In late September, the Department of Labor (DOL) announced a proposed rule intended to help employers determine whether a worker is an employee under the Fair Labor Standards Act (FLSA) or an independent contractor.
The DOL says it believes the ruling will streamline and provide consistency for purposes of minimum wage, overtime pay, child labor and recordkeeping by helping clearly determine a worker’s status, explains Harold G. Hartsig, managing director of operations at Cafaro Greenleaf, a OneDigital company. But experts say the proposal stops short of advancing the opportunity for nontraditional workers to be able to obtain key financial benefits.
Currently, independent contractors are considered self-employed, and therefore are not eligible for unemployment, health care, retirement, sick time or family leave benefits—all of which experts and research say play a big part in workers’ physical and financial well-being. Independent contractors may also not form a union with other workers and are not protected by employment laws including the FLSA, Family and Medical Leave Act (FMLA) or the Employment Non-Discrimination Act (ENDA).
Hartsig argues that while independent contractors—otherwise known as gig workers, freelancers or 1099 workers—enjoy different types of benefits, including flexible hours, the ability to work remotely and improved work-life balances, they miss out on integral financial benefits offered by employers. “Despite these positives, contractors are missing a critical component of their financial future: a company-sponsored retirement plan. By law, companies are not allowed to offer 1099 workers the opportunity to participate in company-sponsored retirement plans,” he says.
Under the proposed rule on independent contractor status, businesses would find it simpler to decide whether to classify workers as independent contractors, Hartsig says. However, the proposed ruling doesn’t cover retirement security. “Because they do not meet the definition of an eligible employee for retirement plan purposes, independent contracts are excluded from participation in any retirement plan sponsored by their employer,” Hartsig says. “It seems under the proposed rule, whether you are a freelancer, an independent contractor or a budding entrepreneur, you would continue to access an alternative retirement plan outside of the company’s plan.”
What the Proposed Rule Says
In order to determine whether an independent contractor is an employee, employers should adopt an “economic realities test” that analyzes whether a worker is dependent on the employer, says Camille Olson, a partner at Seyfarth Shaw LLP. Two core factors are covered under the test: the nature and degree of the individual’s control over their work and the individual’s opportunity for profit or loss. The first factor questions whether a contractor has substantial control over key aspects in work performance, including setting his or her own schedule, selecting his or her own projects and having the ability to work for other organizations. The second factor examines whether a contractor can earn profits or losses due to their own initiative.
Hartsig notes that the DOL looks to these factors as proof of employment status, explaining that “the ability to control one’s work and to earn profits and to risk losses strikes at the core of what it means to be an entrepreneurial independent contractor,” as opposed to a wage employee.
The DOL also identifies three other factors that might serve as additional guidelines in the analysis: the amount of skill required for the work; the degree of permanence of the working relationship between the worker and the potential employer; and whether the work is part of an integrated unit of production, Hartsig says. Lastly, he notes that under the rule, the actual practice must be more relevant than what may be contractually or theoretically possible. As an example, the proposed rule mentions a lawsuit in which a court found the fact that “[a company’s] ‘agents’ possess, in theory, the power to set prices, determine their own hours, and advertise to a limited extent on their own [but that] is overshadowed by the fact that in reality the ‘agents’ work the same hours, charge the same prices, and rely in the main on [the company] for advertising.”
Olson relates the economic realities test to another one under the Employee Retirement Income Security Act (ERISA) called the “common law of agency test.” The test was famously interpreted by the Supreme Court during the 1992 case of Nationwide Mutual Insurance Co. v. Darden, which examined the issue of protections for independent contractors. Ultimately, the case was remanded and a lower court found that the plaintiff, who was an independent contractor working with Nationwide Mutual Insurance, was an employee of the company.
“Some of the relevant factors that are described here are also relevant under the Darden test,” Olson says. “Those factors are described as modernized or up-to-date economic situations. So, they might be looked to for guidance as to how [an employer] would interpret things.”
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