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Is that Independent Contractor Now an Employee?

| Dec 9, 2022 | Business Law

Proposed Federal Rules Will Increase Misclassification Risks for Many Businesses

The United States Department of Labor (DOL) has proposed new rules for determining whether a worker is an independent contractor or an employee. The new framework places increased scrutiny on business, making it much more difficult to lawfully classify workers as independent contractors.  If the changes are implemented, almost every business that uses independent contractors, including large portions of the gig economy, will be impacted.  At a time when many businesses are attempting to right-size their workforce to align with a declining economy, they may have to increase head count and payroll costs by converting their independent contractors to employees.

At the federal level, the DOL’s test for determining independent contractor status has varied drastically from administration to administration.  There are significant policy interests driving the proposed changes.  One concern for business owners with this change is the possible expansion of the pool of potential union members.  Independent contractors cannot be in a union.  However, if the contractors are reclassified as employees, they can join a union.  While the impact of the proposed rules does not discriminate by industry, for gig economy employers and many transportation/delivery employers, the proposed rules could have severe consequences.

While the DOL has extended the time for public comments from November 28th to December 13th, predictions indicate they will be implemented with little to no material changes.  The proposed rules require businesses to evaluate several factors before classifying a worker as an independent contractor. Under the proposed rules, businesses would have to apply a more stringent version of the Trump administration’s “multi-factor economic realities test” consisting of six factors:

  • The nature and degree of the worker’s control over the work;
  • the worker’s opportunity to profit or loss based on initiative;
  • investments by the worker and the employer;
  • the degree of permanence in the working relationship;
  • the extent to which the work performed is an integral part of the employer’s business; and
  • the degree of skill and initiative exhibited by the worker.

Of additional concern to business owners, the six factors are not exhaustive and the DOL reserves the right to consider “additional factors” beyond the six.

Worth noting, the federal rules represent the floor of regulations for matters under the DOL’s purview, which allows states to have more exacting requirements, which must be followed (although the IRS will continue to follow its own rules). Illinois is among many states that use even more rigorous standards. For example, under the Illinois Wage Claim Act, all workers are presumed to be employees unless and until each of its three factors are proven in a proceeding:

  • The worker 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;
  • the 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
  • the worker is engaged in an independently established trade, occupation, profession, or business.

K+H is closely monitoring the federal issue and its impact on Illinois business owners. An update will be posted when the DOL issues the final rules.

Businesses of all industries and sizes must be aware of this determination, as it can impact workers compensation, employer tax liability, unemployment insurance obligations, and increase the overall cost to hire workers. Moreover, the new rules take aim at pandemic driven hiring practices where some businesses opted for the convenience of engaging remote workers as contractors rather than as employees to avoid state law regulatory entanglements.

To ensure that your business is correctly categorizing employees and independent contractors, or to answer any other labor and employment questions, reach out to your K+H attorney, or contact Andy Boling of the Employment Practice Group.