by:  Jonathan K. Driggs

It can be mighty tempting for businesses to treat workers as independent contractors (ICs).  The allure of cost savings can be a powerful draw (no employment-related taxes, no health insurance or other premiums, etc.)  The lack of a clear “bright-line” test to determine which workers qualify as ICs—and inconsistent enforcement efforts from government agencies—have created a false sense of security for some businesses.  But it is time to get real about ICs because the game is about to change in a big way.

The U.S. Department of Labor (DOL) recently indicated that it intends to issue proposed “right to know” regulations under the Fair Labor Standards Act that would require employers to: 1) prepare a written classification analysis describing why a worker qualifies as an IC, and 2) provide a copy of that written analysis to each worker at the time the relationship begins.  It is anticipated that the DOL would view a failure to comply with these requirements as an automatic rejection of the worker’s IC status (i.e., the DOL will treat the worker as an employee).

If these regulations are finalized, it will have the effect of educating workers about their rights (I find that many employees are just as confused about IC requirements as employers are).   Thus, the chance that workers will challenge their IC status will significantly increase.  Further, as previously mentioned, businesses who fail to comply with these documentation requirements may lose the ability to claim the workers are ICs.  This is a big game changer.

So where are we in the process of this potentially changing game?  It is expected that the DOL will issue its proposed “right to know” regulations any day now.  There will be a period for the public to comment on the regulations, the DOL will then consider the comments and release final regulations listing an effective date for these changes to be put in place.  It is difficult to say exactly when this change will be made effective (and it is possible for the process to be derailed), but this is clearly a high-priority issue for the DOL and other government agencies.

One of the reasons why it is such a priority issue—in addition to protecting employee rights—is that it is ultimately a revenue issue (federal and state governments are attempting to collect employment-related taxes that they desperately need).  In tough economic times, it is not surprising that IC relationships are being scrutinized.

A few general points to remember about IC classifications:

  • “Employee status” is the default/preferred classification.  The burden is on the business to prove the worker qualifies as an IC, or the worker is deemed to be an employee.
  • Workers may not waive their rights to employee status if they don’t actually qualify as ICs (so, even if the worker prefers to be an IC, it doesn’t really make a difference).
  • While the IRS and DOL use different tests to determine IC status, both tests focus on whether the business is exercising employer-like control over the worker, versus the worker truly functioning independently.  There is a degree of subjectivity to these tests, so a conservative approach is warranted.
  • Serious liability can result when businesses misclassify workers as ICs, including: 1) assessments for unpaid employment-related taxes, 2) assessments for wage and hour violations (e.g., unpaid overtime pay), and 3) claims by workers for employee benefits they were wrongfully denied (e.g., health insurance, stock options, bonuses, etc.)

So, with serious changes in the wind, it is time for businesses to scrutinize their IC relationships and get their houses in order.  Next month we’ll discuss in greater detail what it takes for workers to qualify as ICs.

This article should not be construed as legal advice.

Jonathan K. Driggs is an employment law attorney with over 18 years of experience, including 3 years with the Utah Labor Commission.

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