Wednesday, October 12, 2022

Biden’s Department of Labor proposes significant new independent contractor regulations

Who qualifies as an independent contractor? If the Biden administration's new proposed regulations take effect as drafted, the answer to that question will change significantly. 

Under the proposed new rules, the DOL will use a multi-factor "economic realities test" that considers and balances the following non-exclusive list of six factors to determine whether the worker is truly in business for themselves, or is an employee working for someone else.
  1. Opportunity for profit or loss depending on managerial skill. This factor includes whether the worker determines or can meaningfully negotiate the charge or pay for the work provided; whether the worker accepts or declines jobs or chooses the order and/or time in which the jobs are performed; whether the worker engages in marketing, advertising, or other efforts to expand their business or secure more work; and whether the worker makes decisions to hire others, purchase materials and equipment, and/or rent space. If a worker has no opportunity for loss, and additionally no opportunity for profit other than earned wages, then this factor favors employment status.

  2. Investments by the worker and the employer. A worker making investments that enables him or her to perform a specific job favors employment status. A worker making capital or entrepreneurial investments that support an independent business favors independent contractor status. 

  3. Degree of permanence of the work relationship. A work relationship that is indefinite or continuous favors employment status. A work relationship that is definite in duration, non-exclusive, project-based, or sporadic favors independent contractor status.

  4. Nature and degree of control. More indicia of control by the employer favors employee status; more indicia of control by the worker favors independent contractor status.

  5. Extent to which the work performed is an integral part of the employer' business. When the work performed is critical, necessary, or central to the employer's principal business, then this factor favors employment status. 

  6. Skill and initiative. Where a worker does not use specialized skills in performing the work or where a worker is dependent on training from the employer to perform the work, then this factor favors employment status. Where a worker used specialized skills in connection with business-like initiative on the worker's own behalf, then this factor favors independent contractor status.

This proposed rule replaces the Trump-era rule that gig economy companies applauded by businesses for its clarity and focus on the degree of control and opportunity for profit/loss as the two primary determinative factors. The new proposed rule is a lot hazier and will make it harder for gig businesses to classify workers as independent contractors. 

For now (and likely forever), my mantra for employee vs. independent contractor classification issues remains unchanged — unless it's abundantly clear that your worker is an independent contractor, the safest course of action is to classify them as an employee. The risks of misclassification (i.e., unpaid overtime, missed payroll and other taxes, and penalties for missing health insurance) are just too great to mess around with this issue.