Employee or Contractor? Businesses Must Beware of Changing Rules

William “Bill” C. Davell, Esq.

The Good News provides a monthly column with important content having to do with topics from the legal community. This month features a conversation with Paul Lopez, director and COO of Tripp Scott.

When is a worker with your business an employee – or an independent contractor? The answer is critical and can vary for the same worker depending on what agency you’re dealing with, in which state or with the federal government. And oh, yeah: it’s ever-changing.

On March 11, it will change again. A Biden Department of Labor (DOL) rule will take effect with guidelines on determining who is an employee under the Fair Labor Standards Act (FLSA). Actually, it could be seen as an old rule – it largely goes back to a standard for determination established under President Barack Obama in 2015, before the Donald Trump Administration narrowed it.

Let’s take a look at the new rule and why it’s important to understand what’s going on.


Bill Davell: Why does it matter whether a worker is treated as an independent contractor or an employee?


Paul Lopez: Putting aside the tax implications of these determinations, which are also substantial, let’s focus on FLSA. The 1938 law established a federal minimum wage and time-and-a-half pay for overtime work, that is, above 40 hours in a week. Because the FLSA only applies to employees, worker advocacy groups argue that misclassification of an employee as an independent contractor could forfeit those rights, as well as access to employer contributions to Social Security, collective bargaining rights, and workers’ and unemployment compensation.

Charges of deliberate “misclassification” has become more frequent with the rise of “gig” work, involving freelancers, car service drivers, delivery people and the like. There are already 71.2 million full-time, part-time and occasional workers who consider themselves “independents.” In five years, they will make up 33 percent of the workforce. 

Employers, on the flip side, might suddenly find themselves liable for back overtime pay for workers they had treated as contractors, and lose some flexibility inherent in a contract versus an employment situation. Businesses are increasingly facing lawsuits – frequently class actions – over alleged misclassification.


BD: Isn’t an employer who signs a worker to an independent contractor agreement automatically insulated from that liability?


PL: No, because there are admittedly situations in which employers have tried to classify workers as independent contractors when they are treated much more like everyday employees. That’s why the Supreme Court in 1947 established an “economic reality” test, stating that employees are “those who as a matter of economic reality are dependent upon the business to which they render service.”


BD: How does that economic reality test work?


PL: The Supreme Court laid out six sets of facts to consider:

  • The degree of employer control over the worker (the sole test under common law)
  • The worker’s opportunities for profit or loss
  • The permanency of the relationship
  • Whether the worker’s activities were an integrated part of the business’s operations
  • The skill required and
  • The worker’s investment in the facilities for work.

The Court indicated that the determination does not depend on any single one or combination of these factors, “but rather upon the circumstances of the whole activity.” 

The problem(s): the test is subjective – especially appropriately weighing factors – complex, and hasn’t been consistently applied. As a former DOL administrator overseeing the FLSA and another top employment law official have pointed out in a recent analysis, different courts have applied the test based on fewer factors, and the DOL at one time added a seventh factor – whether the contractor was organized as a separate business entity. (Not to mention that, including the FLSA, there are “no fewer than 100 different federal and state statutes regulating worker classification under at least six different types of employment and tax laws.”)

After the Obama Administration issued its own FLSA interpretation in 2015 based on the six factors listed above, the Trump Administration attempted to simplify the determination and provide certainty by focusing on the first two issues – control and opportunity for profit or loss – as “core factors.” Only if the core factors were inconclusive would the test involve the next three factors, and the last, level of worker investment, was dropped.


BD: What changes under the new rule?


PL: The new Biden Administration rule essentially returns to the six factors and a more subjective “totality of the circumstances” determination. It also adds guidance on how DOL will interpret some factors, especially control and whether an activity is integral to the business. But the officials cited assert that, because DOL has also stated that the rule’s six factors “are not exhaustive,” the agency “can consider any facts it wants and give those facts whatever weight it wants.”


BD: What is the effect on businesses, and what should we do now?


PL: Now, by re-introducing greater subjectivity and potentially changing the interpretations and broadening some of the factors, the new regulation could open the gates to a flood of new litigation from individuals and entire classes claiming employee status. 

This makes it crucial to stay on top of what is happening with the rule, which is likely to be challenged by business groups. If it becomes final, competent legal counsel should review your particular business’ arrangements with independent contractors to determine if changes in interpretation and approach in the regulation will put you in potential violation or require changes.

Read more Ask Bill at: https://www.goodnewsfl.org/author/william-c-davell/


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