The Age-Old Argument Of Who Qualifies As An Independent Contractor – Employment and HR

In the final weeks of a tumultuous tenure, then-President Donald J. Trump overridden a long-known and time-tested list of factors used in deciding how to designate an employee as an employee or an independent contractor. President Joseph R. Biden, Jr. then took his place in the Oval Office and suspended Trump’s bill and later completely revoked it. This “rocking” turmoil is due to employers looking for a more reliable way to determine who can stand up to a status review by the US Department of Labor (“DOL”) or the Internal Revenue Service (“IRS”) Uncertainty and confusion resulted.

The importance of properly classifying an employee as an employee or an independent contractor cannot be underestimated. In the event of improper classification, the employer must expect additional taxes, penalties, interest and the reclassification of all employees in the same position to employee status. Among other adverse consequences, employers become liable for employee compensation and other insurance costs and benefits that an independent contractor would otherwise pay themselves.

On January 7, 2021, with less than two weeks remaining, the Trump administration passed a new five-factor test with effect from March 8, 2021, which was later referred to as the “Test of Economic Reality” and the long-standing list of factors play a role in deciding the independent contractor issue. The Economic Realities Test took a two-pronged approach, initially considering: (1) the nature and degree of control the worker has over work; and (2) the employee’s potential for profit and loss. If these two considerations are not sufficient to finally decide the question, three additional factors should be considered: (1) the skill level required for the position; (2) the duration of the employment relationship; and (3) how integrated the role of the worker is into the overall operation of the organization. The aim of this test is to determine whether the employee is economically dependent on a particular person, company, or organization, or whether the employee is instead working for himself Labor Standards Act (Final Rule). “86 Fed Reg. 1168-1248 (January 7, 2021) (to be codified in 29 CFR parts 780, 788 and 795).

The test of “economic realities” is seen as another employer-friendly policy of the Trump administration that would never see the light of day. On January 20, 2021, the Biden administration conducted a regulatory freeze of the economic reality test, which was still being reviewed by the Biden administration itself. See “Regulatory Freeze Review”. 86 Reg.No. 12,535 (January 20, 2021). The DOL then finally withdrew the test of economic reality on May 6, 2021. In doing so, DOL cited three main reasons: (1) that the economic reality test was contrary to the provisions of the Fair Labor Standards Act (“FLSA”) text and purpose and relevant court judgments; (2) that the prioritization of two “core factors” by the FLSA’s rule for determining employee status would undermine the long-standing test and case law that requires a review of the entirety of the circumstances surrounding the employment relationship; and (3) that the rule would have narrowed the facts and considerations involved in analyzing whether an employee was an employee or an independent contractor, which would have resulted in employees losing FLSA protection. See “Independent Contractor Status Under the Fair Labor Standards Act (FLSA): Withdrawal”. 86 Reg.No. 24,303 (May 6, 2021).

Employees are self-employed more than ever. With this in mind, the Trump administration attempted to change the way we distinguish workers from independent contractors in an extremely critical way by examining whether an employee is dependent on the alleged employer for work rather than the one received Income. That is, one can be considered an “independent contractor” for this test by generating his own business and work, regardless of his continued reliance on another company for income.

While the Biden administration has yet to announce whether we will continue pursuing the longstanding test or pass a new one, it is worth noting that the US House of Representatives (“House of Representatives”) recently passed the “Protecting the Right” to Organize Act “which would apply the California” ABC test “to work organizations. See Law to Protect the Right to Organize, HR 842, 117th Cong. (2021). The ABC test was originally written at Dynamex Operations West, Inc. v. Superior Court, 4 Cal.5th 903 (2018) develops and uses a three-part investigation: (1) whether the employee is responsible for the performance of. The work is under the employer’s control; (2) whether the work is in the ordinary course of the employer’s business and (3) whether the employee is “ordinarily” engaged in an independent trade or business related to the work being performed for that employer. Experts in the field believe that this ABC test favors the results of “employees” over “independent contractors”.

While this issue is heading in this direction at the federal level, it is equally important to know and consider the laws of your own state. For example, New Jersey courts, in addition to doing essentially the same tests as the California ABC test1, conduct an additional test to determine whether the person at issue is normally engaged in an independent trade, profession, or business. See NJ Rev. Stat. § 43: 21-19 (i) (6) (2018). A test similar to the traditional set-of-factors test is now being used in New York, which, among other things, takes into account whether the employee: (1) works at will; (2) is free to pursue another occupation; (3) receives fringe benefits; (4) is on the alleged employer’s payroll; and (5) on a fixed schedule. See generally Bynog v. Ciprani Group, Inc., 1 NY3d 193 (2003).

As noted above, a misclassification between “independent contractor” and “employee” status has significant consequences for both employees and employers, including but not limited to: (1) higher tax liability as the self-employed tax rate is higher than the one included at FICA; (2) lack of access to unemployment benefits as self-employed contractors do not have an employer who pays unemployment tax (SUTA or FUTA) on their wages; (3) lack of protection from minimum wage and overtime laws under the FLSA; (4) lack of insurance coverage so that an independent contractor may not receive employee compensation or government disability insurance; and (5) lack of benefit options such as retirement benefits, health insurance, or paid time off. See Blakely-Gray, “What the Biden Administration Means for the New DOL Rule on Contractors,” available at https://www.patriotsoftware.com/blog/payroll/new-dol-rule-contractors-2021/
[Last Accessed: June 2, 2021].

Given the significant adverse effects that the misclassification of an independent contractor can have on companies and workers alike, it is helpful for the contractor to sign a written contract that specifically identifies the worker as an independent contractor and identifies the employee’s responsibilities for self-employment tax and for all other benefits and insurance. As part of the duty of care, proof of the tax identification number, the company name / the documents and the insurance of the person is essential. The company may wish to add a statement of what the independent contractor is responsible for while stating that the company has no control over the independent contractor’s work, the manner in which the work is performed, including but not limited to the work of the Independent Contractor, will perform date (s), time (s), duration (s), place (s), method (s) or any other specific detail of the work other than the final product. It is helpful to point out that the independent contractor is not exclusively working for the company and that the independent contractor is not prohibited from working with other third parties. Of course, one should include clauses protecting the company’s confidential and proprietary information. Employers should seek advice from competent employment and employment advisors who may contain other favorable clauses that not only use the twenty factors from the long-term factor test, but also the factors from the ABC test. While not final, it will certainly help if tested.

footnote

1 These are: (1) like; (2) when; and (3) where the work is being done.

The content of this article is intended to provide general guidance on the subject. Expert advice should be sought regarding your specific circumstances.