Independent Contractors…or Employees?

On June 17, Department of Labor (DOL) deputy secretary Seth Harris testified in a Senate hearing about a proposed rule that would impose additional recordkeeping and notification requirements for employers. The text of this testimony can be found here. Reading all 4,465 words is enlightening.

Mr. Harris’ testimony was directed at “worker misclassification,” which occurs when a worker who is legally an employee is treated as an independent contractor. He cited five industries where misclassification is most prevalent, and construction was first on his list.

The testimony was in support of proposed legislation (the Employee Misclassification Prevention Act) that would make misclassification a violation of the Fair Labor Standards Act (FLSA); providing the DOL with additional tools for enforcement, such as monetary penalties for recordkeeping violations. This legislation would also establish a legal presumption that a worker is an employee and “put the burden of proof on the employer” to demonstrate that the worker is an independent contractor. Given the political opposition, the odds of the bill passing this year is not high. But Mr. Harris made it clear that the DOL nonetheless intends pursue the same ends with “new tools to detect and prevent worker misclassification” in pursuit of its “good jobs for everyone” mission.

Specifically, the DOL wants to implement “a broad strategy that requires employers to understand [emphasis added] that the burden is on them to obey the law.” But whether or not a worker is an employee depends on which law is applicable. Mr. Harris favors the FLSA’s “economic realities” test, which is broader than the common law test used by the IRS.

Mr. Harris went on to state, “We call this compliance strategy ‘plan/prevent/protect.’” This new strategy will require employers to:

1. Create a plan for identifying and remediating risks of employment law violations and make the plans available to workers so they can participate in their creation, fully understand them, and help to monitor their implementation.

2. Implement the plan in a manner that prevents legal violations.

3. Ensure that the plan’s objectives are met so it actually protects workers from violations of their workplace rights.

“One way in which ‘plan/prevent/protect’ will be implemented is by increasing transparency in employers’ recordkeeping requirements under the FLSA,” stated Mr. Harris. To achieve this transparency, the DOL’s Wage and Hour Division (WHD) proposes that employers perform a written analysis – applying the FLSA’s “economic realities” test – before declaring that a worker is an independent contractor; and that they disclose the analysis to the affected worker and keep a record of it in case of a WHD investigation. Because “plan/prevent/protect” is a department-wide initiative, OSHA will be considering similar rules.

Also, the WHD has launched a campaign called “We Can Help,” focused on the construction and other targeted industries “tailored to inform low wage, vulnerable workers of their rights and benefits, how to get help if they believe those rights are violated, and to assure them that their complaint is confidential.” A cynic might call this a snitch campaign.

These efforts, which Harris calls “regulatory innovations,” are part of a broader effort that includes “close cooperation with our partners in the…IRS…to address worker misclassification.” Before that chill runs all the way down your spine, there’s more good news. The DOL has also drafted legislation for Congress called the “Unemployment Compensation Integrity Act,” which contains provisions that would “enable states to retain a percentage of delinquent employer UI taxes.” This essentially provides states with an incentive to target misclassification as part of their tax compliance efforts.

Coming so closely on the heels of OSHA’s “administrative enhancements” and the EPA’s flawless rollout of the RRP Rule, this is not good news for contractors already dealing with additional compliance burdens (echoing the EPA’s cost estimates for the RRP Rule, Harris stated that compliance would be “simpler” under the DOL’s innovative new scheme). Of course employers – especially contractors – try to minimize their fixed costs, particularly in an economy that leaves no margin of error; and there will always be those who abuse the system. But this seems to punish the class for the behavior of a few students.

Harris attempts to quantify the scope of the misclassification problem, but his key allegations are so tempered with qualifications like “some employers,” “many workers,” “often exploited” and the like, that it’s questionable whether the problem truly warrants such an aggressive response from the DOL. Our cynic might imagine other motives for this, such as the pursuit of additional sources of revenue, the expansion of governmental control, and the fact that you can’t unionize independent contractors.