed rule changes regarding how DOL will determine whether a worker classified as an independent contractor is, in fact, an employee. 

The proposed rule changes to the Fair Labor Standards Act (FLSA) will change the factors that are to be considered and make it easier for DOL to police those workers who are wrongfully labeled as independent contractors.  This is important because under the FLSA this would mean independent contractors reclassified as employees would be subject to minimum wage and overtime requirements.  But changes in how a worker is either, classified as an independent contractor or employee will undoubtedly impact whether those workers classified as employees rather than independent contractors are entitled to workers compensation, unemployment insurance, the protection of various labor and safety regulations, and other legal requirements applying to employees.

While the DOL’s top attorney, Seema Nanda, has noted the proposed rule changes are “not intended to target any particular industry of business model,” the underlying intent is clearly to target the gig economy (think Uber and free lancers) and the construction and trucking industries.

Companies across the country, particularly in construction, including framing contractors, and trucking have made it a practice to classify many workers or group of workers as independent contractors rather than employees.  By doing so, a lower tier framing contracting crew, for example, may use alternative compensation methods that can be far more competitive if they do not have to strictly adhere to all FLSA requirements for overtime, payroll taxes, employee benefits, and workers compensation insurance.  The same thing is true with trucking. 

Without getting in to too much legal speak, the proposed rule does two things.  It rescinds a Trump administration regulation on making an independent contractor determination and restores an analysis historically applied by the courts (although done so inconsistently and in an unclear fashion).  Biden DOL officials say the regulations as they now exist are inconsistent with federal court decisions, and result in more workers being misclassified as independent contractors when they should be employees.

The proposed rule broadly defines “employee” as you would expect and explains essentially independent contractors must as a matter of reality be “in business for themselves.”  The specific factors that will apply under the new rule are:

The worker’s opportunity for profit or loss.  Whether the worker’s managerial skill affect the worker’s economic success or failure in performing the work.  For example, does the worker negotiate the charge or pay for the work provided, does the worker accept or decline jobs or chooses the order and/or time in which the jobs are performed, does the worker engage in efforts to expand their business or secure more work, and whether the worker makes decisions to hire others, purchase materials and equipment, and/or rent space. If a worker has no opportunity for a profit or loss, this suggests the worker is an employee. 

Investment by the worker and the employer.  This factor examines whether a worker’s investment is “capital or entrepreneurial in nature,” and notes that costs borne by a worker to perform a job, such as tools and equipment, are not capital and entrepreneurial, and instead indicate employee status.  Additionally, the proposed rule provides that a worker’s investment should be considered on a relative basis with the employer’s investment in its overall business.

Degree of permanence of the work relationship.  This factor examines whether a work relationship is indefinite in duration or continuous, which suggests employee status, or whether the relationship is definite in duration, non-exclusive, project-based, or sporadic, thus indicating independent contractor status.

Nature and degree of controlThis factor considers the employer’s control over the performance of the work including whether the employer sets the worker’s schedule, supervises the performance of the work, or explicitly limits the worker’s ability to work for others.  Additionally, facts relevant to the employer’s control over the worker include whether the employer uses technological means of supervision (such as by means of a device or electronically) and reserves the right to supervise or discipline workers.  More indications of control by the employer favors employee status.

Whether work performed is an “integral” part of the employer’s business. This factor considers whether the work performed is an integral part of the employer’s business.  This factor weighs in favor of the worker being an employee when the work they perform is critical, necessary, or central to the employer’s principal business.

Skill and initiative.  This factor considers whether the worker uses specialized skills to perform the work and whether those skills contribute to business-like initiative. Employee status is indicated where the worker does not use specialized skills in performing the work or where the worker is dependent on training from the employer to perform the work. 

No doubt this legal analysis will be confusing.  DOL has not been definitive on the proposed rule’s impact, but the intent certainly is to provide the means to allow for greater classification of independent contractors as employees.  There will undoubtedly be endless litigation and fewer opportunities for independent contractors and the utilization of this type of business model.

The proposed regulation was officially published in the Federal Register on Oct. 13. The public has 45 days to comment.