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You are here: Home / Employment Law / DOL Officially Withdraws Regulation Clarifying Proper Independent Contractor Classification

DOL Officially Withdraws Regulation Clarifying Proper Independent Contractor Classification

May 10, 2021 //  by Joseph Pettygrove

The U.S. Department of Labor (DOL) recently “withdrew” a regulation widely regarded as “pro-employer” that was set in motion last fall towards the end of President Trump’s administration. We’ll spare you the procedural and regulatory history – the bottom line is this: the Trump-era rule simplified the test for identifying a properly-classified independent contractor, and the DOL under President Biden has ditched that short-lived rule in favor of the long-standing prior test widely regarded as more subjective, more complicated and more worker/employee-friendly (if you’re interested in learning more about the precise differences in the rules, you may want to check out this article from the Indiana Lawyer). 

This change in DOL’s direction from one administration to the next isn’t particularly startling, but it should be significant – at least to the many employers out there who utilize independent contractors (i.e., vendors) to supply physical labor or other human services.

Why? Because classifying (and paying) a worker as an independent contractor when the law regards them as an employee has multiple and serious legal consequences. The DOL (and most state equivalents) want to ensure that employees are receiving minimum compensation, overtime and other wage/hour protections. The Internal Revenue Service (IRS) wants to ensure that employers are properly withholding and reporting taxes at the time of payment. State workers’ compensation and unemployment agencies want to make sure employers are properly funding their respective benefit systems so eligible employees can draw on them when needed. An employee misclassified as a contractor – and therefore paid as a contractor and not employee – means someone (or often multiple people) aren’t getting the money or other benefits to which the law entitles them. And these agencies have a host of enforcement mechanisms—not to mention the possibility of lawsuits by misclassified employees themselves—to ensure that employers “correct” their misclassifications. Those corrections are typically quite pricy and can include back wages, back taxes, penalties, liability for medical treatment, payment of the newly-classified “employee’s” attorney fees and more (plus the costs and disruption of government investigations, follow-ups and extra oversight).

And this is critical: even though different government agencies and courts use different tests to determine proper contractor classification, they tend to center on certain common principles. Perhaps the most significant is that a worker and the person using that workers’ services do not themselves get to “decide” whether they want an employment relationship or a contractor one. The relevant laws and regulations all start from a presumption that any given individual worker is an employee. It is the alleged employer’s responsibility (burden of proof) to present sufficient, relevant evidence showing that the nature of the work and the nature of the relationship meets each relevant legal test(s).

Employers of all shapes and sizes across all industries routinely get this wrong, relying on long-standing but dangerous myths. For instance, a long-running company or industry tradition of treating certain workers as contractors does not matter. The fact that a worker may prefer an independent contractor arrangement (particularly the payment-by-1099 aspect that often accompanies that arrangement) does not matter. The often-uttered phrase, “I wasn’t intentionally trying to harm anyone or break any law,” does not matter. In the end, what matters is whether or not an “employer” can show that the day-to-day realities of a workers’ job “check all the boxes” (or at least check enough of the boxes) that apply to a recognized legal standard.

Generally speaking, an organization’s independent contractors should be far fewer in number and perform very different tasks under very different circumstances compared to the organization’s regular employee workforce. The more contractors you have, and the more their work “looks like” the work commonly performed by employees, the greater the risk of misclassification. The DOL’s roll-back of a more employer-friendly test should serve as a reminder of the need to periodically audit pay classifications (be they contractor v. employee or exempt v. non-exempt) as well as pay practices (e.g., proper calculation of overtime, no improper deductions from exempt employee salaries) to avoid the significant exposure associated with a government agency (or a court) notifying you that you got it wrong.

Joe Pettygrove leads KGR’s Employment Law Practice. You can learn more about him here or contact him at jpettygrove@kgrlaw.com.

Category: Blog, Employment LawTag: Joseph Pettygrove

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