What Change Would the Rule Bring?

The U.S. Department of Labor (DOL)’s proposed new rule would:

• Adopt an “economic reality” test to determine whether a worker is an employee or an independent contractor under the FLSA. That is, whether a worker is economically dependent on an entity for work and would be an employee, or conversely, whether the individual is in business for him/herself (independent contractor);
• Identify and explain two “core economic reality factors,” specifically the nature and degree of the worker’s control over the work, and the worker’s opportunity for profit or loss based on initiative and/or investment. The DOL would weigh these two factors more heavily than any others to help determine if a worker is economically dependent on an entity’s business or is in business for themselves. The DOL believes that taking this approach will likely encourage the creation of independent contractor jobs that provide autonomy and satisfying entrepreneurial opportunities;
• Identify three other factors that the DOL will consider: 1) amount of skill required for the work; 2) degree of permanence of the working relationship between the worker and the potential employer (the more permanent, the more likely there is an employee status); and 3) whether the work is part of an integrated unit of production and if so, that would weigh in favor of finding employee status (meaning where a worker is a component of a potential employer’s integrated production process that “requires the coordinated function of interdependent subparts working toward a specific unified purpose.” For instance, if a worker depends on the overall process to perform work duties as would a computer programmer on a software development team, that person would be more likely to be classified as an employee.
• Advise that the actual practice of what the parties are doing is more relevant to determining whether the worker is an independent contractor or an employee than what may be contractually or theoretically possible.

What Should Employers Do Now?

Nonprofit organizations and businesses have an opportunity to provide public comment on the proposed rule until October 26, 2020.  Even if the final rule is substantially unchanged from the proposed rule, organizations should remain mindful that their respective State Departments of Labor and court rulings relating to State labor laws and wage orders may impose stricter definitions or interpretations of “independent contractor” than under the FLSA.  Therefore, employers should speak with their legal counsel before determining whether a worker is properly classified as an independent contractor rather than an employee to help minimize legal risk.

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That means that organizations and companies that choose to take this payroll tax deferral would then withhold additional amounts from those affected employees’ paychecks from January 1, 2021 through April 30, 2021 to repay that deferred tax obligation.  The payroll tax deferral would not excuse the requirement of payment of such taxes. Additionally, the deferral is not retroactive meaning that an employer may only defer payment of taxes prospectively through December 31, 2020 (it may not include deferral of taxes or reimbursement of taxes to employees that were already withheld starting September 1).

There remain questions about the legality of President Trump’s memorandum in the absence of approval from Congress which constitutionally holds the power over the federal “purse strings”— to tax and spend public money for the national government. Although the Internal Revenue Service (IRS) issued guidance on August 28, 2020 (Notice 2020-65), employers are still awaiting further IRS guidance regarding how the deferral would be implemented, including whether (or how) an employee’s obligation to pay those deferred taxes or an employer’s obligation to withhold will be forgiven in the absence of Congressional approval, written confirmation that the choice of whether to implement deferrals rests with the employer, not the employee, and employer obligations with respect to such taxes if an employee is no longer employed with that employer at the time that repayment is due.

The payroll tax deferral is simply a deferral, not a forgiveness of taxes.  If an employer does not pay the deferred payroll tax to the IRS by April 30, 2021, it could potentially be liable for penalties, interest and late fees.

Organizations should confer with their legal counsel and accountant before deciding to defer payroll tax withholding and to discuss structuring any agreements with affected employees concerning repayment if those organizations do decide to defer payroll tax withholdings.

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These and other considerations are discussed in my article Avoiding Legal Pitfalls When Re-Opening Your Workplace: What Nonprofits and Businesses Need to Know.

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Effective January 7, 2020, pursuant to NYLL Section 203-E, employers of all sizes within New York State must notify employees of their rights under the law and remedies.  For those employers with an employee handbook, the notice of rights and remedies must be contained in that handbook.  The NYS Department of Labor has not issued any guidance yet, including whether independent contractors are encompassed by this law as “employees” and whether they must receive written notice of rights as well.

Employees may sue in court for violation of the law.  Violation of the law can result in damages, including, but not limited to, back pay, benefits and reasonable attorneys’ fees and costs for a prevailing plaintiff, injunctive relief against an employer, reinstatement; and/or 100% liquidated damages of the award for damages unless an employer proves a good faith basis to believe that its actions were in compliance with the law.  The law also contains civil penalties against employers that retaliate against an employee for complaining of a violation of this law.  The New York State Labor Law amendment does not exempt religious or faith-based organizations (see below for further information).  It also does not define “employee” and so it is unclear whether the mandated employee notice must also be provided to an entity’s independent contractors who are now covered by NYSHRL antidiscrimination provisions.

The justification for the law is that the federal Affordable Care Act (ACA) recently required that health insurance plans cover FDA-approved birth control methods without out-of-pocket costs to employees. Some for-profit employers have attempted to prevent employees from accessing health insurance plan coverage of FDA-approved birth control without out-of-pocket costs on the grounds that this health insurance benefit conflicts with an employer’s personal beliefs. As a result, over 100 federal lawsuits have been filed by employers to deny employees this benefit, including employers operating in New York State. New York State’s legislature seeks to ensure that employees’ decisions about pregnancy, contraception, and reproductive health are protected under state law from employment discrimination.

This amendment to New York State’s Labor Law prevents an employer from discriminating against employees based on reproductive health decisions, regardless of how the employer became aware of those decisions. Despite medical confidentiality protections under The Health Insurance Portability and Accountability Act (HIPAA), an employer does receive health insurance utilization summaries, which are distributed to each employer on a regular basis. In these reports, in some cases, an individual’s identity may be deduced by an employer based on the nature of the service and composition of the insured class reported in the summaries, and the State does not want employers using information about an employee’s reproductive health decision as a basis for discriminating against an employee or taking a negative employment action against them.

The State Labor Law amendment follows a recent amendment to New York City’s own Human Rights Law, which prohibits employers with four or more employees in New York City, labor organizations or employment agencies, from discriminating against or harassing job applicants, employees, interns, and independent contractors without employees, based on their sexual and reproductive health decisions. [1]

Note to religious/faith-based nonprofit organizations:  The State Labor Law and New York City Human Rights Law amendments are currently being challenged in federal court in New York by Evergreen Association, Inc., a nonprofit that operates pregnancy centers, and its founder and President, Chris Slattery, on the grounds that the law violates their constitutional rights to freedom of speech, freedom of association and due process, and that the term “reproductive health decision-making” is undefined, making that law unconstitutionally vague.  Stay tuned for developments in this litigation as there is no exemption for religious or faith-based organizations under the New York State Labor Law. While New York State and New York City Human Rights Laws do contain religious organization exemptions from those laws (though NYCHRL does not define a “religious organization”), those exemptions are nonetheless limited in their scope.[2]  Religious organizations, in particular, should consider the impact of the amendment to New York State’s Labor Law and consult with their legal counsel about their rights and obligations.

What Should an Employer Do Now?  Provide a written notice of employee rights and remedies as required and review and update all EEO and other policies prohibiting discrimination and employment-related hiring materials.

[1] New York City’s Human Rights Law defines “sexual and reproductive health decision” as “any decision by an individual to receive services, which are arranged for or offered or provided to individuals relating to sexual and reproductive health, including the reproductive system and its functions.” Services include, but are not limited to:

• Fertility-related medical procedures;
• Sexually transmitted disease prevention, testing, and treatment; and
• Family planning services and counseling, such as birth control drugs and supplies, emergency contraception, sterilization procedures, pregnancy testing, and abortion.

[2] NYC’s Human Rights Law does not prohibit religious organizations from limiting employment or giving preference to persons of the same religion or denomination or from making such selection as is calculated by such organization to promote the religious principles for which it is established or maintained.

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