Could your contractors be classed as employees?

Q: When is an employee not an employee?

A: When they’re a contractor.

For years things were literally as simple as that.

As someone who gave their services for a limited period of time (and outside traditional employment terms), contractors would happily forego perks like holiday and sickness pay, because their enhanced contractor salary would reflect this. Employers, meanwhile, benefited from tapping into skilled people as and when they needed. Plus, they didn’t have to have people permanently ‘on their books’. In short, everyone was happy because they knew exactly where they stood.

But then came the rise of gig working and the inexorable rise of the ‘gig economy’.

In 2014 there were just 26 digital companies that relied solely on gig work. During 2014-18 the number of companies that fully operated on gig work increased by 554%, and by 2021, it was estimated that at least 59 million American adults participated in the gig economy in some form or another – that’s around 36% of the entire US workforce. Overall, job growth in the United States between 2010-2020 was only 1.1%, while the gig economy’s growth was a staggering 15%.

But with many of these gig workers now arguing they are heavily dependent on just a single employer for all of their income (such as those that work for Uber and Deliveroo), contractors have recently been fighting to be counted as employees after all – with all the perks and benefits that being an employee offers.

It’s a situation that’s required legislators to have to respond quickly, and last month the US Department of Labor announced its long-awaited proposed rule on contractor classification.

Its latest declaration suggests that HRDs take a more holistic approach to determine whether or not a worker is an independent contractor under the Fair Labor Standards Act. This includes using a six-factor, equally-weighted ‘economic reality’ test. The proposals also directly rescind the current applicable rule.

But, many suggest the new guidelines do little to make things clearer at all – and in fact only muddy the waters further.

So what’s the true picture? TLNT sat down with Mark Wallin, labor and employment partner at Barnes & Thornburg, to hear his analysis of the changes.

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He says it’s now more important than ever for businesses using independent contractors to review their current classification analysis:

Q: Can you briefly summarize how we’ve got to where we are in the contractor/employee debate?

A: The proliferation of gig workers in recent history has increasingly become an area of contention – because once workers are classified as employees, they are immediately eligible for things like minimum pay and holiday. The problem is that determining how gig workers are classified has largely been individual states’ interpretations of certain tests – chief amongst which has been what’s known as the ‘economic realities’ test – which looks at whether people are economically dependent on a particular employer, or whether the gig worker is a freelancer in their own right. What this new DOL ruling will do – if it goes through – is have the force of federal law.

Q: So why is this new DOL proposal proving to be so controversial?

A: In early 2021 the Trump Department of Labor released proposed regulation that would have restated the economic realities test. But this was rescinded by the Biden DOL and a new rule began to be worked on. This new ruling argues that the previous DOL ruling didn’t accurately reflect the last 60-70 years of case law. This new ruling claims to clarify what the DOL view is of the common law, but although it takes elements of the previous 2021 ruling, my view is that it takes things further, and there’s greater opportunity for people to argue misclassification.

Q: How is this?

A: The ruling requires that six factors should be looked at in totality, and that employers should look at all of the factors that determine work being done and the relationship this creates. I feel this now gives less certainty for employers. We’re still at the comment stage, and a final ruling isn’t expected until 2023, but there is a worry there could be mass misclassification and litigation as a result. Of note is that the DOL now seems to consider things like the worker’s opportunity to make a profit or loss based on their ‘managerial skill’ – in other words gig workers being able to prove their businesslike initiative. It implies they have to show they are doing more than just applying their skills, but are also doing things to grow their business, like doing marketing.

Q: Doesn’t this imply workers are more likely to be seen as independent contractors still?

A: What it looks like the DOL is looking for, is for people to demonstrate that they are being entrepreneurial, and that they can distinguish themselves as a small business owner. The more entrepreneurial they are the less they can claim to be ‘bound’ to just one company. But where it could get problematic, is if companies, like Uber, say they don’t have a permanent relationship with that worker, but the worker could counter claim that the reality is that this is not true. So the degree of permanence in the relationship is key, but also whether the worker is left with enough time to be able to promote themselves to other parties.

Q: With the rule currently under review, what’s the best advice you can give to employers?

A: Businesses will naturally have a vested interested to try and continue as they always have. But my advice would be to conduct your own analysis of what they ruling could mean to you – in terms of the people you use, and what you use them for.

Q: What if there’s a grey area revealed?

A: If people are borderline in your analysis, then you either need to change your business so you can maintain your existing classification, or make these people employees. You need to ask what your company can operationally do so people can maintain being independent contractors. The point to remember is that there will be more ambiguity now. The 2021 rule seemed to be clearer. This new ruling will be less clear, and it doesn’t provide more clarity.

Peter Crush is the interim editor of TLNT. He’s an award-winning journalist based in London, and he writes exclusively about the ever-changing world of work.

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