Labor & Employment

Contractor or Employee? Labor Department changes the rules again

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Bad news for employers that rely on the gig economy: It just got harder to run a business based on independent contractors. Image from Shutterstock.

Bad news for employers that rely on the gig economy: It just got harder to run a business based on independent contractors.

On Tuesday, the U.S. Labor Department released a final rule that revises its interpretation of a provision in the Fair Labor Standards Act concerning how to determine whether a worker is an independent contractor. According to a news release, there are six factors to consider, including the degree of permanence for the work, how much control an employer has over someone’s work and whether the work someone does is essential to the business.

The new rule will take effect March 11. Industries that will likely be affected include home health care, construction, trucking, and ride-share and delivery services. It cuts changes to employee classifications made by President Donald Trump’s administration, which some management-side labor lawyers say their clients didn’t follow out of fear the rules were too lax and could lead to lawsuits.

However, employment lawyers representing plaintiffs say the landscape will change.

“The big picture is that the new rule will slow down the effort by businesses to avoid laws that protect employees by classifying employees as contractors,” says John C. Cook, a partner at the Fairfax, Virginia-based Cook Craig & Francuzenko who practices employee-side employment law.

Angelo Spinola, a shareholder in the Atlanta office of Polsinelli who advises home health care and other businesses, says he expects the Labor Department to aggressively pursue companies that misclassify their employees as independent contractors.

“Expect the gig economy to be in the spotlight for the next few years,” Spinola says.

He advises businesses to be especially focused on whether they have employees and independent contractors working side-by-side doing the same type of work.

“An investigation might lead to a finding of unpaid wages and could force companies to change their models of operation or go out of business,” Spinola says. “In many cases, companies either need to reclassify their independent contractors or build protections around their business model, such as offering an overtime equivalent compensation model for independent contractors who work more than 40 hours a week.”

The rule for how to determine if a worker is an employee or a contractor has been at the center of a political battle. Before Trump took office, there was a multifactor analysis for determining whether a worker was an independent contractor. The Trump administration created an easier test that labor lawyers say benefited employers seeking to classify their workers as independent contractors. That rule examined how much control a company had over its workers and how much entrepreneurial opportunity there was in the job.

The latest six-factor totality-of-the-circumstances test, the Labor Department said in the press release, “restores the multifactor analysis used by courts for decades.” The factors also include the worker’s opportunity for profit or loss, as well as the financial stake and nature of resources a worker has invested in the work.

Kathleen Cahill, who advises employees from her firm in Towson, Maryland, says the rule change “should curtail the use of misclassification that deprives many workers of full and fair compensation, including overtime, health care benefits, workers’ compensation coverage, protection against discrimination and entitlement to social security.”

According to her, the rule will specifically benefit workers in lower-wage jobs. Cahill warns there might be a “period of pushback from businesses and litigation that could indefinitely delay and blunt the intended impact” of the rule change.

Others note the back-and-forth in policy when a different party takes control of the White House.

“This is another situation where employers who relied on a prior administration’s agency decision need to recalibrate,” says Gerald T. Hathaway, a partner in the New York City office of Faegre Drinker Biddle & Reath. He practices management-side employment law.

“This seesaw has become part of being a compliant employer in America,” he adds.

Despite the Trump-era rule change, Hathaway says he continued advising his clients to follow the prior, more stringent test for independent contractor classification.

“My clients are typically risk-averse, and getting an independent contractor classification wrong can be very expensive,” he explains. “I never really changed my advice on independent contractor classification in the wake of the issuance of the Trump regulation because courts were and are not necessarily bound by the Trump regulation, and the state laws were certainly not changed by that regulation.”

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