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Independent contractor guidance withdrawn by US Department of Labor

June 19, 2017

More freedom or more potential liability?

By Michael Burns, courtesy of SBAM Approved Partner ASE

Signaling the start of the Trump Administration’s rollback of employment and labor Obama era regulations, the Department of Labor announced it is withdrawing its two guidance letters that further defined the restrictions on engaging a worker as an independent contractor. 

As reported last year in ASE’s EPTW this Administrative Interpretation (AI) sought to further restrict the use of Independent Contractor (IC) classification by more strictly defining it. The AI uses the “economic realities” test to analyze whether a worker’s IC classification is proper. In addition to the FLSA, the test is also used for determining employment status under the Family and Medical Leave Act (FMLA), the Worker Adjustment and Retraining Act (WARN), many civil rights cases under Title VII of the Civil Rights Act, the Age Discrimination in Employment Act (ADEA), and the Americans with Disabilities Act (ADA). This test is recommended as a fair standardization of employee definition. 

The questions the Wage and Hour Department use to determine IC status are as follows:

  1. The extent to which the work performed is integral to the employer’s business
  2. Whether the worker’s managerial skills affect his or her opportunity for profit and loss
  3. The relative investments in facilities/equipment by worker and the employer
  4. The worker’s skill and initiative
  5. The permanency of the worker’s relationship with the employer
  6. The nature and degree of control exercised by the employer

These six questions are to determine whether the purported IC has sufficient economic independence and is operating sufficiently on his/her own to be truly considered an independent contractor. The DOL starts its investigation from the premise that “most workers are employees under the FLSA’s broad definition.” Just because the worker and the company record the worker as an independent contractor status does not create a legally acceptable classification. The worker must be, and hold himself out as, a “truly independent business.” 

This approach makes virtually all employees working in any aspect of the employer’s core or ancillary business employees of the company. With the classification of workers as employees rather than independent contractors comes all the administrative and legal liability burden of employment – taxes, insurances, and legal liabilities.

So what happens now? Does this mean employers may engage workers any way they prefer? No, in fact on a significant level it causes more uncertainty. The DOL’s Obama era interpretive position was that in most cases it would find workers engaged in most aspects of a company’s business can only be classified as employees, not independent contractors. Withdrawing these guideline re-opens the previously confusing reality of employer exposure to misclassification liability based on differing interpretative tests by differing government agencies and different courts.

Some states may take a more proactive position on joint employment issues as well by seeking to pass laws that follow Obama era guidance.  Michigan did pass a law aimed at franchising that sought to work against the Obama joint employment position. Not much has come from that state law since its passage last year. Another factor that may drive individual state action are shortfalls in unemployment insurance funding.  States in this position may transition independent contractors to employees as a way to tax their way out of that shortfall.

In the US DOL’s press release last week, newly confirmed Secretary of Labor Alexander Acosta stated “removal of the administrator’s interpretations” “does not change employers legal responsibilities under the Fair Labor Standards Act.” He stated the DOL “will continue to fully and fairly enforce all laws within its jurisdiction.” 

As advised previously in EPTW, employers should keep in mind that there are currently other agency and court tests being used to determine independent contractor vs. employee status. There is the IRS’s Common Law test (20 factor test), the EEOC’s 16 factor test, state unemployment insurances agencies’ “ABC” test (most states), not to mention various other federal and state agencies using one or the other of the above tests and sometimes a combination of them. The more restrictive AI test withdrawn by the DOL last week went beyond the above tests and caused much employer confusion and potential misclassifications of IC versus employee determinations. Now employers must trust in their interpretation of these other tests to determine if engagement of a worker as an independent contractor is defensible should it be challenged.

To be safe employers that have cleaned up their outside worker engagement relationships may want to continue the safer approach to avoid problems.   

Law firm Seyfarth Shaw advises employers to evaluate their IC models under several relevant factors to ensure their assignment of IC status is correct:

  • Ask the right questions about your independent contractors 
  • Be willing to relinquish control over ICs
  • Be wary if your ICs perform services that are the core of your business
  • Have a carefully drafted IC agreement

And some specific DO NOTs:

  • DO NOT provide the IC with employee benefits, tools, equipment, etc.
  • DO NOT ask the IC to perform services that are already being performed by employees
  • DO NOT require the independent contractor to:
  • Provide services exclusively for your organization 

Perform services exclusively on the Company’s premises

Work established hours

Provide services personally

Attend employee meetings or events

Submit regular reports that ordinarily are required of employees (periodic status reports are OK)

Follow your instructions on the “who, how, when, and where” of getting the details of the project completed

  • DO NOT assume an independent contractor relationship means you are free from managing within any applicable employment laws or company policies.
  • DO NOT retain a contractor long term – the longer the worker is retained, the greater the risk
  • DO NOT use employment terminology with Independent Contractors or treat them like employees 
  • DO NOT provide Independent Contractors with a Form W-2

If you have questions about determining independent contractors from employee, it is advisable to contact your legal counsel. 

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