The right to self-employment is under attack. Offered as initiatives to help workers, federal and state governments have been initiating policies that, in effect, are making it increasingly difficult for individuals to exercise their right to self-employment.
Examples of these obstructionist policies are found in President Obama’s proposed Fiscal Year 2017 budget, the U.S. Department of Labor’s (“DOL’s”) growing memorandum of understanding program, DOL’s Administrator’s Interpretation of the application of the Fair Labor Standards Act (“FLSA”) to independent contractors, and recently enacted state laws which increase worker misclassification enforcement activities.
Fiscal Year 2017 Proposed Budget
A cursory examination of President Obama’s proposed Fiscal Year 2017 budget reveals priorities that will make it more risky for companies to do business with self-employed entrepreneurs. For example, the budget proposes to eliminate Section 530 of the Revenue Act of 1978 (“Section 530”) which provides service recipients and self-employed service providers with absolute certainty that the independent-contractor status of their relationship will be respected for federal employment-tax purposes so long as, among other things,[1] the service recipient has a reasonable basis for treating the service provider as an independent contractor. In addition, the budget requests an addition $530 million in funding for the Internal Revenue Service to increase enforcement initiatives.
The budget also requests $10 million for the DOL to distribute to states that increase efforts to investigate, detect and remedy worker misclassification. The Coalition to Promote Independent Entrepreneurs was part of the successful effort to eliminate this program in 2016 and plans to do so again. Furthermore, the budget requests an additional $277 million for the DOL Wage and Hour Division to increase enforcement activities, specifically targeting areas such as worker misclassification and addressing the fissured workplace.[2]
DOL Initiatives
On July 15, 2015, the DOL Wage and Hour Division released Administrator’s Interpretation No. 2015-1[3] which provides a narrowed interpretation of the economic realities test[4] used to determine whether an individual is an employee or independent contractor for purposes of the Fair Labor Standards Act. Specifically, this guidance attaches less weight to the “control” factor and more weight to the “integration” factor.
Additionally, this DOL guidance indicates that for the relative investment factor to weigh in favor of independent contractor status, an individual must not only have an investment in his or her business, but the investment must also be of a level that is significant relative to the putative employer’s investment in its overall business.[5] DOL’s guidance on this factor makes it difficult for a service-based independent contractor to satisfy inasmuch as many operate a business that only requires a minimum investment (e.g., merely a computer or smart phone).
Furthermore, as of the time of this writing, twenty-eight states have signed a Memorandum of Understanding (“MOU”) with the DOL to work collaboratively to combat worker misclassification. Pursuant to these MOUs, participating states and the DOL share information and coordinate worker misclassification enforcement efforts.
State Legislative Developments
During 2015, Indiana, North Carolina and Utah enacted laws which increase efforts to identify and punish worker misclassification. Indiana enacted a law which makes it a misdemeanor for an employer to misclassify a worker as an independent contractor to avoid obtaining workers’ compensation coverage.[6] In effect, this new law criminalizes worker misclassification. Additionally, Indiana enacted a law which requires its Department of Workforce Development to share information concerning suspected improper worker misclassification in the construction industry.[7]
North Carolina enacted a law which requires the North Carolina Department of Commerce – Division of Employment Security to coordinate efforts with the Department of Revenue to detect employers’ failure to pay unemployment insurance taxes as a result of, among others, worker misclassification.[8]
In addition, Utah enacted a law which Permits the Utah Unemployment Insurance Division to disclose to the DOL Wage and Hour Division, information regarding certain employers that have misclassified workers.[9]
Conclusion
The policies identified in the foregoing are making it increasingly more difficult for independent entrepreneurs to exercise their right to self-employment inasmuch as these policies are making it risker for potential clients to do business with them. Consequently, to ameliorate such risk, clients and potential clients may hire additional employees in lieu of engaging an independent contractor, freelancer or sole entrepreneur.
Fortunately, these destructive policies can be stopped and reversed. To do so, independent entrepreneurs must ban together and form a unified front; the Coalition to Promote Independent Entrepreneurs is your catalyst. For years the Coalition, with the assistance of numerous businesses, associations and individuals, has helped led the fight to support an individual’s right to self-employment. Join our movement today by visiting https://iccoalition.org/product/individual-membership/ and help us work to preserve your right to self-employment.
[1] A company qualifies for Section 530 protection so long as:
(1) the company has always consistently treated the covered workers as independent contractors for federal employment-tax purposes, and for all periods beginning after December 31, 1977, the company and any predecessor have consistently treated all other workers holding a substantially similar position as independent contractors for federal employment-tax purposes (the “substantive consistency” requirement);
(2) for the tax year at issue the company has complied with the Form 1099 reporting requirements with respect to the compensation paid to the covered workers (the “Form 1099” requirement); and
(3) the company had a reasonable basis for treating the covered workers as independent contractors (the “reasonable basis” requirement).
[2] The “fissured workplace” refers to the separation of workers and businesses receiving the benefit of their labor as a result of companies contracting out or otherwise shedding activities to be performed by other businesses. See The Fissured Workplace, David Weil (October 17, 2014) available at http://blog.dol.gov/2014/10/17/the-fissured-workplace/.
[3] http://www.dol.gov/whd/workers/Misclassification/AI-2015_1.pdf.
[4] The economic realities test typically examines the following factors:
(A) the extent to which the work performed is an integral part of the employer’s business;
(B) the worker’s opportunity for profit or loss depending on his or her managerial skill;
(C) the extent of the relative investments of the employer and the worker;
(D) whether the work performed requires special skills and initiative;
(E) the permanency of the relationship; and
(F) the degree of control exercised or retained by the employer. Administrator’s Interpretation No. 2015-1 *4 (2015).
[5] Administrator’s Interpretation No. 2015-1 * 9-10 (2015).
[6] See Burns Ind. Code Ann. § 35-43-5-21.
[7] See Burns Ind. Code Ann. § 22-4-19-15.
[8] See N.C. Gen. Stat. § 96-40.
[9] See Utah Code Ann. § 35A-4-312.
