As we previously reported, last week, the U.S. Department of Labor (“DOL”) released a long-anticipated proposed rule which seeks to reinstate the “totality of the circumstances” test to determine whether an individual is an “employee” or “independent contractor” under the Fair Labor Standards Act (“FLSA”).
What Is the Proposed Rule?
The proposed rule is designed to reduce “misclassification of employees as independent contractors.” The proposed rule noted that misclassification of workers is particularly pronounced in the construction industry. The DOL cited a 2019 study finding that “a construction contractor in the District [of Columbia] can reduce [its] labor costs by 16.7 percent [by] unlawfully misclassifying workers as an independent contractors.” The study also noted that “[i]n an industry where every dollar counts, a 16.7 percent premium on doing business legally is significant. [T]his gives law-breaking contractors a marked advantage over … employers who play by the rules.”
The proposed rule is designed to reduce misclassification by returning to the “totality of the circumstances” test for analyzing whether a particular worker is an “employee” or “independent contractor.” The “totality of the circumstances” test analyzes the following six factors:
- Opportunity for profit or loss depending on managerial skill;
- Investments by the worker and the employer;
- Degree of permanence of the work relationship;
- Nature and degree of control;
- Extent to which the work performed is an integral part of the employer’s business; and
- Skill and initiative.
The proposed rule provides further detail and explanation as to what each of these factors means in practice. It also clearly states that these six factors are not exhaustive and that additional factors may be relevant depending on the circumstances.
Throughout the proposed rule, there are indications that construction workers will be closely scrutinized in order to assess whether they are truly “independent contractors” or whether they should be classified as “employees.” For example, the DOL noted that the seasonal nature of construction work will not by itself indicate independent-contractor status:
[I]n Baker v. Flint Engineering & Construction Co., the Tenth Circuit determined that temporary rig welders who worked no more than two months at a time for a gas pipeline contractor exhibited sufficient permanency in their work relationship to indicate employee status because such temporary work was intrinsic in the industry rather than a “choice or decision” by the workers. Therefore, consistent with the applicable case law, the Department is proposing to revise the 2021 IC Rule provision’s acknowledgement that the seasonal nature of work alone would not necessarily indicate independent contractor status to acknowledge more broadly that a lack of permanence may be due to operational characteristics that are unique or intrinsic to particular businesses or industries and the workers they employ rather than the workers’ business initiative, in which case this factor would not weigh in favor of independent contractor classification.
Likewise, the DOL noted that specialized skills held by tradespersons will not necessarily be indicative of independent contractor status:
[S]pecialized skills possessed by carpenters, construction workers, and electricians are not themselves indicative of independent contractor status; rather, it is whether these workers take initiative to operate as independent businesses, as opposed to being economically dependent, that suggests independent contractor status.
DOL Example (Welder vs. Specialty Custom Welder)
In fact, the proposed rule included an example of a welder who could be considered an “employee” or an “independent contractor” depending on the circumstances. In the first scenario, the proposed rule would consider the welder to be an “employee”:
A highly skilled welder provides welding services for a construction firm. The welder does not make any independent judgments at the job site beyond the decisions necessary to do the work assigned. The welder does not determine the sequence of work, order additional materials, think about bidding the next job, or use those skills to obtain additional jobs, and is told what work to perform and where to do it. In this scenario, the welder, although highly skilled technically, is not using those skills in a manner that evidences business-like initiative. The skill and initiative factor indicates employee status.
In the second example, the proposed rule would consider the welder to be an “independent contractor.” Note the differences from the example above:
A highly skilled welder provides a specialty welding service, such as custom aluminum welding, for a variety of area construction companies. The welder uses these skills for marketing purposes, to generate new business, and to obtain work from multiple companies. The welder is not only technically skilled, but also uses and markets those skills in a manner that evidences business-like initiative. The skill and initiative factor indicates independent contractor status.
As you can see, the proposed rule would require construction contractors to more carefully scrutinize workers who purport to be “independent contractors.” Remember, if an “independent contractor” is determined to be an employee, then the contractor would be on the hook for all of the various employment laws (including overtime), tax withholdings, FICA and FUTA taxes, unemployment insurance, workers’ compensation and numerous other legal requirements.
What Does this Mean for Signatory Contractors?
Because signatory contractors are required by their CBA to hire workers directly (usually from the union’s hiring hall), it would be unlikely that a signatory contractor would need to vet an independent contractor relationship. In fact, CBAs usually prohibit attempts to subcontract work to unscrupulous, non-signatory contractors who may attempt to use independent contractors (rather than employees).
Thus, signatory contractors actually stand to benefit from the DOL’s proposed rule. If the proposed rule is adopted by the DOL, the rule would help root out non-union contractors that are not playing by the rules and level the playing field for contractors performing work the right way.
The proposed rule is just that: proposed. Interested parties will have 45 days to submit public comments on the proposed rule. After the comment period closes, the DOL will need to decide whether to move forward with a final rule. If it does, it is believed that the final rule would issue sometime in mid-2023, or perhaps as late as early 2024.
If the proposed rule takes effect, construction contractors would need to carefully scrutinize any purported “independent contractors” to ensure that they are properly classified as contractors – not “employees.” Since they generally do not use independent contractors, signatory contractors have less worry and actually stand to benefit from these stricter rules.
FCA International will continue monitoring this proposed rule as it winds its way through the regulatory process. Keep an eye on the industry platform for any updates.