Department of Labor focuses on independent contractors – are you in compliance?
On October 13, 2022 the Department of Labor (DOL) informed businesses that it is proposing to modify the rule for how it determines whether a worker is an employee or an independent contractor, under the Fair Labor Standards Act (FLSA). Some people refer to independent contractors (IC) as a freelancer, or a 1099 worker, or a consultant, or a contractor. I will use the term IC to refer to any of these type of workers.
The new proposed rule seeks to rescind a 2021 rule, and replace it with a new rule. There is a December 13, 2022 deadline for interested parties to submit comments on the proposed rule, so this means that the new rule has not taken effect yet.
The DOL claims that the new rule will simply go back to the long-standing 6-factor economic realities test, with some tweaks that would focus on the following:
1) the worker’s opportunity for profit or loss due to their managerial skill;
2) the worker’s investment;
3) the permanency of the work relationship;
4) the degree of control by the company over the worker;
5) whether the work is an integral part of the company’s business, and
6) the worker’s skill and initiative.
The overarching analysis will be to determine whether, looking at all of these factors, it shows that the worker is in business for him/herself. If the conclusion is no, then they should be classified as an “employee” and not as an “independent contractor.”
Regarding element #1 above, the DOL will look at the extent to which the worker’s business judgment or acumen affects their opportunity for profit or loss. For example:
- a worker who never negotiates his/her rate of pay may have very little opportunity for profit or loss;
- if a salesman’s major determinants of profit or loss (such as the distribution of sales leads, which products they could sell, which territories they can sell in, the hiring/firing of subordinates, the ability to overwrite commissions), are controlled exclusively by the business, that will not support this element;
- the following facts, can be relevant to assessing the degree to which the worker’s managerial skill affects the worker’s economic success or failure in performing the work: whether the worker determines the charge or pay for the work provided (or at least can meaningfully negotiate it); whether the worker accepts or declines jobs or chooses or can meaningfully negotiate the order and/or time in which the jobs are performed; whether the worker engages in marketing, advertising, or other efforts to expand their business or secure more work; and whether the worker makes decisions to hire others, purchase materials and equipment, and/or rent space (as opposed to the amount and nature of the worker’s investment). The more “no” responses to these factors, the more likely that they are an employee.
- Workers who are paid an hourly have no risk of loss, and have no incentive to work faster or more efficiently in order to increase their opportunity for profit, and this factor may suggest employee status. Whereas workers hired on a flat-rate-per-job basis would be the opposite.
- Workers whose earnings are derived primarily from their “fixed” commissions have no meaningful opportunities for profit, nor any significant risk of financial loss, and therefore indicate employee status.
- Worker who decide which assignments to accept based on which jobs are more profitable, with no negative consequences for turning down jobs, indicate IC status.
- A worker who produces their own advertising, negotiates contracts, decides which jobs to perform and when to perform them, and decides when and whether to hire helpers exercises managerial skill that affects their opportunity for profit or loss, indicating IC status.
Element #2 above, will be analyzed by the DOL as follows:
- An investment borne by the worker must be capital or entrepreneurial in nature.
- Costs borne by the worker simply to perform their job (e.g. tools and equipment to perform a specific job) are not evidence of capital or entrepreneurial investment.
- The DOL will consider the nature of and reason for the investment, so it will look to see if the investment was made to support an independent business, such as increasing the worker’s ability to do different types of or more work, reducing costs, or extending market reach).
- Investments should be large expenditures, such as buying a welding machine, not negligible items such as gloves.
- The use of a personal vehicle that the worker already owns is generally not an investment.
- The DOL proposed to compare the worker’s total investment to the company’s total investment, including office rental space, advertising, software, phone systems, and insurance.
Element #3 above, will be analyzed by the DOL as follows:
- Independent contractors usually do not work for only one company.
- Working exclusively for one company suggests “employee” whereas working for multiple companies on a project-by-project basis suggests independent contractor under this third factor.
- One-year contracts that are automatically renewed suggest permanence of relationship, and indicate the worker is an employee.
Element #4 above, will be analyzed by the DOL as follows:
- Control can be exerted directly in the workplace by an employer, such as when it sets a worker’s schedule, compels attendance, or directs or supervises the work.
- Business can “control” a worker even without direct supervision, assignment, or scheduling, if it relies on technology to: supervise a workforce, set prices for services, or restrict a worker’s ability to work for others.
- Lack of control if the worker can sell their products or services on the market for whatever price they can command.
- If the nature of a business requires a company to exert control over workers, then those workers may be employees, not independent contractors.
- If a company hires, trains, supervises, and directs the workers to ensure compliance with the governmental requirements, that may show “control” and weigh in favor of “employee” status.
- The facts and circumstances of each case must be assessed, and the manner in which the company chooses to implement such obligations will be highly relevant to the analysis. For example, if a company requires all individuals to wear hard hats at a construction site for safety reasons, that is less probative of control; if a company chooses a specific time and location for weekly safety briefings and requires all workers to attend, that is more probative of control. Similarly, if a company requires workers to provide proof of insurance required by state law, that is less probative of control; if a company mandates what insurance carrier workers must use, that is more probative of control.
- A company’s direct control over a worker’s schedule can be evidence of “employee” status; whereas scheduling control by the worker is indicative of an independent contractor relationship, such as when the worker is not required to report for work, does not punch a time clock, does not have a set schedule, and does not face discipline for not working.
- Schedule flexibility, weighing in favor of independent contractor status, is shown when workers set their own hours and days of work.
- Sham flexibility will be scrutinized, such that if the ability to pick one’s shift is offset by the limited hours provided by the company or the company claims to allow a worker an accommodating schedule, but arranges the work in a way that makes finding other clients impossible, then meaningful scheduling flexibility may not exist. Moreover, a company may also exert so much control over the amount or pace of the work as to negate any meaningful scheduling flexibility.
- Drivers who are able to set schedules that are entirely of their making, and who can select their own routes, and turn down jobs without penalty tend to exercise business-like initiative, illustrative of an independent contractor.
- Giving a worker the power to decline work, and thus maintain a flexible schedule, is not alone persuasive evidence of independent contractor status if the employer can discipline a worker for doing so.
- A company’s close supervision of a worker on the job may be evidence of “employee” status. Conversely, the ability to work independently without close supervision may be evidence that a worker is an independent contractor.
- In-person, continuous supervision is not required to show supervision. Supervision can be maintained remotely through technology. So, using monitoring systems that can track a worker’s location and productivity, and even generate automated reminders to check in with supervisors can be used as evidence of control by supervision. Also, requiring a worker to log in and out of a service on their cell phone to record when they arrived on a job and when they completed a job has held to be meaningful supervision and monitoring.
- One court found that direct monitoring techniques used to monitor furniture delivery drivers were a form of supervision that made it more likely that the worker was an employee; as company supervised the drivers by conducting follow-alongs; requiring that drivers call their supervisor after every two or three stops; monitoring the progress of each driver on the route monitoring screen; and contacting drivers if they were running late or off course – all of which supported the conclusion that the workers were employees.
- Remote supervision can be shown by using electronic systems to verify attendance, manage tasks, or assess performance, set schedules, discipline staff, or run payroll systems.
- A company that expresses the right to supervise a worker’s work at its discretion may still be evidence of control, even if the company rarely exerts supervision.
- Workers in business for themselves are generally able to set (or at least negotiate) their own prices for services rendered. If the company sets a price for goods or services provided by the worker, that is a form of control indicative of an employment relationship. It is evidence of employee status when an entity other than the worker sets a price or rate for the goods or services offered by the worker, or where the worker simply accepts a predetermined price or rate without meaningfully being able to negotiate it.
- Where a worker has an exclusive work relationship with one employer and does not have the ability to work for others, this indicates employee status. Where the employer exercises control over a worker’s ability to work for others - either by directly prohibiting other work, for example, through a contractual provision, or indirectly by, for example, making demands on workers’ time such that they are not able to work for other employers - this is indicative of the type of control over economic aspects of the work associated with an employment relationship.
- Requiring worker to sign a non-disclosure agreement does not demonstrate control, but requiring the worker to sign non-compete agreement does show control over the worker.
Element #5 above, will be analyzed by the DOL as follows:
- A worker who performs work that is integral to an employer’s business is more likely to be employed by the business, whereas a worker who performs work that is more peripheral to the employer’s business is more likely to be independent from the employer.
- If the business could not function without the service performed by the worker, then the service provided is integral. E.g., exotic dance club could not function without exotic dancers; security guards were integral to a business where company was formed specifically for the purpose of supplying private security; nurses are integral to a business that provides on-demand health care personnel.
- In most cases, if a company’s primary business is to make a product or provide a service, then the workers who are involved in making the product or providing the service are integral.
Element #6 above, will be analyzed by the DOL as follows:
- Does the worker use specialized skills to perform the work? This factor indicates employee status where the worker lacks specialized skills. Where the worker brings specialized skills to the work relationship, it is the worker’s use of those specialized skills in connection with business-like initiative that indicates that the worker is an independent contractor instead of an employee.
- General driving (delivery driver/taxi driver) is not a specialized skill; janitorial work does not require specialized skills; landscape workers and call center workers do not involve special skills.
- Example: A highly skilled welder uses these skills for marketing purposes, to generate new business, and to obtain work from multiple companies. The welder is not only technically skilled, but also uses and markets those skills in a manner that shows business-like initiative.
These six factors are not to be applied mechanically but should be viewed along with any other relevant facts in light of whether they indicate economic dependence or independence.
The Department of Labor (DOL) did not include the whether the worker created a corporation or receives a Form 1099 as a factor because it was concerned that this may reflect mere labels rather than the economic realities. The DOL specifically noted that if a company requires a worker to set up a corporation in order to perform work for it, this may be evidence of the employer’s control, rather than a worker who is independently operating a business.
Companies are reminded that the above 6-factor test is looked at as a whole, or a totality of the circumstances. So, even if one factor demonstrates employee, if the remaining five factors demonstrates independent contractor, the worker may still be an independent contractor.
It is always wise to have an experienced employment lawyer analyze your specific situation because misclassifying workers as freelancers/ independent contractors when they really are employees, can be a very expensive mistake.
If you would like an experienced employment lawyer to analyze your Florida business arrangement with workers please contact us by email or you may call us at 1-772-465-5111.
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