You may have heard that the U.S. Department of Labor (DOL) put out new rules about independent contractors. Former Labor Secretary Eugene Scalia said these rules will help reverse recent efforts to “drastically curtail the recognition of independent contractors.”
But you should think twice before making any changes to how you hire and/or manage independent contractors. There are two main reasons why:
- There’s a good chance the rules will be repealed or replaced.
- The new rules affect only one law, the Fair Labor Standards Act (FLSA). You still have to look out for state laws and other federal laws that set different standards.
The stakes are high if you make changes based on the new rules. If you get it wrong, you could be liable for back wages, attorney fees, and other penalties, which can really add up depending on how long a worker has been on your books and how many workers you’ve misclassified.
What Do the Rules Say?
The FLSA requires employers to pay employees a minimum wage and overtime when they work more than 40 hours in a workweek. But some types of workers — including independent contractors, volunteers, trainees, and interns — lie beyond the scope of the law. They are not considered employees, so the businesses that hire them don’t have to worry about paying them the minimum wage and overtime.
Example: A worker needs 45 hours to complete a project. If the person’s an employee, the employer needs to pay at least $344.88 ($290.00 for 40 straight-time hours at $7.25 an hour, plus $54.38 for five overtime hours time-and-a-half). But if the person is a true independent contractor, the business can pay the worker any flat agreed-upon sum (say, $200) without violating the FLSA.
As of today, there is no definition of the term independent contractor in either the FLSA statute or its regulations. As a result, it’s been left to the federal courts to interpret who is an independent contractor and who is an employee. Over the years, the courts have adopted a set of factors known as the economic realities test to figure it out.
The DOL has said that this test lacks focus and has not been explained well enough by the courts, making it hard for businesses to figure out who’s an employee and who’s an independent contractor under the FLSA.
With its new rules, the DOL hopes to simplify the test for independent contractor status, boiling it down to the following five factors:
- The nature and degree of the individual’s control over the work
- The individual’s opportunity for profit or loss
- The amount of skill required for the work
- The degree of permanence of the working relationship between the individual and the potential employer
- Whether the work is part of an integrated unit of production
Fate of the New Rules
The rules are scheduled to take effect on March 8. But on President Biden’s first day in office, the White House issued a memo directing the DOL and other agencies to consider postponing by 60 days the effective date of so-called “midnight regulations” like the independent contractor rules, which were finalized during the lame-duck period between the election and the inauguration but have not yet taken effect.
The memo also directs the DOL to consider further delaying or publishing for notice and comment proposed rules further delaying these rules beyond the 60-day period.
It remains to be seen whether the Biden administration will go through the more lengthy process of permanently repealing and replacing them. Furthermore, even if the Biden administration’s rules are un-frozen, there’s a good chance that the new Democratic-controlled Congress will pass legislation to establish a stricter test for independent contractor classification.
Patchwork of Laws
On the off-chance that the DOL’s rules survive intact, businesses still have to deal with a patchwork of state and federal laws.
Other, stricter tests for an independent contractor will still apply under many federal laws (like the tax code, Title VII of the Civil Rights Act, and the Age Discrimination in Employment Act) and under state laws (especially unemployment insurance and workers’ compensation laws). So even if a worker might qualify as an independent contractor under the new FLSA rules, they may still be considered an employee under these other laws, potentially exposing the hiring party to liability for back taxes, workers’ compensation premiums, health and welfare benefits, etc.
Finally, you can’t count on the courts to follow the DOL’s rules. Although courts are supposed to give them a substantial amount of deference, the rules will be weighed against decades’ worth of precedent-setting cases about independent contractor status under the FLSA.
Do your Independent Contractors meet the IRS and DOL Economic Reality Test to be classified as an Independent Contractor? Contact your designated YPTHRM Business Partner or a member of our team to determine if your IC meets the test. A 15-minute phone call is all it takes!