Who is an employee and who is a contractor: the DOL proposal explained

There are just 41 days left for anyone to try to get Biden’s labor department to change its mind on a proposal outlining the legal test that would allow workers to be more easily classified as employees rather than independent contractors under the law. federal wage and hour law.

With the growth of relationships with contractors in the economy over the past few decades, the question of who is an employee with protections and benefits under employment law and who is a contractor not covered by these laws is become essential for large companies, such as Uber Technologies Inc., Lyft Inc., Instagram and others.

Unions, Democrats and some workers say companies are misclassifying their workers as independent contractors to avoid the tax and legal obligations that come with employment. Businesses, Republicans and some entrepreneurs, however, say the relationship is fully within the law and provides more flexibility for the modern economy.

The DOL has moved forward with its proposal to counter what it perceives to be misclassification abuses.

“While independent contractors play an important role in our economy, we have seen in many cases that employers incorrectly classify their employees as independent contractors, especially among our country’s most vulnerable workers,” said Labor Secretary Marty Walsh said when the proposed rule was released earlier this month. “The misclassification deprives workers of their federal labor protections, including their right to collect their full legally earned wages.”

1. What happens next?

Already, trade organizations have urged the Department of Labor to double the 45-day comment period, given the potential impact of the regulations and the 184-page length of the proposal.

Once the comment period ends, the agency will review each comment and prepare to finalize the rule, a process that could take several months.

When the rule is finalized — which is expected to happen in the first quarter of next year — opponents of the settlement will be able to challenge it in court, which some groups have suggested they do.

2. How does the proposed settlement work?

The Department of Labor’s new worker classification proposal outlines a test that examines several factors in the employment relationship between a worker and an employer, to determine whether the worker is truly in business for themselves or economically dependent. of the employer.

The six factors considered by the DOL include: the nature and degree of worker control over the work; the worker’s ability to make a profit or loss; worker and employer investments; the degree of permanence of the employment relationship; the extent to which the work performed is an integral part of the employer’s business; and the degree of skill and initiative shown by the worker.

The agency says that each of these factors carries no more weight than the other when deciding worker status, and that other factors may be considered in the analysis. they indicate that the worker can be in business for himself.

3. How is this different from the current norm?

The Biden DOL’s proposal would replace a simpler worker classification test finalized under the Trump administration that is still in effect. The Trump standard also assesses factors within the employment relationship, but places greater emphasis on the degree of control workers have over their job duties and earning opportunities. The shortened Trump test makes it easier for companies to classify their workers as entrepreneurs.

The Biden plan would use a longer multifactor economic reality test to determine worker status. It lists more circumstances in which the agency might conclude that a worker should be classified as an employee, including whether the work is integral to the business of the business, among other factors. The Biden test would also consider all factors of the employment relationship equally in the analysis, as opposed to the Trump test which focuses on control and earnings.

4. Who does this impact and will it lead to big changes?

Using a rough estimate, as there isn’t much good data available on the number of independent contractors in the United States, the DOL predicts that the regulations could impact more than 22 million contractors.

Independent contractual relationships exist in all sectors of the economy, including trucking, construction, journalism and many others. Drivers from companies like Uber and Lyft, while making up a small portion of the economy’s independent contractors, have also dominated the conversation about worker classification, given the role of technology in our modern economy.

Ultimately, the Biden DOL will decide how much of a splash it wants to make when it comes to cracking down on worker classification if the rule is finalized.

Lawyers for management and the DOL said they don’t expect companies to broadly change the way they classify their workers because the test is based on historical case law and generally reverts to the approach used. under the Obama administration.

While the agency will have more legal leeway to argue that a worker is an employee versus a contractor, lawyers say companies using independent contractors have had years to develop their legal cases to defend those relationships and their business model.

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