OPINION:
A new rule from the Department of Labor goes into effect on March 11, and it will have a significant impact on my company and millions of other businesses around the country.
The rule updates the testing requirements for determining whether or not a freelancer or independent contractor should be classified as an employee. It reverses the prior test established by the Trump administration and updates a number of guidelines, the most concerning which requires employers to determine whether or not a contractor is “integral” to the operations of a business.
For many companies - like mine - that rely on independent contractors to perform certain core processes or provide services to their customers, this one factor could mean that we would have to classify those independent contractors as employees.
These re-classified workers would then be potentially entitled to a company’s benefits, worker’s compensation and other protections afforded by employees, including the right to unionize (which some say is the real reason behind the rule). Companies would also be responsible for paying their share of employer taxes.
Most in the business community - and many in the freelancing community - oppose this regulation. But the train has left the station, and the effective date is only a few weeks away. So what should a company like mine be doing in order to comply? One strategy is to ignore it. Here are four reasons why.
The first is that the new rule is being contested in the courts.
The U.S. Chamber of Commerce is considering a lawsuit to stop the regulation from taking effect. But they’ll have to stand in line. A lawsuit was filed this month by a group of freelancers (yes, freelancers hate this regulation too because it takes away their ability to be their own boss) and three business groups - The Coalition for Workforce Innovation, Associated Builders and Contractors, and the Financial Services Institute’s – have immediately revived their lawsuit against the regulation.
Uber and DoorDash – two companies that are targeted by this regulation - also filed a motion right after the rule was announced to revive previous litigation involving a different Biden administration independent contractor rule that was issued in 2021 and, in the meantime, are shrugging off the revised regulation.
“This rule does not materially change the law under which we operate, and won’t impact the classification of the over one million Americans who turn to Uber to make money flexibly,” CR Wooters, Uber’s head of federal affairs, said in an emailed statement. “As this rule is implemented, we look forward to working with the Biden administration and making sure they continue to hear directly from drivers.”
Bottom line: These lawsuits could take years to resolve, and in the meantime, the regulation would be on hold.
Secondly, there may be a small business exemption.
Roger Williams (R-TX), who chairs the House of Representatives Committee on Small Business, wrote a public letter to the acting Secretary of Labor, Julie Su, pleading for an exemption for small businesses like mine. Mr. Williams pointed to a report from the Small Business Administration’s Office of Advocacy, which concluded that the rule would threaten “the livelihood of many small business owners by re-implementing a confusing multifactor analysis to determine whether a worker is an IC or an employee.”
He also pointed out that the final rule “fails to provide adequate analysis and consideration of small entities” and urged the Department of Labor “to delay the rule from coming into effect until the department provides proper consideration of small entities.”
There has yet to be a response to the January 18 letter. Would President Biden potentially step in? Would he do it to defend the “14.6 million new startups during his administration” that he loves to talk about, particularly when the lion’s share of those startups are independents and freelancers who vote? I’m not holding my breath, but an exemption - or at least a delay - could happen.
Third, a Supreme Court decision in June could throw a huge obstacle in the way of this rule.
This month, justices at the Supreme Court heard arguments to overturn the “Chevron Deference,” which, for decades, deferred the responsibility of interpreting legislation to government agencies. Based on the questioning, many legal experts believe that the high court will reverse this precedent and give the power back to the courts to decide how legislation is to be implemented. This would take away much power from agencies like the Department of Labor (the worker classification regulation falls under an interpretation of the 1938 Fair Labor Standards Act). Removing the Chevron Deference will strengthen its opponents and give them more ammunition to have it reversed.
Finally, a Republican may win the White House in November.
Both former President Donald Trump and former South Carolina Gov. Nikki Haley are business-friendly and would likely either overturn the new worker classification ruling or decide not to pursue a defense of it in the courts, which would basically let the existing regulation - which is more friendly to those that are or use independent contractors - to survive.
Of course, I’m not advocating breaking the law or risking non-compliance, so please consult your own legal expert. And as business owners and managers, we should still be preparing for the worst. We should still be looking hard at our independent contractor relationships and determining whether or not they are “integral” to our business.
We should be tuning up our agreements to further document their independence as to the type of work they perform, when they perform it, how they’re compensated and other factors. We should single out those contractors that may potentially need to be classified as employees and budget for the added costs - or make alternative plans for not using them.
I don’t think that’s going to happen, though. I think this new regulation will ultimately go nowhere. But as for me and my business, I’m going to wait and see. And I’ll add this new regulation to all the other reasons why the Biden administration is making it so much easier for business owners like me to support a Republican this November.
• Gene Marks CPA runs The Marks Group PC, a financial and technology consulting firm near Philadelphia.
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