Misclassification conundrum
Independent contractor or employee?
For years, labor unions and activists have argued that companies in many industries, including building supplies and construction, have attempted to hold down labor costs by labeling workers as independent contractors when they were actually employees. The difference in terminology is significant. Contractors are not eligible for overtime pay, unemployment insurance or workers’ compensation. They typically pay all their Social Security taxes, compared with employees, who split that cost with employers.
In July 2015, the Department of Labor’s Wage and House Division (WHD) issued a guide to determine whether a worker is an employee or an independent contractor in relationship to the employer. This new directive emphasizes that a worker who is “economically dependent” on the employer should be treated as an employee. By contrast, to be regarded as an independent contractor, workers must be in business for themselves.
The new guidance comes as the Labor Department steps up its enforcement of classification rules. Last year, it forced companies to pay $79 million in back wages to 109,000 workers across a myriad of industries.
The penalty for non-compliance can be severe. Earlier this year, Lowe’s agreed to pay $6.5 million — plus legal fees — to settle a lawsuit filed by independent contractors who claimed they legally qualified as employees. The plaintiffs said Lowe’s controlled all aspects of their work, from the uniforms they wore to how they were paid, and they were told by the retailer to describe themselves to customers as Lowe’s employees. Lowe’s contended that its relationship was with a business that had recruited the workers.
Various other cases of classification issues around the industry have spurred interest from a myriad of voices. Executives representing the hardware and building material supply industry voiced concerns over the new guidance, which some say has gained momentum following the recession as cash-poor states and the federal government went looking for additional sources of revenue.
Casey Voorhees, executive director of the Western Building Material Association (WBMA), said his group is firmly against this new guidance, which he termed “just another unnecessary regulation making things more difficult for our members.”
Voorhees said the new guidance would mostly impact WBMA members providing installed services. “Also, to a smaller extent, it may possibly affect some of our members who outsource some of their operational functions, such as IT, as opposed to delegating it to an employee. The best thing we can do is continue serving as a resource to keep them informed as changes occur.”
Voorhees added that its national association — the National Lumber and Building Material Dealers Association (NLBMDA) — is monitoring this issue closely and is providing member education in the form of webinars.
According to Frank Moore at the NLBMDA, “No one factor is determinative of whether a worker is an employee or independent contractor.” He said the interpretation looks at the six most common factors applied by federal courts.
To be considered an independent contractor, he said the following criteria applies:
The worker’s work should not be an integral part of the employer’s business;
The worker should be in business for him or herself with evidence of using managerial skills relative to exposure to profit or loss and development of future work;
The worker’s relative investment in his or her business should be comparable to that of the employer, demonstrating that the worker is exposed to a risk of loss;
The worker’s business skills, judgment and initiative, not his or her technical skills, will be used to determine if the worker is economically independent — it will be assumed that an independent contractor will use his or her skills in some independent way, such as demonstrating business initiative;
Permanence or indefiniteness in the worker-employer relationship suggests that the worker is an employee — it will be assumed an independent contractor will seek independence from a single employer.
Mike Beeter, president and CEO of BRI Roofing in Fort Worth, Texas, called misclassification a “cancer” in the construction industry. He lobbied the Texas House and urged its involvement. In a letter to the House, he wrote, “The problem is so immense that it will not be fixed without ethical companies as well as government joining together to stop the fraud known simply as worker misclassification.”
Jerry Howard, chief executive of the National Association of Home Builders (NAHB), said forcing small businesses to have full-time employees on each and every crew that builds a home “would be to force those people out of business or drive up the cost of housing to where it would be unaffordable to most Americans.”
NAHB spokeswoman Suzanne Beall said organization members are greatly concerned about DOL’s efforts. “One concern is that DOL’s actions could create an incentive for investigators when making a worker status determination to find misclassification where none exists,” she said. “We are working on two efforts that are interrelated: a grants program tucked under the Unemployment Insurance Integrity program, as well as the new DOL misclassification guidance. Traditionally, control has been the prevailing factor in DOL’s analysis. Now, DOL has shifted its focus to economic dependence. Our builders’ subs need to be economically independent from the builders. In other words, the subs have to work for multiple businesses in order to be considered economically independent.”
What is meant by “economically dependent?”