Agency curbs worker misclassification

WASHINGTON – When are workers employees? When are they contractors?

The U.S. Labor Department recently issued new guidance that could limit the ability of many companies to designate their workers as contractors. That could spell trouble for sharing-economy firms such as Uber and TaskRabbit, which often rely on independent workers for short-term projects.

The guidance comes amid a wave of lawsuits brought by workers against companies such as FedEx, ride-hailing service Lyft and online cleaning service provider Handy. The workers said they should have been treated as employees rather than contractors.

Labor unions and activists for years have argued that companies in many industries – including construction, hotels, and janitorial services – have sought to hold down labor costs by calling workers independent contractors. Contractors aren’t 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.

The guidance was issued by the Wage And Hour Division of the U.S. Labor Department, headed by David Weil. It doesn’t represent a new regulation or have the force of law but is intended to clarify how companies and courts should interpret the rules.

“We very much believe that misclassification is a problem that has been growing,” Weil said. “It undermines all the legitimate employers who are doing the right thing ... but they are put at a competitive disadvantage.”

Yet attorneys who represent employers said the directive reflects a very broad interpretation of what constitutes an employee and likely will encourage more lawsuits.

“It is an unapologetic effort to restrict the use of independent contractors,” said Richard Alfred, a partner at Seyfarth Shaw, a law firm that typically represents employers. The guidance “ignores many of the realities of the modern workplace, and different relationships that workers and businesses want to have.”

The issue also has emerged in the presidential campaign, after Democratic nomination candidate Hillary Clinton promised to “crack down” on companies that wrongly classify workers as contractors. Though she praised the “gig economy” for “creating exciting opportunities,” Clinton also said it is “raising hard questions about workplace protections.”

The move comes as the U.S. 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 in the janitorial, temporary help, food services, day care and hotel industries.

The Economic Policy Institute, a liberal think tank, estimated that 10 percent to 20 percent of employers misclassify at least one worker.

The U.S. Labor Department’s directive emphasizes that a worker who is “economically dependent” on the employer should be treated as an employee. By contrast, a worker must be in business for himself or herself to be an independent contractor.

That is a broader standard than guidelines followed by many states and the U.S. Internal Revenue Service, said Michael Droke, an employment law partner at Dorsey and Whitney. They generally focus on how much control a company has over how a worker does the job.

The directive also said that an agreement between an employer and worker that designates the worker as an independent contractor “is not relevant” to the classification question.

That is an “extremely surprising” view, Alfred said, who added such agreements at least should be considered.

Prior to taking his government post in May 2014, Weil was a professor at Boston University and wrote the book “The Fissured Workplace,” which examined ways that companies have sought to outsource or subcontract many functions. That has increased the misclassification of workers, Weil said.