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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On October 25, 2016, in the Matter of Yoga Vida NYC,  a decision sure to have rippling effects through many industries, the New York State Court of Appeals–the highest court in New York State — ruled sensibly and logically, that certain yoga instructors were independent contractors, not employees. Specifically, the Court found that substantial evidence supported a finding that non-staff yoga instructors were independent contractors where the non-staff instructors:

1) set their own schedules; 2) chose how they were paid (hourly or on a percentage basis); 3) were paid only if a certain number of students attended their classes; 4) were not restricted as to where they could teach (whereas staff instructors who were employees could not work for competitors within certain geographical areas); 5) could inform students of classes they taught at other locations; and 6) were not required to attend meetings or receive training.

The Court further opined that evidence of incidental control by the yoga studio, including an inquiry by the studio as to whether the instructors held proper licenses to teach yoga; the fact that the yoga studio published a master schedule on its website; and the fact that the studio provided space for the classes, did not support the conclusion that the instructors were employees.

Employers should understand that, depending on the facts, some yoga instructors or other kinds of instructors may be deemed to be employees while others will be deemed independent contractors.

NYC Now Protects Freelancers/Independent Contractors

On November 16, Mayor de Blasio signed into law a bill that protects New York City freelancers/independent contractors by requiring that whomever hires a freelancer provide a written contract for the freelancer’s work, pay him/her in full and on time, and that the hiring party does not retaliate against the freelancer for exercising his/her rights.

More specifically, the law requires any person or entity who engages a freelancer to have a written contract with that freelancer for any work over $800.  The contract must itemize all services to be provided, the value of those services, the rate, the method of payment, and the payment due date or the mechanism by which such date will be determined.

The client must pay the freelancer on a timely basis and may not require the freelancer to accept less than the full amount of the contract in exchange for timely payment. If the contract does not provide the payment date or the mechanism by which such date will be determined, payment must be made no later than 30 days after the completion of the freelance worker’s services under the contract.

The party engaging the freelancer/independent contractor bears the burden of showing there is a written contract if any dispute arises regarding the terms of engagement.

The freelancer may bring a complaint with the Director of New York City’s Office of Labor Standards or bring an individual cause of action in state court. Violation of this law may result in damages equal to the value of the services, double damages, statutory damages, injunctive relief and attorney’s fees and costs. Where there is evidence of a pattern or practice of violations, the Corporation Counsel may bring a civil action in court on behalf of the City, and a civil penalty up to $25,000 may be imposed.  The law takes effect in 180 days from its signing, or on May 15, 2017.

Any nonprofits that are planning to engage freelancers should be mindful of this new law and ensure their independent contractor engagements are in writing and compliant with the new law.

In light of the above developments, it would be wise for New York employers to confer with their employment counsel to ensure their workers are properly classified and that their independent contractor agreements are properly drafted.

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Employers seeking amnesty must satisfy eligibility requirements, submit an application to the IRS, and enter into a closing agreement with the IRS.  The agreement that the employer enters with the IRS need not include all of the workers that the employer is treating as independent contractors.  If an employer chooses to participate in the program, it will be required to pay 10% of the amount of the employment taxes that would otherwise have been due on compensation paid for the most recent tax year to the workers. This amounts to about one percent (1%) of the wages paid to the reclassified workers during the prior year and  the IRS will not impose interest or penalties on the amount paid, and the employer will not be subject to an employment tax audit with respect to these workers for prior year

A caveat – the program covers only federal taxes and not unpaid local state payroll taxes.

The IRS did not set a deadline yet for businesses (or charities)  to apply.

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