April 13, 2024

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Employee vs. Independent Contractor: An Evolving Definition

Paul Lopez | 4/1/2024

Are people who work with your business “independent contractors” or “employees?” It can be a constantly changing distinction depending on the current presidential administration.

A new rule issued by the Biden Department of Labor (DOL) sought to establish independent contractor status under the Fair Labor Standards Act (FLSA). That regulation rescinds a rule from the Trump administration, which had in turn narrowed a definition established under President Barack Obama in 2015.

These ever-shifting sands — first set with the 1938 passage of the FLSA and later the “economic reality” test established by the U.S. Supreme Court in 1944 — only further complicate an already complex situation wrought with extraordinary complexity and specificity. A former DOL administrator estimated that “no fewer than 100 different federal and state statutes regulating worker classification under at least six different types of employment and tax laws.”

Adding further complexity is the fact that commonly-used independent contractor agreements do little to insulate employers from liability. All that matters is whether the relationship meets the DOL’s latest qualifiers.

This is a potentially huge — and growing — issue affecting a sizeable part of the American workforce. Full-time, parttime and occasional “independents” now number 71.2 million and in five years will make up 33% of the workforce, notes MBO Partners.

With the rise of “gig work” and true independent contractors working ever-more closely as part of their clients’ teams, concern has risen about worker exploitation arising from misclassification. Alleged misclassification had led to lawsuits filed by state governments, worker groups and others.

What do these “independent” workers want and are the rules “protecting” them? Almost two thirds say it is entirely their choice to work independently, and nearly 80% are “very satisfied” being independent, with only 1% saying they were “very dissatisfied.”

This disconnect between what workers want and the “protections” the government seeks to enforce upon employers is costing both dearly. In addition to the employer cost of new obligations and potential litigation, new regulations could come at a high price to the workers themselves. Some 3.43 million reclassified contractors would lose part-time or full-time jobs with net earnings losses of $42.1 billion, notes one study.

With the new rule having taken effect, it is expected that business groups, which successfully have delayed the rule in the past, will challenge it again in court. If your organization uses independent contractors, it might be wise to contact your employment lawyer to see if these shifting sands could impact your business.

For more than 50 years, Tripp Scott has played a leadership role in issues that impact business.

Learn more at TrippScott.com.

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