When 2021 dawned, rules on classifying workers as independent contractors promised to get easier and more employer-friendly. But then the Trump administration-led final rule was rescinded, and clarity is back to square one. How will this affect working with contractors moving forward? Let’s take a look:
In January, the U.S. Department of Labor (DOL) announced a final rule simplifying employee versus independent contractor standards under the Fair Labor Standards Act (FLSA). The rule favored the “economic reality” test to determine whether a worker should be classified as an employee or an independent contractor. Questions at the heart of the test: What’s the nature and degree of control over the work, and what’s the worker’s opportunity for profit or loss based on their initiative and/or investment? The rule called out three more factors that could serve as additional guideposts: the amount of skill required for the work, the degree of permanence of the working relationship, and how the work is integrated into what the employer does.
But with the newest rule gone, where does that leave us? The Texas Workforce Commission uses what it calls a 20-point comparative approach to classify workers, while the IRS streamlined theirs into an 11-factor test that covers behavioral control, financial control, and the nature of the relationship. President Biden has said he supports a stringent “ABC” test—similar to what California, Illinois, and Massachusetts use—which is the furthest from TWC’s 20-point test yet.
“After rescinding the simpler independent contractor test, the test the U.S. DOL will employ at this point is the multi-factor ‘economic realities’ test. But companies definitely need to stay tuned for any potential attempts by the DOL to adopt the strict ‘ABC’ test in future rulemaking. That test is an exceedingly hard test to meet,” indicates Amy Beckstead, employer-side employment attorney at Beckstead Terry PLLC.
In the meantime, pay attention to the most common areas for which employers are fined. They include workers classified as independent contractors who routinely work what would otherwise be considered overtime. An Austin clean-up company found this out the hard way in 2020 when it was forced to pay $44,400 in back wages to 11 misclassified employees who worked more than 40 hours a workweek. The company was also cited for FLSA recordkeeping violations and for failing to provide general notice to its employees about their rights under the Family Medical Leave Act (FMLA).
Texas cases involving insurance sales agents and construction workers were recently settled, too. Also of note, Texas recently created a new category for gig workers who find work through digital platforms like Uber. They’re considered “marketplace contractors” with a set of rules all their own.
The bottom line warns TWC, “Do not underestimate the difficulty of applying these standards to specific individuals performing services. In doubtful cases, always consult a knowledgeable labor and employment law attorney.”
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