Independent Contractors May Have a Weil Problem On Their Hands

Crash Test Dummies is a band from Winnipeg that I really like — especially the 1993 album, God Shuffled His Feet. It’s full of thoughtful questions asked in a booming deep voice. The song In the Days of the Caveman takes a look back, with some keen observations added for good measure:

In the days of the caveman
And mammoths and glaciers
Bugs and trees were your food then
No pajamas or doctors

See, that’s all true and probably not something you had thought about before.

President Biden has given us another reason to look back and reconsider some things you hadn’t thought about in a while. Last week, Biden nominated David Weil to serve as Wage and Hour Administrator. Weil served in the same role under Obama, so we’ve seen that movie too.

Here are some highlights from Weil’s last stint as W&H Administrator:

  • Administrator’s Interpretation 2016-1: Joint Employment under the FLSA, which I wrote about here when it was issued. Weil embraces the broadest possible view of joint employment. The Trump Administration’s DOL rescinded this guidance in 2017.
  • Administrator’s Interpretation 2015-1: Applying the FLSA’s “Suffer or Permit” Standard to Independent Contractor Classification, which I wrote about here. Weil advocates an expansive view of employment, declaring that “most workers are employees under the FLSA’s board definitions.”

Here’s what we can expect from Weil 2.0:

  • Increased enforcement activity by the DOL against companies using independent contractors.

Right now, claims generally arise through lawsuits, and class/collective actions present the most danger. The risk of class claims can be limited with arbitration agreements and class waivers. But arbitration agreements provide no defense against a DOL action. Those agreements don’t bind the government. Expect the DOL to go after companies that make extensive use of independent contractors.

  • Increased enforcement activity by the DOL on joint employment claims.

Remember, unlike independent contractor misclassification, joint employment is not illegal. Joint employment is a problem when a primary employer (such as a staffing agency or vendor/subcontractor) fails to comply with some aspect of the FLSA and its wage payment rules. Under a broad theory of joint employment, the company benefitting from the services is going to be liable for the errors of the primary employer, even though the alleged joint employer had no control over the primary employer’s wage practices.

  • New regulations on independent contractor classification and joint employment.

The standards and test keep changing, depending on who holds the White House. One step the Wage and Hour Division can take to try to make its views more permanent is to adopt its views as formal regulations, not just Administrator’s Interpretations. This is what the Trump DOL tried to do for both independent contractor misclassification and joint employment. Expect a strong push by the DOL to adopt new regulations that make it harder to maintain independent contractor status and easier to find joint employment.

The bottom line is that we’re going back in time. Maybe not so far back that bugs and trees were your food then, but back to 2015 and 2016 interpretations of the FLSA. Expect no pajamas or doctors.

What to do about it? Businesses that rely on independent contractors should tighten their agreements now. Businesses that engage staffing agencies should review those contracts now.

These posts contain a few of my favorite tips:

Good luck out there, and beware of mammoths and glaciers.

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© 2021 Todd Lebowitz, posted on WhoIsMyEmployee.com, Exploring Issues of Independent Contractor Misclassification and Joint Employment. All rights reserved.

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What Are the I-9 Requirements for Independent Contractors?

The Munker-White Illusion, image by David Novick (UTEP)

This is one of my favorite optical illusions. The spheres here are all beige. They are not red, green, or purple. Look closely and you’ll see. David Novick, a professor of engineering at UTEP, explains the illusion here.

It’s fun to be fooled with optical illusions. But it’s not fun to be fooled with federal immigration law.

Companies retaining independent contractors should remember these key points for I-9s and immigration law compliance:

1. Properly classified independent contractors do not need to complete I-9 forms.

2. Misclassified independent contractor — that is, those who are really employees under federal law — are employees and should have a completed I-9. A multi-factor test is used to make this determination. According to federal regulations, these factors should be considered:

  • Who supplies tools or materials;
  • Whether the worker makes services available to the general public;
  • Whether the worker works for a number of clients at the same time;
  • Worker’s opportunity for profit or loss as a result of labor or services provided;
  • Worker’s investment in facilities for work;
  • Who directs the order or sequence in which the work is to be done; and
  • Who determines the hours during which the work is to be done.

3. Federal law prohibits individuals or businesses from contracting with an independent contractor to provide services in the U.S., knowing that the contractor is not authorized to work in the U.S. [8 U.S.C. 1324a(a)(4)]

4. Staffing agency temps employed by the staffing agency must complete I-9s as employees of the staffing agency. Contracts with staffing agencies should make clear the staffing agency accepts this obligation. If an agency sends a bunch of undocumented temps to your worksite, you might get an unscheduled visit from ICE, which is not a good look.

For those keeping a list at home (wait, that’s just me?), you can add immigration law noncompliance to the list of Things That Can Go Badly When Independent Contractors are Misclassified.

And that’s no illusion.

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© 2021 Todd Lebowitz, posted on WhoIsMyEmployee.com, Exploring Issues of Independent Contractor Misclassification and Joint Employment. All rights reserved.

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Breaking News? DOL Rescinds Independent Contractor Rule That Never Took Effect

Remember when TV news was on at 6 p.m. and 11 p.m. and that was it? Every once in a while, there would be a Breaking News! alert, and it was always something really important. They wouldn’t interrupt Diff’rent Strokes for just anything. (Bonus points if you remembered there was an apostrophe in the title instead of the first ‘e.’)

But now, with 24-hour news on a dozen stations, everything is Breaking News! – even this story about a New Mexico man who went grocery shopping, then returned to his car to find 15,000 bees in the back seat. (Man walks back into store, returns jar of honey.)

The Breaking News! you’re reading about today is the Department of Labor’s (DOL) latest announcement, rescinding its proposed rule for determining independent contractor status under the Fair Labor Standards Act (FLSA).

Click here for the rest, posted by me on Friday on the BakerHostetler Employment Law Spotlight blog.

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By Todd Lebowitz, posted on WhoIsMyEmployee.com, Exploring Issues of Independent Contractor Misclassification and Joint Employment. All rights reserved.

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Kick Back or Kickback? Using Independent Contractors in This Situation is a Felony

With summer coming, you’re probably ready to kick back, to relax. Vacation rentals invite you to kick back and relax. Meditation music invites you to kick back and relax.

But remove the little space between “kick” and “back,” and that’s not something you want at all.

The federal Anti-Kickback Statute makes it a crime to “knowingly and willfully” offer, pay, solicit, or receive any remuneration to induce referrals of items or services reimbursable by Federal health care programs. 42 U.S.C. § 1320a–7b(b).

That means you cannot retain an independent contractor sales agent to refer customers to buy items or services that are reimbursable by Federal health care programs. Paying commissions or any other thing of value for these referrals is illegal. (There are some limited exceptions.)

Violations are a felony, punishable by up to ten years in prison and massive fines. Violations of the Anti-Kickback Statute are also automatic violations of the False Claims Act, 31 U.S.C. § 3729.

The risk of prosecution is real. One recent decision upheld damages and penalties of more then $100 million against a blood testing lab that had retained independent contractor sales agents to provide referrals.

But employees can provide these referrals, even when independent contractors cannot. The Anti-Kickback Statute says it is not a violation when the remuneration is paid to an employee providing services in the course of employment. 42 U.S.C. § 1320a–7b(b)(3)(B). To avoid violating the Anti-Kickback Statute, these sales agents should be classified as employees, not independent contractors.

There are other safe harbors too. Earlier this year, the Department of Health and Human Services adopted a new rule describing these safe harbors, but they are narrow and all conditions must be met. There is a Personal Services Arrangements Safe Harbor that, under some circumstances, will permit payments to an independent contractor agent. You can read more about the new rule here.

Tread very carefully. The penalties for violating the Anti-Kickback Statute are serious. But if you get it right, maybe you can kick back and relax after all.

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© 2021 Todd Lebowitz, posted on WhoIsMyEmployee.com, Exploring Issues of Independent Contractor Misclassification and Joint Employment. All rights reserved.

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A Million Dollar Bill? Be Careful Before Relying on the Direct Seller Exemption for Contractor Status

All this cash is available on Amazon for just $13.67!

A Tennessee woman was recently busted for trying to use a $1 million bill to buy a cartful of personal items at a dollar store. The clerk reported the woman to Blount County police, who issued a no trespass order.

That really had no chance of working. Did the woman really think the register at a dollar store had $999,900 or so in change? She did not think that one through too carefully.

Thinking things through is important in all walks of life, including when classifying sales personnel as contractors or employees.

You may have heard that the Internal Revenue Service treats a “direct seller” as an independent contractor, not an employee. But don’t assume all directs sellers are contractors, not employees. Here are two important notes of caution:

First, the definition of “direct seller” is narrow. Here’s what it means, according to IRS Guidance on Direct Sellers:

Direct sellers include any of the following:

  • A person who sells consumer products in the home or a place of business other than a permanent retail establishment,
  • A person who sells consumer products on a deposit or commission basis, or to other persons who will sell the products in the home or place of business,
  • A person who delivers and/or distributes newspapers or shopping guides.

Direct sellers have certain things in common. Their compensation is related to sales rather than to the number of hours worked. Services are performed under a written contract between the seller and the person for whom the seller performs the services.

And the contracts involved provide that sellers are not treated as employees for federal tax purposes.

But wait, there’s more. The Internal Revenue Code also requires, for someone to be a “direct seller,” that:

(B) substantially all the remuneration (whether or not paid in cash) for the performance of the services described in subparagraph (A) is directly related to sales or other output (including the performance of services) rather than to the number of hours worked, and

(C) the services performed by the person are performed pursuant to a written contract between such person and the person for whom the services are performed and such contract provides that the person will not be treated as an employee with respect to such services for Federal tax purposes.

The full statute is here. Further IRS Guidance can be found here.

Second, even if someone is a “direct seller” under the Internal Revenue Code, that doesn’t mean they’re automatically independent contractors under other laws, including federal wage and hour laws state laws.

For example, the FLSA says that “outside sales” professionals are exempt from minimum wage and overtime requirements, but the requirements are different. DOL Fact Sheet #17 explains this exemption.

California’s ABC Test does not apply to “direct salespersons,” but only if those individuals meet the test in California’s unemployment law. Other states have different rules for sellers.

The bottom line when classifying direct sellers is to remember that different tests apply to different laws. Be thorough, and remember that a worker’s classification may be different under federal tax law than under wage and hour law or state law. You’ve got to think this all the way through.

Getting it wrong can be costly, especially for businesses that use lots of independent contractors, and — most important — novelty U.S. currency like million-dollar bills won’t cover those penalties or litigation damages. But, according to the seller of these bills on Amazon, these are the “million dollar bills that get the WOW response.” So there’s that.

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© 2021 Todd Lebowitz, posted on WhoIsMyEmployee.com, Exploring Issues of Independent Contractor Misclassification and Joint Employment. All rights reserved.

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West Virginia Adopts Pro-Business Independent Contractor Test

Three Fun Facts about West Virginia:

  1. The New River is actually one of the world’s oldest rivers and, unusually, flows south to north.
  2. The nickname and team mascot for Poca High School in Poca, WV is the Dots.
  3. West Virginia just adopted the most pro-business worker classification test in the nation.

While I would love to write about the Poca Dots, I’m going to focus on the state’s new worker classification test, enacted March 11, 2021. It takes effect 90 days later, on June 9, 2021.

The new test creates a safe harbor. If you comply with a list of requirements, including a written contract, your worker is automatically an independent contractor under WV wage and hour law, anti-discrimination law, workers’ compensation, and unemployment.

The bill nearly had a disastrous flaw. In its original form, passed by one chamber, if you failed to meet the safe harbor criteria, you’d automatically be deemed an employee. That would have had absurd unintended consequences, including that a worker would automatically be an employee if there was no written contract or if the contract did not include all required clauses.

I drafted a last-minute amendment that was adopted and inserted into the bill at the eleventh hour. The amendment said that if the safe harbor was not met, the worker would not automatically be an employee. Instead, the worker’s status would determined by using the 20-factor Right to Control Test in IRS Rev. Ruling 87-41. (The 20 factors are explained here in this PDF from the Texas Workforce Commission.)

The bill is very pro-business.

Businesses retaining contractors in WV should review the safe harbor provisions and be sure to comply. Compliance means a free pass for independent contractor status under state law (but not under federal law). Contracts may need to be adjusted to include the required clauses. Now is the time to do that.

Here is a link to the bill. The blue text contains the safe harbor. Read it closely and make sure these provisions are in your WV independent contractor agreements.

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© 2021 Todd Lebowitz, posted on WhoIsMyEmployee.com, Exploring Issues of Independent Contractor Misclassification and Joint Employment. All rights reserved.

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Use a Sea Slug’s Secret Superpower When Drafting IC Arbitration Clauses

Witness: The severed head of a sea slug. Image by Sakaya Mitoh, who performed this awesome experiment.

Did you know that sea slugs have superpowers?

According to researchers at the Nara Women’s University in Japan, if you sever the head of a certain type of slug, the slug can grow a new body, organs and all. I like that as the basis for a new Marvel character. Or maybe the slug is a distant cousin to Roland the Headless Thompson Gunner.

The moral of the story is that when a slug loses its head, all is not lost. (This is how sea slugs survived the French revolution.) The same may be true in the context of arbitration agreements for independent contractors. (Come on, that’s a really good segue, isn’t it?)

For independent contractors in the transportation industry, arbitration agreements may be unenforceable under federal law. But all is not lost. In some states, state arbitration law can save the day. That means it’s important to know your state laws and to draft choice of law clauses carefully.

Here’s what I mean:

For companies that work extensively with independent contractors, there are lots of good reasons to require that disputes are resolved in arbitration, not in court. One of the biggest advantages of arbitration is the ability to include a class action waiver, requiring any claimant to bring a case on an individual basis only. No class actions. Class claims are the sexiest of all claims to plaintiff’s lawyers. Individual claims are not nearly as lucrative. Or sexy.

The Federal Arbitration Act (FAA) embraces arbitration as an enforceable way to resolve disputes. But there’s a big exception to the FAA. It doesn’t apply to transportation workers “engaged in … interstate commerce.” The meaning of that phrase is unclear, and there are lots of lawyers fighting about its scope. Different courts have come to different conclusions, especially regarding last mile delivery drivers and rideshare. Eventually, the Supreme Court is likely to rule on exactly what this phrase means.

But in the meantime, what if your contractors are arguably “engaged in … interstate commerce”? Are you stuck with a lengthy legal battle over whether your arbitration agreement is enforceable under the FAA?

Not necessarily. Don’t forget about state law. Several states have their own laws embracing arbitration as an enforceable way to resolve disputes, and these state laws generally do not have exceptions for transportation workers.

New York is a good example. Courts in New York have upheld arbitration agreements, even when the workers were arguably transportation workers not covered by the FAA.

Choose your state law carefully, especially if your arbitration agreement might be subject to the FAA’s exception for transportation workers. It’s common to include a “choice of law” clause in contracts, but those clauses are often dropped into contracts without anyone thinking about why a certain state’s law should apply. Those clauses really do matter, and the choice of law section should be carefully considered.

When it comes to arbitration agreements, the choice of law clauses should not be viewed as a boilerplate clause to toss in without careful thought.

The ability to choose a particular state’s law is a real superpower. Use it like a sea slug!

© 2021 Todd Lebowitz, posted on WhoIsMyEmployee.com, Exploring Issues of Independent Contractor Misclassification and Joint Employment. All rights reserved.

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Macaques & The Guess Who: Why the New Independent Contractor Rule Won’t Take Effect March 8

Photo by Hectonichus and, yes, this fella is sticking his tongue out at you (but he can’t remember why).

A Swedish study concluded that baboons, pig-tailed macaques, and squirrel monkeys have some of the worst short-term memories in the animal kingdom, barely exceeding that of bees. The point is, never ask a pig-tailed macaque where you left your car keys.

Having a short memory can be a problem in some situations, but not it’s not an issue if you’re just trying to recall the latest Department of Labor test for independent contractor misclassification. Everything you recall from six weeks ago is being undone anyway. (Or Undun, if you’re a fan of the spelling-impaired Canadian band The Guess Who.)

Remember the new rule issued by the DOL in January 2021 for determining employee vs. independent contractor status? It was going to modify the Economic Realities Test to focus on two core factors: (1) the nature and degree of the worker’s control over the work, and (2) the worker’s opportunity for profit or loss based on personal initiative or investment. The new rule was to take effect March 8. The test would apply only to claims under the Fair Labor Standards Act (FLSA).

No more. Last week, the DOL delayed implementation until May, but the rule most likely will be rescinded completely. Undun.

This decision comes on the heels of the DOL rescinding two opinion letters that were also issued in January. Undun. The letters provided guidance on determining independent contractor status in a few particular situations.

The Economic Realities Test remains the test used to determine who is an employee under the FLSA. It’s a multi-factor balancing test.

So if you’ve been relying on recent DOL guidance for how to apply that test, channel your inner pig-tailed macaque. Whatever you recall from January can be forgotten. And where did I put my car keys?

© 2021 Todd Lebowitz, posted on WhoIsMyEmployee.com, Exploring Issues of Independent Contractor Misclassification and Joint Employment. All rights reserved.

Sign up now for the BakerHostetler 2021 Master Class on The State of Labor Relations and Employment Law. Twelve sessions, one hour every Tuesday, 2 pm ET, all virtual, no cost. Click here for more information. List me as your BakerHostetler contact so I know you’ve registered. 

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Beary Scary: Will UK Uber Decision Bite US Businesses?

We saw this fella in Yellowstone. (C) my wife. Used with permission after arms-length negotiation involving chocolate.

Sometimes trouble comes at you from an unexpected direction. One Alaska resident learned this the hard way when she sat on her outhouse toilet and was bitten by a bear — from below. Didn’t see that coming.

US law on Independent Contractor vs. Employee is based on federal and state statutes and common law, but a decision last week from overseas has US businesses concerned. Should they be?

On Thursday, the UK High Court ruled that Uber drivers were “workers” under UK law, not independent contractors, and were therefore protected by minimum wage and other laws.

But I don’t think this ruling will bite US businesses in the arse. There are important differences between US and UK law, and those differences drove the outcome here.

In the US, someone is either an employee or an independent contractor. Those are the only two options. But under UK employment law, there are three categories:

  • Those employed under a contract of employment (US: employee; UK: employee/worker);
  • Those self-employed people who are in business on their own account and undertake work for their clients or customers (US/UK: independent contractor);
  • and an intermediate class of workers who are self-employed but who provide their services as part of a profession or business undertaking carried on by someone else (UK: worker).

Some UK statutory rights, such as the right not to be unfairly dismissed, are limited to those employed under a contract of employment; but other rights, including those claimed in the UK case, apply to all “workers.”

The question in this case, therefore, was not whether the Uber drivers were employees, but merely whether they were “workers.” They were.

The decision also turned largely on a City of London requirement relating to licensing requirements for drivers for hire. The Uber drivers were under contract with Uber London, which had the required license.

The court considered elements of control, but this case was not decided under a US-style Right to Control Test, Economic Realities Test, or ABC Test. The rules we are used to seeing in the US don’t apply in the same way overseas.

In the end, this case is noteworthy in its result — that Uber drivers were protected by UK minimum wage law and other worker protections — but the legal basis for reaching that conclusion just doesn’t apply in the US.

We will continue to see increased pressure in the US for more worker protections, and we will continue to see challenges to worker classification. But US businesses don’t need to worry about the bite from this ruling from a few thousand miles east. Of more immediate concern, at least to Alaskans visiting the outhouse, is what might be waiting a few feet below.

© 2021 Todd Lebowitz, posted on WhoIsMyEmployee.com, Exploring Issues of Independent Contractor Misclassification and Joint Employment. All rights reserved.

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Watch This Rooster! PRO Act Would Change Definition of Employee Under Labor Law.

Who says the news is always negative? Not so in Alabama, where we were treated this headline on AL.com:

Teen reunited with pet rooster lost at Alabama Cracker Barrel after Civil War reenactment

It seems an 18-year old Civil Ward reenactor brought his Buff Orpington rooster, Peep, to a civil war reenactment in nearby Tennessee, then stopped for lunch afterward. Our hero dutifully put on Peep’s leash and secured him to the bed of his truck while dining at a nearby Cracker Barrel after the event. But when he returned, the rooster was gone.

Police and animal control were summoned to the scene. The parties were later reunited when Peep wandered back to the Cracker Barrel, and this story had a happy ending. This had been Peep’s third Civil War reenactment, although his role in the battle plan was unclear. Fortunately for Peep, further battles lie ahead.

Further battles lie ahead in Congress too, not for roosters but for businesses everywhere. Rep. Bobby Scott and 200 Democratic co-sponsors have re-introduced a massive labor bill that fulfills every wish of the unions.

The PRO Act – Protecting the Right to Organize – would bring a massive overhaul to the National Labor Relations Act. Two portions of the bill would affect independent contractor misclassification and joint employment.

First, the PRO Act would re-adopt the Browning-Ferris test for determining whether someone is a joint employee of two employers. This test had been adopted by the Obama Board but reversed by the Trump Board. The test would consider two entities to be joint employers if they “share or codetermine” control over workers’ terms of employment. The notion of control would be broad. It would include not just actual direct control, but reserved control or indirect control. Under the original Browning-Ferris test, control over the speed of an assembly line was considered sufficient control to make a business a joint employer.

Second, the PRO Act would adopt a nationwide strict ABC Test for determining whether someone is an employee or independent contractor. The new rule would require that all workers performing services be considered employees under the NLRA unless (all three):

(A) the individual is free from the employer’s control in connection with the performance of the service, both under the contract for the performance of service and in fact;
(B) the service is performed outside the usual course of the business of the employer; and
(C) the individual is customarily engaged in an independently established trade, occupation, profession, or business of the same nature as that involved in the service performed.

This is the same test adopted by California (recall Dynamex and AB 5) but without the exceptions. California lawmakers recognized this test wouldn’t work in all industries and adopted a long list of exceptions to this test.

The PRO Act would not have any exceptions.

It’s no surprise that the bill was reintroduced. A similar bill was passed by the House last year but never considered by the Senate.

While 60 votes in the Senate isn’t going to happen, this bill deserves a close and watchful eye. (Follow its progress here.)

That means really watching it, not just tying it to the bed of your truck and hoping it’s still there after you finish your Cracker Barrel omelet.

© 2021 Todd Lebowitz, posted on WhoIsMyEmployee.com, Exploring Issues of Independent Contractor Misclassification and Joint Employment. All rights reserved.

Sign up now for the BakerHostetler 2021 Master Class on The State of Labor Relations and Employment Law. Twelve sessions, one hour every Tuesday, 2 pm ET, all virtual, no cost. Click here for more information. List me as your BakerHostetler contact so I know you’ve registered. 

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