- The U.S. Department of Labor has proposed a federal independent contractor rule revising its interpretation of the Fair Labor Standards Act's classification to "bring clarity and consistency" on how employers decide who is an independent contractor and who is an employee.
- The proposed regulation includes an "economic reality" test to help determine whether individuals are in business for themselves or economically reliant on an employer. Part of the test includes two factors — whether the person has the opportunity for business profit or loss and to what degree they control the work they perform. Other factors that can be used as "guideposts" are the level of skill required to perform the job, the performance of the worker-employer relationship, and whether the work is "part of an integrated unit of production."
- The rule gives some leeway to employers, allowing them to consider a work relationship's "actual practice" rather than what is contractually or theoretically possible. The DOL’s Wage and Hour Division Administrator Cheryl Stanton said in the press statement that the new federal guidelines should help reduce worker misclassification.
The classification of workers as independent contractors or employees is a hot button issue in the construction industry. Some unscrupulous employers use the independent contractor status to deprive those that should be classified as employees of overtime pay, workers' compensation coverage and other benefits. Foreign-born workers are particular targets because they often are afraid of the repercussions — like deportation and threats of violence against them and their families — of reporting their employers to authorities.
The DOL's publishing of proposed federal regulation regarding independent contractor status, said attorney Joshua Holt with Smith, Currie and Hancock LLP in Virginia, is a departure from the agency's previous position of simply being a source of guidance on the issue.
The Internal Revenue Service also provides guidance on independent contractor status because some employers misclassify workers to avoid withholding federal taxes from their pay and contributing Social Security and Medicare funds.
Whether or not a federal independent contractor rule will have an impact on construction contractors, however, largely depends on the state in which they operate, Holt said. Much like minimum wage laws, states can enact stricter measures for what constitutes an independent contractor. In states without independent contractor laws, federal regulation "would fill the vacuum," he said.
Holt recommends that all contractors “know your state [law] and err on the side of following the stricter of the two.”
One state that has a very strict interpretation of the independent contractor definition is California. Under a law that went into effect at the beginning of this year, California employers must use the “ABC test” to determine whether a person is an independent contractor or employee. Workers can be considered independent contractors only if they:
- Perform work without control and direction of the hiring employer.
- Offer services that are outside the employer’s normal scope of work.
- Usually offer their services as part of a business.
Barring industry intervention that resulted in an exemption for licensed subcontractors, the second step could have prevented general contractors that self-perform certain work from subcontracting those jobs.
The proposed DOL regulation would not impact California, said Peter Tateishi, CEO of the Associated General Contractors of California, unless "the court were to strike down the [existing state] law, this would be the default.”
DOL's proposal is being processed for publication in The Federal Register either later this week or next week, senior officials said; once published, it will be subject to a 30-day public comment period.