The U.S. Department of Labor’s new rule for defining an employee vs. an independent contractor is likely to be challenged in the incoming Biden administration as well as court, but it does provide some helpful guidance for companies struggling with how to adapt to the new gig economy.
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It may have an impact on how companies account for their workers as more businesses expand the use of independent contractors as opposed to full-time employees, especially with the rise of the gig economy. It also has some tax implications in terms of whether companies withhold payroll taxes from workers or simply send them a Form 1099 by Jan. 31.
“If you're talking about tax issues, the IRS uses the general common law agency test for tax purposes under federal law, and that’s a test that really looks at a variety of factors, including the right to control the manner and means by which the services are performed,” said Camille Olson, co-chair of the law firm Seyfarth's National Complex Litigation practice group, and national chair of its Complex Discrimination Litigation practice group. “That's a different test than the economic realities test under the Fair Labor Standards Act, which is being interpreted in this final rule.”
The Labor Department rule might be applicable for tax purposes. “The point is that there are factual inquiries that are relevant to the economic realities test that the Department of Labor issued the rule on that would be similarly relevant to the IRS’s or any court’s review of somebody’s status for tax purposes,” said Olson. “The reason why it’s so helpful is I believe it's a balanced approach to determining employment or independence. It’s modern and pretty exhaustive in terms of a factual, practical application of the facts that are relevant. Many of the facts that are relevant under the economic realities test are also cited, although the emphasis is a little different, under the general right-to-control test.”
The rule provides guidance on how companies should account for gig economy workers, such as those who receive business from apps like Uber, Lyft, Airbnb, DoorDash, Grubhub, Instacart and Postmates. Many gig economy companies already consider such workers as independent contractors, and the new rule may lead some businesses to reclassify existing employees as independent contractors.
“In terms of the work that's done in what I would describe as a multisited platform — the technology apps that connect service providers to customers, which is in the gig delivery services, but also for other services — this rule updates some of the ways you would look at the issue of whether somebody’s services are integrated into the business of the company that's offering a platform to connect people,” said Olson. “I think that it's very useful and it’s a balanced, modern approach. Most gig workers have the opportunity to perform services for multiple entities, and that's cited as an indicia of independence in the final rule, but also in just about every rule that’s ever been promulgated on this issue. Some of those updated interpretations that involve gig workers and platforms and today’s workplace are described in a practical way that didn't exist before this final rule came.”
The issue of employees vs. independent contractors has become a politically contentious one. In 2019, California Governor Gavin Newsom signed a law known as Assembly Bill 5, or AB5 for short, which required many companies to reclassify their independent contractors as employees unless they meet a three-prong test: the workers are free from the control and direction of the company in connection with the performance of the work; they perform work outside the usual course of the company’s business; and they’re customarily engaged in an independently established trade, occupation or business of the same nature as the work they’re performing for the company. Otherwise, the workers would need to be added to the company’s payroll and receive salary, benefits and labor protections. The new law was set to take effect on Jan. 1, 2020, but Silicon Valley tech companies protested and organized a ballot initiative in last November’s elections known as Proposition 22 to overturn it and allow rideshare drivers and delivery workers to remain as independent contractors. The companies spent hundreds of millions of dollars on an ad campaign arguing that the law would result in lost jobs and business, and voters ultimately approved Proposition 22. However, Prop 22 does give the workers some benefits in terms of wages, health care subsidies, and payment for medical expenses incurred on the job, and includes safeguards against overwork by drivers along with sexual harassment prevention and training.
“II would say specifically for gig workers in terms of, for example, Proposition 22 in California, the rule recognizes that a company could provide certain benefits to an independent contractor and that independent contractor may still not be an employee, and that’s not necessarily evidence of employment,” said Olson. “That's consistent with Prop 22 and the amendment to AB5 in California. That’s very helpful to platform companies and their independent workers.”
It’s unclear if the new rule will survive long enough to induce companies to provide benefits to independent contractors, as Prop 22 does to a limited extent. Some labor unions and members of the incoming Biden administration have already expressed opposition to the rule.
“Depending upon the survival of the rule, whether it's going to take effect, whether it's going to be frozen, whether the Biden administration is going to take steps to nullify the rule, I think it remains to be seen,” said Olson. “If the rule has continued viability after the Biden administration, I think it will be helpful.”
Approximately 1,800 comments were filed in response to the rule when it was proposed last fall. Labor Department Wage and Hour Division administrator Cheryl Stanton said at a press conference last week that the comments were 20 to one in favor of the proposed rule. “But there were many comments filed by labor unions and others who said that they thought the rule was going to lead to more workers being found to be independent contractors than employees,” said Olson. “There have been comments published by members of the Biden administration saying that they would freeze the rule from taking effect, and it’s supposed to take effect March 8. It will be interesting to see what does happen. I would say it has an unclear future in terms of how it will be effective, if it will be effective, and what guidance it can provide companies and independent workers, and what kind of precedential value it will be, if any.”
Nevertheless, the rule provides a number of illustrative examples that accountants can use with their clients or the companies where they work. “Regardless of the formalistic, official impact of the rule, I think that it provides sound, evenhanded guidance as practitioners like accountants and CPAs try to understand the impact, or how different facts should be viewed under the different tests, so it’s illustrative and it’s helpful analysis,” said Olson.
