Bob Horton Outlines Potential New DOL Classification for Independent Contractors

September 8, 2022
BenefitsPRO

Bass, Berry & Sims attorney Bob Horton authored an article for BenefitsPRO outlining guidance for employers ahead of the anticipated rulemaking from the Biden administration’s Department of Labor (DOL) related to the classification of independent contractors.

“The issue for businesses of whether workers are properly classified as independent contractors or employees has long been a challenge,” Bob said. “The rules regarding such classification (or at least the manner in which the rules are enforced) seem to change with each administration in Washington and also vary by federal agency as well as by each state government. After unsuccessfully attempting to delay the implementation of the rule issued by the Department of Labor (DOL) in the last hours of the Trump administration in early 2021, the Biden DOL now intends to issue its own rule.”

The Trump administration’s classification rules rely on a test that weighs five factors to determine whether a worker is an independent contractor, with the most weight given to the first two factors: (1) “the nature and degree of control over the work” and (2) “the worker’s opportunity for profit or loss.” The first factor supports independent contractor status if the individual exercises “substantial control over key aspects of the performance of the work,” and the second factor supports independent contractor status if the employee has the ability to affect earnings through methods beyond working faster or more hours.

If these factors are inconclusive, the three other factors would need to be considered, which includes consideration of “permanence of working relationship” and whether the work is “part of an integrated unit of production.” These factors pose challenges to businesses using most typical contracting relationships.

As for the Biden administration’s pending rules, there have been indications that the “ABC test” will be implemented, which turns on three factors:

A: The worker is free from the control and direction of the hirer in connection with the performance of the work.

B: The worker performs work that is outside of the usual course of the hiring entity’s business.

C: The worker is customarily engaged in an independently established trade, occupation, or business.

The B and C factors introduce similar challenges as the “permanence of working relationship” and “integrated unit of production” involvement factors in the current set of rules, but eliminating the ability to forgo consideration of those factors as with the current set of rules means more workers could fail the independent contractor classification test, which would create more compliance and costs for the employer.

“The risks of misclassifying independent contractors can bring significant costs to an organization, especially as we anticipate the new rules to favor classifying more workers as employees instead of independent contractors,” Bob concluded. “With an understanding of the ABC test for classification, employers can begin getting organized now by considering whether any employees’ status might change with the upcoming rulemaking and whether any changes should be made to their job description, employment status or classification.”

The full article, “New Potential DOL Classification for Independent Contractors: What Employers Need to Know,” was published by BenefitsPRO on September 2 and is available online.