DON’T DO THIS: Misclassify your employees as independent contractors

While not quite as outrageous as slavery, ignorance, or misogyny, today’s edition of “Don’t Do This” will apply most practically to readers of this blog.

Yesterday, the U.S. Department of Labor officially withdrew its “Independent Contractor Rule.” The DOL had proposed an “economic reality” test to determine whether an individual is in business for him or herself (independent contractor) or is economically dependent on a potential employer for work (Fair Labor Standards Act employee). Specifically, the DOL previously identified two “core factors” that are most probative on this issue: (1) The nature and degree of control over the work; and (2) The worker’s opportunity for profit or loss based on initiative and/or investment.

Additionally, the DOL identified three other factors that may serve as additional guideposts in the analysis, particularly when the two core factors do not point to the same classification. The factors are:

1. The amount of skill required for the work.
2. The degree of permanence of the working relationship between the worker and the potential employer.
3. Whether the work is part of an integrated unit of production.

The DOL also provided a series of examples to show how these rules applied in real life, one of which involved a gig economy worker whom the DOL considered an independent contractor. (More on this in a bit. Spoiler alert: Grab your clutching pearls now.).

The DOL cited three reasons for withdrawing the rule

• The independent contractor rule was in tension with the FLSA’s text and purpose and relevant judicial precedent.
• The rule’s prioritization of two “core factors” for determining employee status under the FLSA would have undermined the longstanding balancing approach of the economic realities test and court decisions requiring a review of the totality of the circumstances of an employment relationship.
• The rule would have narrowed the facts and considerations comprising the analysis of whether a worker is an employee or an independent contractor, resulting in workers losing FLSA protections.

The net effect is that more individuals will be considered employees rather than independent contractors. That matters because employers must pay employees at least the federal minimum wage for every hour they work and overtime compensation at not less than one-and-one-half times their regular pay rate for every hour over 40 in a workweek. FLSA protections do not apply to independent contractors.

The practical effect is that nothing has really changed in 2021 because the proposed independent contractor rule never took effect.

Even Steven.

But, let’s get real. This is the tip of the iceberg. If the states in which you conduct business don’t have more employee-friendly wage and hour rules, the feds won’t be far behind over the next four years during the Biden administration. That’s not partisan politics. It’s just facts. For example, for those of you with gig workers, the DOL wants to classify them as employees too.

I told you those pearls would come in handy.