Department of Labor Withdraws Independent Contractor Guidance—For Employers, It’s Not a Good Thing

U.S. Secretary of Labor Alexander Acosta announced on June 7, 2017 that the Department of Labor was withdrawing its 2015 guidance on when workers are independent contractors as opposed to employees. No new guidance was offered, so this was “repeal,” but not “replace.” The announcement was cautious, stating that it did not mean that the law was changing (which was comforting, but unnecessary, because Secretary Acosta is not empowered to change the law: he’s a Cabinet Secretary), and it reminded employers that their responsibilities have not changed.

I’ve read the client updates of a few the boutique BigLaw employment firms touting this as a good thing for the employer community, but they can’t really say why. Some declare it as a harbinger for a new enforcement posture that won’t seek to reclassify so many workers as employees, or better yet, fewer enforcement audits altogether. But other than that, they’re just pandering to their client base in my opinion. Don’t get me wrong, fewer visits from DOL investigators is absolutely a good thing. But that’s short sighted at best.

When the 2015 guidance was fairly new, and the Obama Administration had devoted millions of new dollars and issued stern internal directives to its investigators to get out there and root out misclassifications of workers, I handled audits for clients and had that fairly aggressive guidance, Administrator’s Interpretation No. 2015-1, nearly crammed down my throat.

In relevant part, the now withdrawn Obama Administration’s guidance distilled the familiar six-part test to the bottom-line proposition that a worker would be an employee and not an independent contractor if “the worker is economically dependent on the employer.” It’s nearly impossible to envision any worker who is not economically dependent.

And so, the DOL’s approach had come to seem an insincere way to distinguish contractors from employees. At some point, continuing to maintain the possibility of a distinction between employee and independent contractor became meaningless. Classifying workers ought to be capable of a “bright line” determination for businesses, not some guessing game that you learn you got wrong when the DOL came knocking. No one’s playing the lottery here.

Having said that, misclassification of workers has become one of the most broken rules in my experience. Businesses have too often taken the attitude that a worker’s status is simply a matter of private contract between two parties, and clients are often startled to learn that the laws sidestep with ease “independent contract agreements” and peer into the economic realities and the actual control exerted within the relationship. And this is why a renunciation of the 2015 guidance isn’t really a good thing. Because the DOL was never the biggest source of risk for employers. Rather, private lawsuits and collective actions are. Smart, aggressive lawyers seeking damages and court-awarded fees are.

At least the super scary DOL was a way to get everyone’s attention. If Trump & Co. walk it all back, they are only leaving employers vulnerable to the real risks. Here’s why: companies who bury their heads in the sand regarding (mis-)classification of workers open themselves, and corporate officers personally, to liability for unpaid wages (minimum wage, overtime), and unpaid taxes and penalties from private lawsuits. And those (rare) DOL audits that are probably on the decline? At least in the past, when you showed up with an employment lawyer, you demonstrated that you were serious about compliance and open to learning from the investigator whatever it was that you might have missed or not quite understood. This kind of attitude, posture, and compliance-minded presentation is huge in front of a government zealot whose crusade like mission was to sally forth and stamp out all forms of misclassification and wage and hour violations. Mercy for the newly converted.

Not so with the plaintiff’s bar looking for those same violations. They are not interested in good faith, second chances, or honest mistakes that can be rehabilitated with a slap on the wrist. With the damages and fees at stake, and the staggering losses to a company, this is hand-to-hand combat that the unwary employer will lose. Entrepreneurs whose business models shirk compliance in favor of higher margins will fail, fold up their tents, and retreat the battlefield likely never to return. Wait…was the combat metaphor over the top? You get my point. Here’s the thing, this is a dangerous area, so follow the basics below. It’s the law, y’all.

The Basics:

  • Worker status is not a matter of private contract.
  • Hire able counsel to review anyone classified as independent contractors.
  • Correct mistakes going forward and explore ways to reduce past harm; they exist.
  • Conduct an honest cost benefit analysis comparing complying with the rules and not. If you decide that it is economical to classify a large portion of workers as contractors, make certain you understand the potential downside.

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The author, Peter Rutledge, is an Employment Lawyer and Partner at Rutledge Law, Greenville, SC. You can contact him via these channels:
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Don’t get me wrong, fewer visits from DOL investigators is absolutely a good thing. But that’s short sighted at best.
–Peter Rutledge, Rutledge Law