The Small Business Association of Michigan is building opposition to a proposed federal rule change that could affect millions of workers who earn their living as independent contractors.
The U.S. Department of Labor proposal now out for public comment would alter the existing legal tests used to qualify as an independent contractor. While the proposal appears to target companies largely based on using contract labor, such as ride-share providers Uber and Lyft or food delivery services such as DoorDash, SBAM officials worry that far more small businesses and entrepreneurs would be harmed under the changes.
“Their rules, I believe, will catch up to many, many small businesses on both sides of the equation — both the independent contractor who will no longer be able to get work as independent contractors (and) businesses will shy away from the use of independent contractors because it’s too risky when they start talking about misclassification and payroll fraud,” said SBAM CEO Brian Calley.
He also noted that the proposal comes as the number of people starting their own business has been rising through the pandemic.
“I think that it goes right at the heart of the gig economy, it goes right at the heart of sole proprietors, and it goes right at the heart of people who might want to be their own boss and go out as a professional somewhere and have their former employer be their first customer,” he said. “That is such a common way for somebody to start a business, and that’s exactly the circumstance where a person would be limited under these proposed rules.”
Calley hopes the Biden administration will withdraw the 58-page proposal and either start over or stick with existing rules that provide “pretty bright line rules” for classifying workers as independent contractors.
He particularly worries how the change could affect people who start their own small business — many times as independent contractors working for a handful of clients — or small businesses that rely on contract labor to handle certain ongoing tasks.
“On both sides of this relationship, entrepreneurs often start as independent contractors with just one or two clients. So, for new business starts, I think this independent contractor rule would significantly limit their opportunity to start their own business,” Calley said. “But also, (for) small businesses that use independent contractors … this Department of Labor rule will potentially take millions of independent contractors nationwide out of the game.”
The proposal published Oct. 13 in the Federal Register and sent out for public comment until Nov. 28 modifies the legal tests used to determine whether workers are payroll employees or independent contractors classified under the Fair Labor Standards Act.
The rule would take into account a “totality of the circumstances” to test and decide whether to classify a worker as an independent contractor, according to a recent advisory to clients from Grand Rapids law firm Varnum LLP.
“The bottom line of the test would be to determine ‘whether a worker is in business for themself or is instead economically dependent on the employer for work,’” an attorney for Varnum wrote in the advisory.
The potential effects of the proposed rule are huge. Upwork Inc., a website that connects independent contractors with companies, in December 2021 estimated that 59 million people in the U.S., or more than one-third of the workforce, performed freelance work during the prior 12 months.
Among the changes the Labor Department proposes is whether the work that an independent contractor performs is “central, necessary or critical to the business” for a business that retains them, Calley said. If so, “then that is a mark against independent contracting” and “they should be an employee,” he said.
“That is absolutely nonsense. You’re saying to an independent contractor, ‘You’re not allowed to do work that is necessary or critical to your customer.’ Why would somebody use an independent contractor that is not necessary?” said Calley, who assumes the Department of Labor would aggressively interpret and enforce the new rule.
In announcing the proposal, which would rescind and replace a rule implemented in early 2021, the Department of Labor said the change would create a “framework more consistent with longstanding judicial precedent on which employers have relied to classify workers as employees or independent contractors” under the Federal Labor Standards Act.
“The Department believes that this proposal, if finalized, will provide more consistent guidance to employers as they determine whether workers are economically dependent on the employer for work or are in business for themselves, as well as useful guidance to workers on whether they are correctly classified as employees or independent contractors,” the Labor Department wrote in the notice published in the Federal Register. “Accordingly, the Department believes this proposal will help protect workers from misclassification while at the same time recognizing that independent contractors serve an important role in our economy and providing a consistent approach for those businesses that engage (or wish to engage) independent contractors.”
The department noted that the proposal “is not intended to disrupt the businesses of independent contractors who are, as a matter of economic reality, in business for themselves.”
SBAM argues otherwise. The proposal could cause major disruption and put in place a “needlessly complicated and restrictive system” to determine how to classify a worker, and use subjective tests on whether the tools someone uses in their work are “entrepreneurial in nature” to qualify as an independent contractor, according to SBAM.
For example, “entrepreneurial in nature” could mean if a piece of equipment that an independent contractor buys is for a specific job, rather than for general use in their profession, “then it’s no longer entrepreneurial and in essence it counts against you in their test and you’re more likely to be required to be an employee,” Calley said.
That aspect of the proposed rule change likely targets Uber, Lyft and food delivery services where contract employees generally already own their vehicle and use it on the job, he said. Calley believes part of the Department of Labor’s proposal is to get Uber and Lyft to consider their drivers as employees who are subject to the federal minimum wage and worker protections.
“They’re trying to say, ‘No, if a person is bringing their own car to the Uber relationship, that’s not entrepreneurial because they own their own car anyway. They bought that car for personal reasons, they’re using it for the job, and therefore it’s not an entrepreneurial investment, and that’s an employee and not a contractor,” Calley said. “They cast a wide net and they were maybe aiming at Uber and DoorDash, which is bad enough. People voluntarily decide that they want to be Uber drivers as contractors. They control their own schedule and bring their own equipment to the table. To me that is very entrepreneurial.”
The Department of Labor is taking public comments until Nov. 28. Through today, nearly 2,000 comments had been submitted since the public comment period began Oct. 13.