Proposed DOL Independent Contractor Test May “Bug” Some Employers

During a college summer break, rather than return to the same-old internship, I decided that it was time go west to California and seek my fortune. However, instead of prospecting for gold or joining a tech startup, I elected a different path to riches: door-to-door pest control sales!

After arriving in Salinas, California, I was handed a clipboard and told that I would receive $100 for every new annual pest control contract that I sold and was sent out to the wolves. I knocked on doors from Gilroy (the garlic capital of the world) to Castroville (the artichoke capital of the world) to Hollister (surprisingly not as hip as the namesake clothing store) to ask homeowners if they had seen any unwanted creepy crawlies in their kitchens.

Most responded by slamming the door, but a few let me complete my whole sales pitch (“You see just one ant between treatments, a technician will be back within 24 hours!”). A chosen few actually signed up! In fact, after my first week, I racked up a whopping 11 sales.

Based on past jobs, I figured once taxes were deducted, I’d only be pocketing about $600 from my $1,100 in total commissions. However, when payday came, I received a check for $1,100 even. No deductions. No withholdings.

Against my better judgment, I approached the manager of the company and mentioned that I was surprised that no taxes had been taken out of my pay. He responded, “Of course there are no taxes. You are an independent contractor.”

Back then, I had no idea what an independent contractor was. All I remember hearing was that I didn’t have to pay any taxes, so I just shut my trap and moonwalked out of the office (until the following April 15, when I learned, to my great disappointment, that independent contractors do have to pay taxes).

Now as an employment attorney, I spend way too much time thinking about independent contractors and whether they have been classified correctly. Many employers are under the false impression that by simply calling someone a contractor or giving them a “1099,” you can avoid myriad employment-related costs and obligations. This is not the case and misclassifying an employee as an independent contractor can result in significant liability, including back pay, benefit claims, tax obligations and penalties, workers’ compensation assessments, and other damages.

I am not the only one who has been thinking a lot about this issue recently. On October 13, 2022, the U.S. Department of Labor (DOL) issued a proposed rule that would change the test used to determine employee or independent contractor status under the Fair Labor Standards Act. This proposed rule, about which the DOL is currently accepting comments, would make it significantly harder to establish independent contractor status and likely result in many misclassification determinations.

Currently, the DOL uses an “economic reality” test to differentiate between employees and independent contractors. The test considers five factors but two are given significantly greater weight than the others: (1) The nature and degree of the individual’s control over the work; and (2) The individual’s opportunity for profit or loss. 

By proposing the new rule, the DOL is seeking to implement a more “employee friendly” test. The proposed rule contains six factors, all of which are given the same weight:

  1. The worker’s opportunity for profit or loss depending on managerial skill;
  2. Investments by the worker and the employer;
  3. Degree of permanence of the work relationship;
  4. Nature and degree of control;
  5. Extent to which the work performed is an integral part of the employer’s business; and
  6. Skill and initiative.

Other factors may be considered to make the ultimate determination of “whether the workers are economically dependent on the employer for work or in business for themselves.”

In short, the new rule will make it significantly harder to prove that an individual is truly an independent contractor and not an employee. Several states, including New York and California, already use independent contractor tests that are similarly and, in some cases, even more “pro-employee” than this proposal.

Could I have been deemed misclassified had this new “employee friendly” test been in place during my pest control sales adventure? As I mentioned before, upon arrival in California, I was handed a clipboard and sent out to the wolves (worse actually—retirees who had to answer the door during Wheel of Fortune) without training or oversight. I was in control of decisions about which neighborhoods to knock, what sales pitch to attempt, and how many (or in my case, how few) hours to work. In general, my success and ultimate profit were completely dependent on me. Each of these factors would likely lean in favor of independent contractor status.

On the flip side, many other factors favor employment status. I was never provided with a meaningful opportunity to negotiate regarding my own payment or product pricing. I was prohibited from selling for any other companies during the summer, so I couldn’t offer my services to others. There were other company employees who also marketed and sold pest control contracts at the same time I was doing so as a contractor. The company provided me with snazzy polo shirts, clipboards, pens, and brochures and reimbursed car milage and other expenses, meaning that I didn’t really have to invest any of my own funds. And as much as I hate to admit it, selling pest control did not involve as much skill as you might think. Initiative, yes—skill, not so much.

Based on all of this, my gut tells me that, had a dispute arisen about my classification and the newly proposed test was used, it’s likely that I would have been deemed an employee and the company could have faced liability. In fact, the same finding would likely result under the current test.

Seeing how easy it can be to misclassify someone, I would strongly recommend that any readers of this column who use independent contractors do a similar analysis (preferably with legal counsel) and make any changes necessary before this new DOL test is implemented. In my case, no dispute ever arose over my classification, but that’s probably because I quit after just a couple of weeks once I grew tired of people yelling at me for “pestering” them during their dinners.

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