Independent Contractor Status in the News Again

Independent-Contractor

On January 10th, of this year (2024) the Wage and Hour Division of the Department of Labor published new rules for the determination of independent contractor status that will become effective on March 11, 2024.

During the “comment period” (for all proposed regulatory rules) the Labor Dept. received more than 50,000 comments, so there is certainly significant interest in this issue. Especially when you consider that some of those comments were speaking for others, like the US Chamber of Commerce.

In April of last year, we first wrote about the issue of staffing companies hiring Independent contractors where we suggested that staffing companies should, perhaps, do more of it. We noted that the penalties for mis-classifying workers were significant and included reimbursement for accumulated back wages and tax withholdings.

In that article we noted the advantages for the independent contractor and the staffing agency but cautioned that the rules needed to be strictly followed and further that the procedures needed to be approved by an attorney.

The new rules rescind the changes that were made in 2021 that made it easier to claim the independent contractor status. The labor Dept claimed that the new rules are “more consistent with judicial precedent and the Act’s text and purpose.”

Criteria for the New Rules.

Although there are several criteria in determining whether a worker is an independent contractor or an employee, the major issue seems to be who “controls” the worker’s work, the worker themselves or someone who can be defined as their employer? This is not always clear.

When I hire a carpenter to build a deck on my house, I am, in a certain sense, his or her “employer”, but I do not control their work. They are free to do my project or not. They control the price, not me. They can lose money or make a profit on a particular job or on several during their taxable year. They use their own tools, use their own vehicle to transport materials, etc. These several facts contribute to, or make up entirely, what the Department of labor calls, the “entire economic reality” of the relationship.

This “entire economic relationship” is at the heart of the new rules on what makes up the “independent contractor” status.

The problem has been, in the government’s view, that actual employers were trying to get around the employer’s responsibility, especially withholding taxes and related benefits (unemployment insurance, overtime, etc.). They would do this by “technically fulfilling” the individual requirements, (which had actually been reduced in the old rules published in 2021), in order to make the claim to an independent contractor status.

Going back to the example I am using, a carpenter who actually “depends” on most, or all of his jobs coming from a single person or company, may well use his own tools and vehicle and carry his own health insurance, yet in the “full economic reality” of the situation he is not really an “independent contractor”. This is true even though he may fulfill one or more of the otherwise acceptable criteria for making such a claim.

Personally, I am in favor of the wider use of the independent contractor status because it offers significant advantages to both the employer and the employee. But it is not a status that may be good for many workers who might run into problems with self-managed tax filings and therefore missing out on benefits paid through those taxes (unemployment insurance, etc). So, like the comments below regarding the pitfalls for businesses, independent contractors need legal advice as well.

Also, many job categories do not lend themselves to this status like assembly line manufacturing work.

It is interesting that American education, in a culture of capitalism, does not train or make available training for students to become independent contractors. Certainly, the secondary school level does not, and it hardly happens at the college level. This is probably a major reason that most new businesses in the United States fail in the very early stages. But this is the subject for another blog discussion.

 

Pitfalls for Businesses

As there are significant problems for ordinary citizens becoming independent contractors, there are also problems for regular businesses who would like to incorporate the independent contractor status. Before going any further, I want to strongly suggest that you get sound legal advice. As an advocate for this status, I would not let a potential pitfall stop anyone, but simply be prepared by meeting the criteria fully, in law and spirit. Otherwise, as you can guess, it can be costly.

For example, Staffing Industry Analysts (SIA) reported just a few days ago (January 23, 2014) on the recent case of two staffing companies in Denver who owe about one million dollars in fines and restitution as a result of misclassifying workers.

The auditor for the city of Denver, commented that “In the modern Gig economy issues like this are common”, referring to the many gig platforms that operate internationally via web-based platforms which have been very successful at using the independent contractor status successfully, in spite of many complaints from business and governments.

To get an idea of how the battle over IC (Independent Contractor) status is currently being waged, a day earlier from the report on the Denver IC misclassification case, the Boston Globe carried a story about Gig platform companies Uber, Instacart, and others who had raised $7 million to campaign for a new law that would solidly support the Independent contractor status for Uber, Instacart and other “independent” drivers in Massachusetts.

The Boston Globe also noted labor opposition to the measure which had raised $1 million to fight against the measure. (Readers of this blog may recall an article in October 2019 on a California bill titled AB5, that was trying to prevent Uber and others from exploiting the independent contractor status.

Although the law (AB5) initially passed, it was rescinded a year later by Proposition 22 (2020) that allowed Uber and others to continue to use the independent contractor status for its drivers.

Labor unions have usually fought against such measures on the grounds that it presented unfair competition to traditional taxi drivers and their companies.

Governments have been opposed to Uber and similar “Gig economy” companies on the ostensible grounds that it was not good for the Uber drivers because they were not covered by some important labor laws.

The battle also continues in California this year with legislation introduced to nullify the new US Dept of Labor rule (referred to at the beginning of this article) that will make it harder to use the independent contractor status.

So, stay tuned, and, as always, pray for Ukraine, Russia, Israel, and Gaza.