On January 9th 2024, the Biden administration issued their new Independent Contractor rule first proposed under Labor Secretary Marty Walsh in 2022. It will be effective as of March 11, 2024. “Misclassifying employees as independent contractors is a serious issue that deprives workers of basic rights and protections,” explained Acting Secretary of Labor Julie Su. “This rule will help protect workers, especially those facing the greatest risk of exploitation, by making sure they are classified properly and that they receive the wages they’ve earned.”
Employee and employer relationships are, in federal law, defined and regulated by the Fair Labor Standards Act (FLSA). The FLSA was originally enacted in 1938 and has been updated many times. The Trump administration had implemented a new rule defining independent contractor status in the FLSA which would have been effective in March of 2021. The incoming Biden administration canceled the Trump rule and issued this much more restrictive rule as a proposal for comment in late 2022. The rule will make it much harder and potentially impossible for many workers currently classified as independent contractors to retain that status.
The rule states “Under the Act focuses on the economic realities of the workers’ relationship” as defined by the following seven factors in the revised rule:
- Opportunity for profit or loss depending on management skills.This would include including the following factors:
Workers can negotiate pay
Worker accepts or declines jobs and timing of performance
Worker engages in marketing to expand their business
Worker makes decisions to hire others, purchase material or equipment, or rent space
Working more hours or taking more jobs is specifically excluded as an exercise of management skills and therefore indicates employee status.
Opinion: This factor now adds managerial skills not just the work to being what defines a contractor.
- Investment by the worker and the employer.
“Costs borne by a worker to perform their job (e.g., tools and equipment to perform specific jobs and the worker’s labor) are not evidence of capital or entrepreneurial investment and indicate employee status”.
Workers investments “should be considered relative” to the employer’s investments and “should support an independent business or serve a business-like function” to indicate independent contractor status.
Opinion: Investment is now a factor. If the worker has no real investment that weighs against contractor status. A question is also why the worker’s investment in tools and equipment, which may be quite substantial, is specifically excluded as a factor.
- Degree of permanence of the work relationship.
Basically, the rule says “Indefinite in duration or continuous” weighs toward being an employee while “Definite in duration, non-exclusive, project-based, or sporadic” weighs in favor of independent contractor status.
Opinion: Permanence has always been a factor but now if you are working on an ongoing basis but not necessarily a fixed schedule basis, like an Uber driver, this weighs toward being an employee.
- Nature and degree of control.
Relevant facts include “Employer sets the worker’s schedule, supervises the performance of work, or explicitly limits the worker’s ability to work for others”, this includes technological supervision. Also if the employer controls the economic aspects of the relationship including “Control of prices or rates” and “Marketing of services or products provided by worker”. Other indications of independent contractor status would be if the employer imposes controls for legal compliance, safety, or customer service standards.
Opinion: Control has also always been a factor but “Technological supervision” is new. Since when are safety and customer service standards indicative of employee status? Back to Uber like many gig economy workers, the company sets rates and markets the services. So what happens to these gig workers now?
- The extent to which the work performed is an integral part of the employer’s business function.
“This factor does not depend on whether any individual worker, in particular, is an integral part of the business, but rather whether the function they perform is an integral part”. This factor weighs in favor of the worker being an employee when the work performed is “Critical, necessary or central” to the employer’s principal business.
Opinion: This is a very interesting and possibly the most substantial change and potentially a way to end independent contracting entirely. “Integral” work is defined as if the work performed is “Necessary”. If so then the worker performing the work is an employee. What business pays for work that is not necessary to the business other than charitable contributions? The Internal Revenue Code section 162 requires a business deduction to be “Ordinary and necessary expenses paid or incurred”. “Integral” is going to be the bane of businessmen everywhere until case law is developed that defines “Integral” as it applies to the FLSA and independent contractors. It will take years and a lot of money to develop that case law.
- Skill and imitative.
If the worker brings outside created specialized skills to the working relationship “With a business-like initiative that indicates” independent contractor status.
Opinion: This factor is undefined and amorphous. What are specialized skills as opposed to nonspecialized skills and what is the business-like initiative?
- Additional factors.
“The worker is in business for themselves, as opposed to being economically dependent on the employer for work”.
Opinion: This allows the Labor Department to use the phrase “Economically dependent” to define the worker-employer relationship as the Labor Department chooses. Again, it will take long and expensive court cases to litigate this change until case law is developed.
What does all this mean?
The Biden administration is attempting to reduce the number of independent contractors and to force many gig workers into employee status. It is also designed to force tax deductions from what used to be independent contractor payments and the imposition of the cost of employee benefits at the expense of the employer. It is designed to reduce the freedom of independent contractors to negotiate their way of business and way of life.
Though some companies, like Uber, think that these changes will not affect them it will be up to the lawyers and the courts to chart the path forward now that the Biden administration has drawn their line in the sand.
Check out this infographic to see if you are classifying your employees correctly. If you are still not clear please contact us for a free consultation to avoid any penalties.
