The U.S. Department of Labor is aiming to crack down on businesses that misclassify independent contractors with a new proposed rule.
The rule, the Labor Department says, would align the government’s rule to the court’s current interpretation of the Fair Labor Standards Act and the so-called “economic reality” test that includes how much control the worker has over their schedule and their employment, how permanent their employment is and how integral their work is to the work of the company, among other items.
“While independent contractors have an important role in our economy, we have seen in many cases that employers misclassify their employees as independent contractors, particularly among our nation’s most vulnerable workers,” said Secretary of Labor Marty Walsh in a press release. “Misclassification deprives workers of their federal labor protections, including their right to be paid their full, legally earned wages.”
Experts say the rule, once it takes effect, would require some businesses to rethink their classifications of independent contractors – a move that could carry added costs for businesses.
Details on the proposed Department of Labor rule on independent contractors
The proposed independent contractor rule, which would go into effect sometime in 2023 after incorporating feedback from a recently closed public comment period, is a response to a Trump administration independent contractor rule crafted in 2021, challenged by the courts and ultimately rescinded in March 2022. It is likely that the new rule will also be challenged in court, making the ultimate timeline for when it goes into effect unclear.
Mark Kluge, co-founding partner at the Lincroft, New Jersey-based management-side employment law firm Kluger Healey LLC, said while the Trump administration rule was designed to be easier on businesses, and the new rule returns standards to those under the Obama administration, the interpretation of independent contractors by the courts has been fairly consistent and should give business owners pause.
He stressed it is difficult for owners to classify workers as independent contractors under any of the rules.
Kluger gave an example of a plumber. You call a plumber because the sink in your building breaks. He tells you when he’s coming to do the work, he brings his own tools, he has other customers and clients and he is not an integral part of your business – all hallmarks of an independent contractor.
For business owners that use independent contractors, there are several questions to consider. Do they perform an integral function of the business? Do they have an email address with the company? Do they appear for all intents and purposes like an employee? Do they supervise other workers? Does the independent contractor not have any other customers?
“If the worker is an integral part of your business – meaning they do what you do – it’s going to be really hard to claim that they are an independent contractor,” Kluger said.
He stressed that a challenge to a business’ classification of independent contractors doesn’t have to come from a court or from a worker bringing a lawsuit. It can come from oversight agencies that are looking to ensure businesses pay into unemployment or other benefit pools. Sometimes, the Department of Labor may scrutinize specific industries to see if they are misclassifying workers as independent contractors, he said.
Best practices for independent contractors for businesses
Experts say there are several steps businesses can take to avoid misclassifications of independent contractors.
“Let them be genuinely independent. That’s an important thing that in many ways you can’t get away from as an entity. That is probably the biggest tripwire for this issue,” Kluger said. “I hate to have to tell employers this, but under this rule and even under the existing rule, it’s very very tough to have somebody who regularly performs services for you be classified as an independent contractor.”
The biggest difference, according to experts, is that the Trump administration focused on some specific factors more than others in determining who was an independent contractor: The degree of control exercised by the employer, the worker’s opportunity for profit and loss, and the extent the work performed was integral to the employer’s business.
“This would be a departure for businesses who rely on independent contractors and would create a consistent analysis for determining whether workers are employees or independent contractors. Without question, employers would need to review their job descriptions and independent contractor agreements for compliance purposes.” said Frank A. Custode, chair of the employment practice at Rosalind, New Jersey-based law firm Curcio Mirzaian Sirot, LLC.
The Department of Labor is trying to get more workers classified as employees rather than independent contractors, said David Schein, professor and director of graduate programs at the St. Paul, Minnesota-based the University of St. Thomas.
“Generally, perhaps millions of workers are being misclassified as independent contractors instead of employees. That does mean that the federal government and perhaps local governments are not getting their full tax withholdings,” Schein said. “And, of course, these workers are being denied employee benefits. However, I believe better enforcement is the key, which would also include better educating the workforce so they know if they should be classified as one way or the other.”