Independent Contractor or Employee? New Government Rule Would Decide

Independent Contractor or Employee? New Government Rule Would Decide

A newly proposed rule from the U.S. Department of Labor would make it harder for companies to classify workers as independent contractors as opposed to employees – a change that stands to affect the operations and livelihoods of companies and workers in industries that range from ride-sharing services and trucking to promotional products.

Promo companies and any other interested parties are invited to submit formal comments on how the proposed rule would impact them. The comment period began Oct. 13 and runs until Nov. 28.

On Oct. 13, the Labor Department published a proposed rule to revise its guidance on how to determine who is an employee or independent contractor under the Fair Labor Standards Act (FLSA).

Put most basically, the practical effect of the rule would be that many people currently classified as independent contractors would have to be considered employees under FLSA, analysts say.

Employees, compared to contractors, are generally entitled to greater benefits under the law, such as minimum wage, overtime pay, protection from discrimination, mileage reimbursement and more. Those are big reasons proponents are pushing for the rule change, as they feel many employers wrongly classify workers as contractors when they should be employees.

Critics say the proponents are overlooking a pivotal point of practicality: An employee costs a company as much as 30% more than an independent contractor, according to some studies. Faced with such cost increases, companies may choose to cut ties with the contractor rather than bring them aboard as an employee, should they be compelled to reclassify under the proposed rule.

“Limiting independent contracting could lead some companies to slash the number of workers they hire, eliminating some jobs altogether,” Reuters reports.

Certain companies in the promo products market utilize independent contractors as, for instance, salespeople. There are differing views on whether such folks would still meet the criteria of independent contractor under the new rule if it’s enacted.

Chuck Machion, senior vice president/senior counsel at ASI, says a strong argument could be made that current promotional products independent contractor salespeople could have to be reclassified as employees under FLSA if the rule goes on the books, at least in some cases. That creates a potential lose-lose scenario, he says.

“The rule envisions two options: employee or independent contractor. But there’s a third that helps no one: None of the above,” Machion states. “You could have companies in our industry and others saying, ‘Sorry, I have to let you go because I can’t afford to take you on as an employee.’ The company loses the salesperson and the salesperson loses their income. This rule would not be a good thing for our industry.”

Still, others don’t foresee major issues. “I do not believe this new proposed independent contractor rule would have a meaningful impact on HALO or much of the industry,” says Marc Simon, CEO of promo’s largest distributor, HALO Branded Solutions (asi/356000), and a member of Counselor’s Power 50 list of the market’s most influential people.

The proposed rule puts forth six nonexclusive factors that would be used to determine if a worker is an employee or independent contractor under FLSA. Simon is basing his view on some of those factors. “The key factors upon which I focus are opportunity for profit or loss and degree of control,” he says. “The account executive under our model has a much greater opportunity for profit or loss than the distributor, for example.”

Perhaps the most important factor is the extent to which work performed is an integral part of an employer’s business. This factor weighs in favor of employee status when the work is “critical, necessary, or central to the employer's principal business,” law firm Holland & Knight notes.

Admittedly, things can get a bit confusing with these factors.

For instance: If a worker can set or negotiate their pay, accept or decline jobs, choose the order or time of performance, engage in marketing to expand the business, and hire others, purchase materials or otherwise invest in the business, the worker is more likely to be an independent contractor. “However,” Holland & Knight notes, “deciding to do more work or accept more jobs is not indicative of contractor status. It is unclear how the ability to ‘accept or decline jobs’ indicates contractor status, while the decision to ‘take more jobs’ does not.”

As Holland & Knight points out, the proposed rule addresses independent-contractor classification under the FLSA, and not any other statute.

“Different and typically narrower tests apply for determining employee status under, for instance, the Internal Revenue Code (taxes), National Labor Relations Act (unionization), Title VII (discrimination) and common law (for tort liability and other purposes),” the firm states.

Notably, the proposed rule also doesn’t directly affect independent-contractor classification for purposes of state employment laws.

Despite the scope being limited to FLSA/existing laws like that on minimum wage, critics of the rule assert it will inevitably have a much broader ripple effect. Says The New York Times: “Many employers and regulators in other jurisdictions are likely to consider the [Labor] Department’s interpretation when making decisions about worker classification, and many judges are likely to use it as a guide.”

MSNBC’s Opinion Columnist Noah Rothman takes up that argument, further asserting that the Labor Department’s proposal is a direct threat to gig companies and other service providers that rely on contract labor.

“The Labor Department’s new rule is akin to what the Biden administration and its allies in Congress tried (and failed) to pass into law with the Protect the Right to Organize [PRO] Act,” Rothman writes. “Where Congress fails to act, it seems, an activist executive and judiciary will do in a pinch.” The promo products industry came out staunchly against the PRO Act because of its proposed regulations on independent-contractor stratus.

The rule is not likely to take effect soon. After the comment period closes on Nov. 28, the Labor Department will have to analyze the feedback and other factors before deciding how, or even if, to move forward on putting the rule into place. If the Department decides to proceed, then a final rule would be issued in the second half of 2023 or early 2024, according to Holland & Knight. But that’s probably not the end of the story. 

“It is likely that legal challenges to the rule will ensue, with the possibility of injunctions or other events forestalling its effects,” Holland & Knight states. “Such litigation could take many months or even a year or more to resolve.”

Images Powered by Shutterstock