U.S. businesses are increasingly misclassifying employees as independent contractors rather than employees, claims the Department of Labor.
A new Administrator’s Interpretation from the DOL is sending ripples of concern through the business community. The concern is that new regulations will have the federal government trying to classify more contractors as employees and increasing costs.
The key to properly classifying workers, the DOL’s Wage and Hour Division (WHD) notes (PDF) in Administrator’s Interpretation No. 2015-1, is:
“. . .whether the worker is economically dependent on the employer [in this case, the worker should be considered employee] or is really in business for him or herself [which means they are an independent contractor).”
The Interpretation includes six factors to help employers determine the proper classification for their workers. Factors include how essential a worker’s efforts are to the employer’s business; whether a worker’s managerial skill affects the worker’s opportunity for profit or loss; and how the worker’s relative investment compares to the employer’s investment.
According to numerous reports, the new guidance would increase the ranks of employees over independent contractors.
As Richard J. Reibstein of the firm Pepper Hamilton LLP noted:
“The new Interpretation signals a renewed emphasis by the Labor Department on cracking down on companies that it believes are misclassifying employees as independent contractors. Coming on the heels of a number of recent court decisions in high-profile class actions against Uber and Lyft, as well as a $228 million misclassification settlement by FedEx in June 2015, companies that utilize independent contractors… have more reason than ever to enhance their compliance with the laws governing independent contractors.”
The International Franchise Association issued a press release in which it called the new guidance “unnecessarily intrusive.”
IFA President and CEO Steve Caldeira, CFE, said in the release:
“The new guidance fundamentally misinterprets how franchising works. Many franchisees use contractors because of the unique nature of their businesses that require flexibility to meet market demands in the industries in which they operate. They should not be forced to change their business model because of some unelected, pro-labor, anti-business bureaucrats in Washington.”
Overall, the DOL’s “misclassification guidance” could impact more than 5.8 million business owners and nearly 25 million workers, according to Economic Census data and additional information provided by franchise industry researcher FRANdata.
Industries expected to be impacted include Construction, Cleaning and Facilities Services, Individual and Family Services, and Truck Transportation, according to the IFA.
“Government regulations and red tape are one of the top concerns of our members,” Karen Harned, Executive Director of the NFIB Small Business Legal Center, noted recently regarding regulatory oversight in general. She added:
“Most small business owners can’t count on regulatory compliance specialists and lawyers to help them keep up with all of the new federal regulations they must follow. With an average of 10 new regulations a day, small business owners are spending more time on paperwork and less time focusing on their business. That’s bad for their bottom line and for job growth nationwide.”
Image: Tom Perez, Dept. of Labor