‘Employee’ or ‘independent contractor’? DOL proposed definitions could save companies millions

A new U.S. Department of Labor proposal aimed at clarifying whether workers should be classified as “employees” or “independent contractors” could have a major impact on how companies do business and pay their workers – although there are a number of “ifs” associated with the proposition.

“The Department’s proposal aims to bring clarity and consistency to the determination of who’s an independent contractor under the Fair Labor Standards Act (FLSA),” said Secretary of Labor Eugene Scalia. “Once finalized, it will make it easier to identify employees covered by the Act, while respecting the decision other workers make to pursue the freedom and entrepreneurialism associated with being an independent contractor.”

“The rule we proposed today continues our work to simplify the compliance landscape for businesses and to improve conditions for workers,” said Wage and Hour Division Administrator Cheryl Stanton. “The Department believes that streamlining and clarifying the test to identify independent contractors will reduce worker misclassification, reduce litigation, increase efficiency, and increase job satisfaction and flexibility.”

Announced on Sept. 22, the DOL’s proposed rule would:

  • Adopt an “economic reality” test to determine a worker’s status as an FLSA employee or an independent contractor. The test considers whether a worker is in business for himself or herself (independent contractor) or is economically dependent on a putative employer for work (employee)
  • Identify and explain two “core factors” — specifically the nature and degree of the worker’s control over the work, and the worker’s opportunity for profit or loss based on initiative and/or investment. Those factors help determine if a worker is economically dependent on someone else’s business or is in business for himself or herself;
  • Identify three other factors that may serve as additional guideposts in the analysis: the amount of skill required for the work; the degree of permanence of the working relationship between the worker and the potential employer; and whether the work is part of an integrated unit of production; and
  • Advise that the actual practice is more relevant than what may be contractually or theoretically possible in determining whether a worker is an employee or an independent contractor.

The proposal is available for public comment until Oct. 26.

Jonathan Orleans, chair of the Labor and Employment Department at Bridgeport law firm Pullman & Comley, said the “employee vs. independent contractor” argument “goes back many, many decades. The FSLA established the right to minimum wage and overtime requirements for workers, but has a very circular definition of what ‘employee’ means. I’m simplifying it, but the main idea is that an employer is anyone who employs an employee, and an employee is employed by an employer.”

With the rise of the so-called “gig economy” over the past couple of decades – where independent contractors are the basis upon which the likes of Uber, Lyft, Airbnb and Etsy are built – the issue has gained importance, Orleans said.

“From a business point of view,” he noted, “having someone work as an independent contractor means you’re not obligated to pay minimum wage or overtime – and, of increasing importance, those workers are not required to participate in your benefits program.”

The DOL forecasts that, if finalized, the rule could result in net savings for employers of almost $481 million per year, most of that due to reduced litigation costs and fewer benefits payments. Unspecified is how much additional savings could be realized by reclassifying present employees as independent contractors, given that that figure could vary widely from firm to firm.

At the federal level, the DOL estimates that, if enacted, the rule would result in total net savings of $369 million a year over 10 years, and accrue nearly $3.2 billion in total net savings to the federal government’s regulatory budget.

In 2019, about 156.2 million Americans, or around 49% of the nation’s population, received employer-sponsored health insurance from their employer, according to the Kaiser Family Foundation. That, of course, was before the Covid-19 pandemic, which cost some 22 million jobs; less than half of those have been recovered, according to reports.

Acceptable trade-off?

Even so, a growing number of workers “understand and accept” that an absence of insurance and other benefits is worth the freedom they can enjoy as independent contractors, according to Patrice Onwuka, senior policy analyst at the Independent Women’s Forum (IWF), a conservative nonprofit focused on economic policy issues that affect women.

“Being in control of their own time and resources outweighs that for a lot of people,” Onwuka declared. “It’s indicative of how the labor force is changing. Because of the changing workforce and workplace, people can work from anywhere.”

She said the IWF welcomes the DOL proposal, in part because “historically there hasn’t been a real clear definition” of what an independent contractor is.

“We believe that this will lead to providing workers with greater prosperity, economic freedom, and more control over their own careers,” she said.

Fulltime freelancers have steadily been growing, Onwuka added. According to Statista, that number is expected to grow from 57.3 million in 2017 to 64.8 million this year, and 79.6 million by 2025.

The American Trucking Association (ATA) is also in favor of the DOL move.

“Secretary Scalia understands that many Americans choose the independent contractor model – including hundreds of thousands of owner-operators in the trucking industry – because it expands their opportunities to earn and empowers them to choose the hours and routes that suit their individual needs and lifestyle,” said ATA President and CEO Chris Spear. “This proposal is about giving working Americans the freedom to pick the occupation and flexibility they desire.”

The DOL proposal still faces an uphill climb. Orleans noted that the rule would not alter states laws that apply a stricter test for determining worker status.

There is also the chance that if Joe Biden wins the November election, and/or the Democrats win control of the U.S. Senate, the rule could be rescinded. Further, the rule will likely result in a number of court challenges.

“There’s enough ambiguity even in the proposed legislation that it’s not clear whether it will really make a significant difference in how individual cases are decided,” Orleans said.

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