On September 25, the Department of Labor published in the Federal Register a proposed rulemaking that would clarify and ease the restrictions on independent contractor rules. In a boon to the gig economy, the proposed rulemaking would make it easier to be classified as an independent contractor rather than an employee.
The proposed rulemaking would affect the Fair Labor Standards Act (FLSA). “[T]he Department proposes to introduce a new part to Title 29 of the Code of Federal Regulations setting forth its interpretation of the FLSA as relevant to the question whether workers are ’employees’ or are independent contractors under the Act.” The question of whether a person is an employee or a contractor would be addressed with a multifactor test. Or, as the Federal Register puts it: “The proposed regulations would also explain that the inquiry into economic dependence is conducted through application of several factors, with no one factor being dispositive, and that actual practices are entitled to greater weight than what may be contractually or theoretically possible.” The test would involve two main factors: “the nature and degree of the worker’s control over the work and the worker’s opportunity for profit or loss.” Three other factors would also be considered: “The amount of skill required for the work, the degree of permanence of the working relationship between the worker and the potential employer, [and] whether the work is part of an integrated unit of production.” Furthermore, “actual practices are entitled to greater weight than what may be contractually or theoretically possible.” This more pragmatic approach to deciding whether someone is an employee or independent contractor leans more toward the classification of people as independent contractors.
IRS and the States
The proposed rulemaking will be open for comments until October 26. After that, the new rule may take effect. Employers should therefore be aware that the rule may not take effect. In the meantime, there are other factors to consider. The Internal Revenue Service (IRS), for example, has a test for whether someone is an employee or an independent contractor. Its test has three factors:
- “Behavioral: Does the company control or have the right to control what the worker does and how the worker does his or her job?
- Financial: Are the business aspects of the worker’s job controlled by the payer? (these include things like how worker is paid, whether expenses are reimbursed, who provides tools/supplies, etc.)
- Type of Relationship: Are there written contracts or employee type benefits (i.e. pension plan, insurance, vacation pay, etc.)? Will the relationship continue and is the work performed a key aspect of the business?”
Thus employers should be mindful of the different test that the IRS employs when determining if someone is an employee or an independent contractor. The IRS allows independent contractors who believe they have been misclassified to file a form to collect “Uncollected Social Security and Medicare Tax on Wages [and] to figure and report the employee’s share of uncollected Social Security and Medicare taxes due on their compensation.” Many states, too, may have laws governing the employment relationship. California, for example, defines an independent contractor narrowly and recently passed a law that could classify drivers for Uber and Lyft as employees. Under California’s ABC test, a worker is considered an employee and not an independent contractor unless:
- The worker is free from the control and direction of the hiring entity in connection with the performance of the work, both under the contract for the performance of the work and in fact;
- The worker performs work that is outside the usual course of the hiring entity’s business; and
- The worker is customarily engaged in an independently established trade, occupation, or business of the same nature as that involved in the work performed.
This test would limit independent contractors to those who truly perform their work free from the direction and control of those who hire them and belong to an established trade. Plumbers, electricians, and the like would retain their independent contractor status but many gig economy workers likely would not. Furthermore, “The hiring entity cannot unilaterally determine a worker’s status simply by assigning the worker the label ‘independent contractor’ or by requiring the worker, as a condition of hiring, to enter into a contract that designates the worker an independent contractor.”
Illinois has a test similar to California’s in which a worker is classified as an employee unless:
- “Such individual has been and will continue to be free from control or direction over the performance of such services, both under his contract of service and in fact; and
- Such service is either outside the usual course of the business for which such service is performed or that such service is performed outside of all the places of business of the enterprise for which such service is performed; and
- Such individual is engaged in an independently established trade, occupation, profession, or business.”
By this test, it would seem that gig economy workers are not independent contractors and that a class action lawsuit could be in the offing, if one or more have not already been filed.
In New York, the distinction between employees and independent contractors is similarly drawn to favor the employment relationship. New York states that “Independent contractors are free from:
Control in the performance of their duties.”
Further, “Signs of independent contractor status include a person who:
- Has an established business
- Advertises in the electronic and/or print media
- Buys an ad in the Yellow Pages
- Uses business cards, stationery and billheads
- Carries insurance
- Keeps a place of business and invests in facilities, equipment, and supplies….”
Under these rules, it would again appear that gig workers are not independent contractors. Court rulings have sided with gig workers.
In defining the difference between independent contractors and employees, Texas cites case law, specifically United States v. Silk (1947). In that case, the court cited five factors to consider:
- “the degree of control exercised by the alleged employer;
- the extent of the relative investments of the [alleged] employee and employer;
- the degree to which the “employee’s” opportunity for profit and loss is determined by the “employer”;
- the skill and initiative required in performing the job; and
- the permanency of the relationship.”
This test examines the extent of things and is thus highly fact-specific. Nevertheless, gig workers could find themselves classified as employees under the test.
While the federal government appears to be ready to loosen rules governing independent contractor status, states have rules that would appear to classify many gig workers as employees. Employers should therefore exercise caution when classifying workers as independent contractors.