Employee or Independent Contractor? The Rules May Be Getting Simpler

From an employer perspective, using independent contractors provides greater flexibility in managing variable demands for particular services. And, frequently, those services can be obtained more economically because independent contractors don’t receive employee benefits, nor are the companies that use them subject to the employer share of those workers’ FICA taxes.

And yet, depending on market dynamics, companies might need to pay independent contractors more than they would pay employees. That occurs when the demand for individuals with particular skills is strong, and the people possessing those skills prefer to operate as independent contractors.

Either way, the easier it becomes to make a bulletproof classification, the fewer incidences of misclassification will occur, and fewer penalties will be imposed on employers. Greater clarity will “reduce litigation, increase efficiency, and increase job satisfaction and flexibility,” the Department of Labor (DOL) stated upon releasing the proposed rules.

High Hopes

Along similar lines, the Society for Human Resource Management (SHRM) expressed the hope that the rule “will help ensure that worker classifications are accurate, reflect today’s modern workplace, and accommodate the needs of employers and workers alike.”

Today, independent contractor status standards are largely based on federal court interpretations of the Fair Labor Standards Act (FLSA), because that law didn’t provide a clear definition. The U.S. Supreme Court has weighed in on this issue with an “economic realities” standard, yet various lower courts have interpreted its meaning differently.

“Core” Status Determination Factors

In its proposed regulation, the DOL tries to prioritize factors used to determine the economic reality of a given work arrangement. Specifically, two existing factors would be promoted to “core” factor status:

1. The nature and degree of the worker’s control over the work, and

2. The worker’s opportunity for profit or loss based on initiative and/or investment.

The greater the worker’s control over the work, and the greater the opportunity for profit and loss, the greater the likelihood that independent contractor status exists.

“These factors,” according to the DOL, “help determine if a worker is economically dependent on someone else’s business or is in business for himself or herself.” If both factors indicate a worker is an independent contractor, that would strongly support this status, regardless of what other criteria might suggest. The reverse is also true.

Three other factors are added to the mix, but are described merely as “additional guideposts.”

1.The amount of skill required for the work,

2.The degree of permanence of the working relationship, and

3.Whether the work is part of an “integrated unit of production.”

A high degree of skill would point toward independent contractor status. A high degree of permanence would point in the other direction. However, if a worker had a long-term relationship with a company, that wouldn’t necessarily point to “permanence” if there’s no indication that the company has implied to the worker that the work will continue indefinitely.

“Integrated Unit” Standard

Being part of an “integrated unit of production” indicates employee status. But what does that mean? An assembly line worker would easily qualify, but an Uber driver would not. The issue isn’t whether the work being performed is essential to the “potential employer’s” business. Rather, under this test, “discrete, segregable services for individual customers is not part of an integrated unit of production,” the proposed rule explains.

It also states that requiring workers to do certain things doesn’t necessarily affect the “workers’ degree of control over the work.” Those certain things are “requiring an individual to comply with specific legal obligations, satisfy health and safety standards, carry insurance, meet contractually agreed-upon deadlines or quality control standards, or satisfy other similar terms that are typical of contractual relationships between businesses.”

Reality vs. Theory

Finally, the proposal states that “the actual practice of the parties involved is more important than what may be contractually or theoretically possible.” So, for example, if workers treated as independent contractors technically have the ability to negotiate their work arrangements (including pay) with the company they’re working for, or other companies, but never exercise that theoretical opportunity, that could help the worker make the case that he or she should be treated as an employee.

It could take several months for the proposed rules to be finalized. Initial reaction to the proposed rule from labor-oriented organizations has been negative. “The DOL’s anti-worker proposal dramatically and improperly narrows coverage for workers under the FLSA,” was the National Employment Law Project’s assessment of the proposal.

Employers should also be mindful of the fact that this rule would be only advisory in nature and lack the authority of a federal law. Thus, it would only be taken into consideration by a judge in a trial, but not be the sole source of authority. In addition, employers are also subject to state laws, some of which make it easier for workers to achieve employee status than federal standards. Contact Kirsch CPA Group at 513.858.6040 for more information.