When the Department of Labor (DOL) published a proposed rule several weeks ago that will make it harder to classify workers as independent contractors under federal wage and hour law, staffing firms were among the most interested in the development. After all, this rule, once adopted, could have a direct impact on many organizations in the industry and their customers. And while most staffing firms are attuned to the changes this will bring about, not many are aware of the subtleties in the proposed rule that will have not-so-subtle impact.
Recap of Current Rule and Proposed Changes
The DOL’s current rule on the books — which was issued by the prior administration and has been in effect since January 2021 — offers a flexible standard for determining whether workers are independent contractors under federal wage and hour rules. It has helped shape today’s modern economy, as workers gain flexibility and an opportunity to work for more than one organization and businesses can adapt to shifting landscapes in light of recent labor shortages.
While the current test primarily focuses on two “core factors” — the extent of control exercised by the business over key aspects of the work and the worker’s opportunity for profit or loss — the proposed rule seeks to reinstate a rigid, multi-factor analysis. The focus will be on the “totality of the circumstances,” with an employee-friendly interpretation of how each of its six factors should be applied.
Several factors should not be surprising: the relative amount of investment made by the worker compared to investments made by the business, the permanency of the work relationship, the extent to which the work is an integral part of the organization’s business and whether the worker uses specialized skills to do the job.
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But where many organizations might get tripped up is with the “control” factor. The DOL’s proposal seeks to examine the nature and degree of the potential employer’s control, including legal obligations, safety standards or contractual or customer service standards that could indicate an employee relationship. While this seems like a standard factor that many organizations have grown accustomed to working with, further exploration reveals a deeper concern.
Buried in the proposal is the statement from the DOL that businesses that merely reserve the right to control certain aspects of the work — even if they don’t actually exercise that control — could be found to have an employee relationship with the worker.
Another subtle reference in the control standard is the statement that “electronic” supervision will be considered a form of control, as opposed to only considering control exercised through human interaction. This obviously is directed at app-based platforms that control service provider activities through automation. Staffing firms with independent contractor service models could be impacted as well.
Expected Impact and Next Steps
This change in rule and interpretation should cause staffing businesses to carefully review the agreements you have in place to determine whether revisions are needed. Process changes may be appropriate as well, particularly where service provider activities are tightly governed by agencies. Of course, there also may be a number of situations where contractors may need to be converted to a different status.
The DOL has announced it will accept comments from the public through November 28 before finalizing the rule. Once the agency has had a chance to review all comments, it will decide whether to revise the proposal before finalization. You can expect any such revisions to be minor in nature and not to impact the overall direction of the current proposal — and almost certainly will not sweep away the hidden landmine discussed above.
Once the process is completed, the agency will publish the revised rule, which will become the new law of the land — which you can expect in early 2023. There’s not much time to adapt to these changes, so your organization will want to start working with your staffing counsel to ensure your written agreements and management protocols are ready for what’s to come.