DOL Proposes Changes to Classifying Independent Contractors

Under the Fair Labor Standards Act (FLSA), a worker is presumed to be an employee unless they meet the classification standards of an independent contractor. Independent contractors and businesses are keeping an eye on proposed changes to how the federal government classifies employees and contractors. In this case, what’s old is new again.

On Oct. 13, 2022, the U.S. Department of Labor (DOL) published its proposed rule to revise the guidance on classifying employees and independent contractors. As required by law, comments about the proposal can be submitted by 11:59 p.m. on Nov. 28, 2022.

Those familiar with contractor/employee rules and regulations will notice that the proposed rule is not truly new. The proposal mirrors guidance from the Obama administration, which the Trump administration wanted to revise.

The Return of the ‘Totality-of-the-Circumstances’ Test

Many considered the Trump administration’s definition to be a more business-friendly approach that wanted to classify workers as independent contractors if they own their own businesses or have the right to work for competing companies.

The proposed rule has a more layered approach that includes a totality-of-the-circumstances test:

• The opportunity for profit or loss, depending on managerial skill
• Investments by the worker and the employer
• Degree of permanence of the working relationship
• Nature and degree of control
• The extent to which the work is an integral part of the employer’s business
• Skill and initiative
• Degree of independent business organization and operation

The lens through which these factors are considered is whether the individual is dependent on the employer for work or if they are truly in business for themselves. Those favoring the proposed rule say that workers are better protected against employers who treat them like employees but without providing them employee benefits.

Businesses have regulations for employees that are not required for independent contractors:

• Minimum wage
• Overtime
• Record-keeping
• Social Security and Medicare (FICA)

Businesses also benefit by not having to offer health insurance, retirement plans, or other benefits. Contractors do not receive legal protections such as Workers’ Compensation and unemployment insurance. Some states, like New York, have expanded coverage of employment laws to independent contractors.

The Rule Has Been Tested by the Courts

Should the rule go into effect, there is a legal precedent supporting it. The U.S. Supreme ruled in the 1947 Rutherford Food Corp. v. McComb that a worker should be classified based on an “economic realities test” of several factors. Since that decision 75 years ago, courts throughout the U.S. have followed a similar approach. Courts are not beholden to rule according to a DOL rule, but there is a history of judicial opinions that consider a range of criteria in determining whether someone is an employee or a contractor.

States Can Have More Protective Rules

No matter what happens at the federal level, states have the right to implement rules that are more protective toward workers. California, New Jersey, and Virginia are among the states that use an “ABC test” to classify workers.

The ABC test categories a worker as an employee unless all three criteria are met:

• A: The worker is free from the control and direction of the hiring entity
• B: The worker performs work outside the entity’s usual course of business
• C: The worker is customarily engaged in an independent trade, occupation, or business of the same nature as the work performed for the hiring entity

Understanding how a state classifies workers is critical. Misclassified workers can leave a business on the hook for thousands of dollars in retroactive tax liabilities.

Pennsylvania requires that both of the following criteria are satisfied before a worker can be classified as an independent contractor:

• The individual has been and will continue to be free from control or direction over the performance of the services involved, both under the contract of service and in fact
• As to such services, the individual is customarily engaged in an independently established trade, occupation, profession, or business.

Additional criteria must be followed by the construction industry.

Legal Counsel for Business Compliance

Pennsylvania requires businesses to follow a multitude of rules and regulations. Being non-compliant can lead to steep penalties and fines.

At Scaringi Law, our attorneys have focused experience on all aspects of employment law, including how workers are classified. We can keep a business from running afoul of regulations and vigorously defend companies accused of failing to fall regulations.

Speak with one of our attorneys to determine if you are appropriately classifying your workers. Contact us online or call (717) 775-7195 to schedule a consultation.