The Independent Contractor "Misclassification Trap" Remains a Clear and Present Danger for Employers

I've written and spoken for many years on the significant threat to employers of a finding that they have misclassified workers as independent contractors ("IC"). Shortly before it ended, the Trump Administration published regulations by the U.S. Department of Labor ("DOL") that were intended to recognize a more employer-friendly test for determining when a worker is an IC, but those regulations have now been jettisoned by the Biden administration. My view is that those regulations would not have made much of a difference in an area that is clouded by a patchwork of state and federal regulations that are hard to synthesize.

On January 7, the outgoing Trump Administration published its regulations that set forth new, more “business-friendly” standards for determining whether a worker was an independent contractor or an employee. The regulations were to take effect March 8. Shortly after President Biden was sworn in, however, the DOL decided to delay implementation of those regulations. And, as of April 12, 2021, the Trump regulations are now history (although a lawsuit has been filed to challenge the DOL's actions in rescinding them).

Its not clear that the Trump regulations would have had any significant impact, or solved the problems that employers face in determining how to classify certain workers. The Trump regulations were intended to reaffirm the “economic reality” test for determining whether a worker was an independent contractor or an employee, by focusing on two “core factors” that were intended to have great weight. The two factors were (1) the nature and degree of control over the work performed, and (2) the worker’s opportunity for profit or loss.

The Trump regulations would not have solved the larger problem, which is that there is a lack of uniformity among the patchwork of state and federal statutes and regulations in what constitutes an "independent contractor," with the definition varying on the statute at issue, the jurisdiction, or the part of the country in which one operates. As a matter of law, the same worker who is properly designated as an independent contractor under Title VII of the Civil Rights Act might be considered an employee under another federal statute. Moreover, a worker properly designated as an independent contractor on the east coast of the U.S. might not fit that legal description on the west coast. Advice from legal counsel with knowledge of this patchwork of laws is essential.

In the construction industry, for instance, senior management must also be fully aware of the risks when their subcontractors misclassify workers. Aside from the obvious risk of a misclassification suit, there is the added risk that an unpaid employee of a subcontractor will make a complaint to a state agency, or file a civil complaint, alleging that he or she was jointly employed by the general contractor and subcontractor.  I have seen many instances of a cascading effect, when a determination is made at the state DOL level of misclassification, and that agency notifies other state agencies. Now more than ever it is important to tighten up the contractual relationships with all subcontractors, and to closely audit how workers are classified and paid. Now is to time to contact competent counsel with knowledge of these threats to audit your business to ensure compliance with these and other laws which are now being focused on by the state and federal government like never before.

 *Kevin O’Connor is a shareholder with Peckar & Abramson, P.C. His areas of concentration are EPLI and D&O defense; construction law; class action defense; partnership and corporate dissolutions; restrictive covenant and trade secret litigation. Kevin is a frequent lecturer on these topics and has published numerous articles in those areas.  Kevin received his Juris Doctor from Rutgers University School of Law, where he served as Editor-in-Chief of the Rutgers Law Review.