Who’s an independent contractor? Who’s an employee? We’re about to find out. Again.

As published in the Sun Sentinal

An op-ed by Tripp Scott's Paul Lopez

Are people who work with your business “independent contractors” or “employees?” The answer can be like the Florida weather: if you don’t like it, wait five minutes — or its business equivalent.

That’s how many companies must feel as they face a new rule issued by the Biden Department of Labor (DOL) on determining independent contractor status under the Fair Labor Standards Act (FLSA). That regulation rescinds a rule from the waning days of the Trump administration, which had in turn narrowed a definition established under President Barack Obama in 2015.

But the rules for determining employment versus contractor status aren’t just ever-shifting. They are also extraordinarily complex and fact-specific. A recent analysis by a former DOL administrator overseeing the FLSA and another top employment law official estimated that there are “no fewer than 100 different federal and state statutes regulating worker classification under at least six different types of employment and tax laws.”

And while many employers believe they are insulated from liability if they require an individual to sign an independent contractor agreement, the truth is that any such agreement is irrelevant. What is germane is whether the relationship between the company and the individual meets the new factors implemented by the DOL.

The battle over classifying independent contractors has been waged almost since the 1938 passage of FLSA, which established a federal minimum wage and time-and-a-half pay for work above 40 hours in a week. Because of the federal law’s vague definition of “employee,” the Supreme Court in 1944 established an “economic reality” test employing six factors to determine how dependent the worker in question is on the business: the degree of “employer” control, the worker’s opportunity for profit or loss, the relationship’s permanency, whether the work is integral to the business, the need for special skills and the worker’s level and type of investments.

Now, with gig work in particular rising, advocacy groups express ever-greater concern about exploitation of workers misclassified as independent contractors. Such misclassification is argued to deprive them not only of FLSA rights due them, but also employer contributions to Social Security, collective bargaining rights and workers’ and unemployment compensation.

Even as employers increasingly finding themselves the subject of lawsuits — frequently class actions — over alleged misclassification, state governments like California and Massachusetts and DOL have gone to bat for ostensibly disadvantaged workers. The 2015 Obama-era rule assigned equal weight to all six factors identified by the Court, with the broader considerations favoring a subjective determination that a worker is an employee. The simpler and more business-friendly Trump administration rule put the focus on just two core factors — profit and loss opportunity and control — increasing the likelihood of confirming contractor status. 

The new Biden regulation restores the Obama DOL’s broader set of considerations, potentially opening the door to voluminous litigation from individuals and entire classes claiming employee status.

Interestingly, commentators point out that two factors don’t seem to be part of the independent contractor versus employee determination at all. One is the desire of the actual workers. According to MBO Partners, full-time, part-time and occasional “independents” now number 71.2 million and in five years will make up 33% of the workforce.

Of those independent contractors, 63% say it is entirely their choice to work independently, with only 9% citing factors beyond their control and the rest a combination of the two. Nearly 80% are “very satisfied” being independent, with only 1% saying they were “very dissatisfied.”

Second, in addition to the costs to employers faced with new obligations and potential litigation, the new regulations could come at a high price to these very workers. One study has estimated that 3.43 million reclassified contractors would lose part-time or full-time jobs with net earnings losses of $42.1 billion, even considering the gains some reclassified employees would realize as higher-paid employees.

The gathering storm is not certain to hit: Business groups, which were successful in delaying the rule, will likely challenge it again in court. Still, with the rule scheduled to take effect next month, companies should plan on keeping their fingers in the legal wind — and their employment lawyers on speed dial.