September 25, 2020

What’s in a Name? DOL Proposes Independent Contractor Rule

On September 25th the U.S. Department of Labor published a Notice of Proposed Rulemaking (NPRM) in the Federal Register.  The rule proposes a new standard for classifying a worker as an independent contractor instead of an employee.

The concept is not new. Far from it. In July 2007, I had the honor of testifying on behalf of SHRM during a joint U.S. Congressional hearing on worker misclassification. I was asked, “Why do employers misclassify workers?”  Respectfully, I think it is hard for anyone to get it right. Try assessing one worker under federal and state laws, tests, and rules that vary. The IRS uses its assessment, which is different from the DOL‘s which is different from state definitions. This includes different laws within the same state such as workers compensation and unemployment insurance codes that define “employee” differently!  The odds are fairly good that one agency or another is not going to agree with our classification. Now, fast forward more than a decade and the debates and litigation continue.

I applaud the DOL’s effort to streamline this process.  But, until any federal rule preempts all the state and any related local rules, employers’ challenges will continue.  Having said that, after you read the 38-page introduction, the DOL proposes two “core” factors for assessing worker classification. A worker may be properly classified as an independent contractor if the worker is, “as a matter of economic reality” (1) economically independent from the would-be employer; and (2) in business for him- or herself.

And how do we determine the “economic reality”?  The DOL proposes two factors that “are the most probative.” They are: (1) the nature and degree of the individual’s control over the work; and (2) the individual’s opportunity for profit or loss.

These factors are not new. They have just been re-weighted, so-to-speak, and given greater consideration. For example, click on the IRS link above and you will find these factors, in combination with others.  The DOL’s proposed rule does include other factors, which are described as less probative and given less weight including: (1) the amount of skill required for the work; (2) the degree of permanence of the working relationship between the individual and the potential employer; and (3) whether the work is part of an integration unit of production.

What do you think?  Let the Department of Labor know how these factors will support your current worker classification practices or hinder them. Do they align with other tests you currently have to follow under your state codes, regulations, or agency practices?  Let your voice be heard!  You may submit your comments electronically of by mail through October 25th.