Employee or Independent Contractor? The Turbulent World of Worker Misclassification

With everything that has happened in 2020, you may have missed the ongoing battle over worker classification. At issue is how employers pay workers who provide services to that employer. Recently, the U.S. Department of Labor (DOL), Wage and Hour Division, provided employers with guidance on how to determine whether a worker is an independent contractor or an employee. This guidance will have impact on a wide range of businesses, including state-legal marijuana businesses. Although the sale of marijuana remains illegal under federal law, that does not exempt marijuana businesses from federal employment laws. With that in mind, let’s take a look at the guidance from the Wage and Hour Division.

Worker Classification

Before we dive into these recent developments, let’s talk about what we mean when we say “worker classification.” An employer can classify its workers as “employees” or “independent contractors.” For employees, employers must pay payroll taxes on the employee’s earnings, unemployment insurance, workers’ compensation insurance, and must follow rules covering things like training, posting required notices, minimum wage, overtime hours and anti-discrimination. When it comes to independent contractors, employers do not have the same obligations as they would with an employee resulting in lower administrative costs to the employer.

However, an employer cannot decide to classify a worker as an employee or an independent contractor in a vacuum. The classification must reflect the actual relationship between the parties. If an employer’s worker classification is challenged, courts determine what constitutes an “employment” relationship based on a number of factors including whether the worker is truly “independent” from the employer and whether the worker’s business is tied to the employer in some fundamental way. If an employment relationship exists, then a worker is an employee, regardless of whether the employer has classified the worker as an independent contractor. If an employer has misclassified an employer as an independent contractor, it can be costly as there are penalties for failing to abide by state and federal employment laws. Employers who misclassify an employee as an independent contractor can end up owing that employee back wages and owing the state and federal governments for unpaid tax and insurance payments.

Revised Rulemaking at the Federal Level

The problem for employers is that it’s not always clear whether a worker is an employee or independent contractor. To try and clarify things, the DOL Wage and Hour Division put out a rule on September 22, 2020 (the Rule) that would change how the federal government defines an independent contractor for the purposes of wage and hour laws under the Fair Labor Standards Act. The comment period for the Rule has already closed (there were over 1,800 submitted). The Wage and Hour Division hopes to have the Rule finished before the end of the year (and before the end of President Trump’s term).

Currently, the federal government uses the “economic realities” which looks at the entire relationship between the worker and the employer and applies the following six factors to determine if the worker is an independent contractor:

1. The extent to which the services rendered are an integral part of the employer’s business.
2. The permanency of the relationship.
3. The amount of the alleged contractor’s investment in facilities and equipment.
4. The nature and degree of control by the employer.
5. The alleged contractor’s opportunities for profit and loss.
6. The amount of initiative, judgment, or foresight in open market competition with others required for the success of the claimed independent contractor.

The new Rule does not get rid of the economic realities test, rather it changes how the test is applied. Two core factors become more important, and then another three factors are used if the two core factors are inconclusive. However, if the two core factors are in agreement on how a worker should be classified, then those two factors are likely to control, even if the other three factors point the other way.

The two core factors are:

1. The nature and degree of the worker’s control over the work; and
2. The worker's opportunity for profit or loss.

The other three factors are:

1. The amount of skill required for the work;
2. The degree of permanence of the working relationship between the individual and the potential employer;
3. the extent to which services rendered are an integral part of the potential employer’s business.

This is a less strict test, meaning that more workers will be eligible to be independent contractors. This is particularly important for some of the newer “gig” economy businesses, because the “integral part of the business” portion of the test has been relegated to a lesser status under this proposed rule. Think about Lyft or Uber. Providing drivers on demand is an integral part of their business but those drivers can set their own hours, bring their own vehicle, and otherwise control the timing and provision of services. Under the proposed Rule, these drivers are likely to be classified as independent contractors.

The proposed rule could also have a serious impact on the marijuana industry. Marijuana businesses often work with skilled workers who maintain independence and work with multiple businesses. Like Uber and Lyft, there are similar app-based services that focus on delivering marijuana from licensed stores to consumers. In addition, marijuana brands may work with brand ambassadors who may promote their brands online, including on social media. So long as those workers maintain independence by providing their own car or promoting a product on their own social media account.

Conclusion

Should this Rule go into effect, any business that outsources a portion of its main line of businesses may be able to reclassify workers from employees to independent contractors, depending on whether that business can effectively pass the two core factors. The Rule would provide greater flexibility for workers, looser ties between businesses and their workers, and fewer benefits provided to workers overall as more workers are classified as independent contractors rather than employees.

However, there is a countervailing influence at the state level, particularly in California, that makes it difficult to predict the reach of this rule at the national level. Stay tuned for more information on worker classification in California in my next blog post.

You can contact Alicia Altenau at info@gl-lg.com or (503) 488-5424.