PROTECTING SMALL BUSINESS, PROMOTING ENTREPRENEURSHIP

Are You an Independent Contractor? Here’s What the DoL Thinks

By at 17 November, 2022, 3:51 pm

SMALL BUSINESS INSIDER

by Barbara Weltman –

When a company needs to scale up to meet growing demand or outsource specialized work, it may either hire an employee or engage an independent contractor. As a rule of thumb, it costs about 30% more to hire an employee, due compensation costs, as well as payroll taxes, insurance, and benefits. Many times it just makes practical sense for a business to utilize the services of an independent contractor.

There’s no bright line test, such as the amount of compensation, hours worked, or other benchmark. It depends on the applicable test from a federal or state department or agency for specific purposes to the situation. On October 13, 2022, the U.S. Department of Labor (DoL) proposed a new rule for making this determination for purposes of the Fair Labor Standards Act (FLSA), which governs federal minimum wage and overtime rules.

What’s the new rule? Why is it important? And what can you do about it?

The Proposed Rule

Until recently, the DoL used an economic reality test to determine worker classification: the worker is either economically dependent on the employer for work (and is an employee) or is in business for themselves (and is an independent contractor).

Multiple factors came into play for this determination. In January 2021, the DoL published a rule (2021 IC Rule) created by the prior Administration using five “core” factors for worker classification. The current Administration tried to withdraw the rule, but a court said it had to stand.

So, the DoL published a new proposed rule that uses the totality-of-the-circumstances analysis, and if this rule becomes final the 2021 IC Rule would be rescinded.

Factors used to make a determination of worker classification under the proposed rule include, but are not limited to, these six factors:

1.) Opportunity for profit or loss

2.) Investments by the worker and the company

3.) The degree of permanence to the relationship

4.) The nature and degree of control exercised by the company over the worker

5.) The extent to which the work performed is integral to the company’s business

6.) The skill and initiative of the worker

No single factor is determinative or given more weight than any other factor. The totality-of-the-circumstances test in the proposed rule is different from the ABC test and the IRS’s test for worker classification.

Why is the proposed rule important?

At present, different federal departments and agencies as well as those on the state level use different tests for worker classification. For example, for federal tax purposes the IRS uses a test based on behavioral control, financial control, and the relationship of the parties. For unionizing, the National Labor Relations Board (NLRB) looks at various “common law factors through the prism of entrepreneurial opportunity”—whether the worker has an opportunity for gain or loss, as explained in SuperShuttle. And a number of states, including California, use an ABC test for purposes of wage and hour rules.

If the DoL’s proposed rule is finalized, it would likely influence changes in the rules used by other federal departments and agencies.

WTAS: Voices Expressing Concern About the Proposed Rule

American Translators Association

“Forcing language professionals who wish to be independent contractors to be employees would disrupt vital language access services, which are protected under federal law…This restrictive interpretation would result in companies, and even many governmental agencies, being forced to classify as employees a large number of workers who, under current law, are properly classified as independent contractors. This could have a detrimental impact on the livelihoods of our members, the important work they do to ensure the federally protected right to language access for millions of Americans, and our economy….Many interpreters and translators work with language services companies (LSCs), governmental bodies, and other clients as independent contractors…In its present form, the proposed rule poses a serious danger to professional linguists, the priority of language access, and the people we serve, including all Americans.” –  Madalena Sánchez Zampaulo, President, American Translators Association 

National Retail Federation

“The current rules clearly define the difference between employees and independent contractors, providing much-needed legal certainty for employers, employees and independent contractors alike. The changes being proposed by the Labor Department will significantly increase costs for businesses across all industries, and further drive already rampant inflation…NRF staunchly opposes a change in this important area of law, which is both unwarranted and unnecessary. This decision will only foster massive confusion, endless litigation, reduced innovation and fewer opportunities for employees and independent contractors alike.” – David French, Senior Vice President of Government Relations, National Retail Federation

Small Business & Entrepreneurship Council

“The DOL is out-of-touch with the modern economy and how people want to work, as evident by its proposed independent contractor rule. More people are starting businesses because they have access to modern tools and platforms that make it simple and affordable. Overwhelmingly, they want to be to their own boss and want control over their own time.  The proposed DOL rule is a massive step backwards, as it resurrects an outdated approach that works against flexibility and regulatory certainty.  The proposed rule will create uncertainty, higher costs and complexity, and snuff out countless innovative ideas and entrepreneurial dreams in their infancy. Moreover, an independent contractor’s cherished flexibility could be taken away. These are all outcomes that will exacerbate the weakening economy and harm America’s small business ecosystem.” – Karen Kerrigan, President & CEO, Small Business & Entrepreneurship Council 

National Federation of Independent Businesses

“Small business owners need clarity for determining who is and isn’t considered an independent contractor under the Fair Labor Standards Act. The current rule has transparent standards for classifying employees and independent contractors, something NFIB has long advocated for. Unfortunately, the Department of Labor’s new proposed rule will complicate the current standards and ultimately lead to frivolous litigation and increased costs for small businesses. – Beth Milito, Executive Director, NFIB Small Business Legal Center 

What can you do about it?

If you have concerns about the rule and want to make them known, you can submit comments to the DoL by December 13, 2022. This can be done electronically through Regulations.gov. Click on “Employer or Independent Contractor Classification under the Fair Labor Standards Act” and follow the instructions there.

Conclusion

A revised, final rule would impact individuals who wish to be treated as independent contractors as well as the businesses seeking to engage them. What would the rule mean for gig workers? How would the rule impact businesses that use the services of independent contractors? What about the independent contractors themselves – will they lose work, or be forced to become employees?

As noted above by the various groups representing small businesses, the self-employed and independent workers, the change could be dramatic and harm the ecosystem that values and counts on the flexibility and autonomy provided by the current regulatory framework. When the DOL finalizes it IC rulemaking, there will likely be legal challenges to the new rule as well as action taken by the new Republican majority in the U.S. House to stop it from being implemented.

Barbara Weltman is a member of SBE Council’s advisory board, and has been a leading consultant for small businesses of every kind for over twenty years. She’s the founder of Big Ideas for Small Business® and has written numerous books on small business operations, including J.K. Lasser’s Small Business Taxes, Complete Idiot’s Guide to Starting a Home-Based Business, and The Rational Guide to Building Small Business Credit. Follow Barbara on Twitter @BigIdeas4SB.

 

 

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