The pandemic has highlighted, but did not create, a growing diversity of worker status. There are a variety of employee types, from at-will hourly workers to exempt employees engaged under employment contracts (and not subject to minimum wage and overtime rules). There are also a number of different types of independent contractors, including gig workers, those who have sideline activities, and those who work exclusively for a single company on a contract basis.
The laws on worker classification and protection are evolving. The lines are blurring between independent contractors and employees, with more protection and greater benefits usually limited to employees being extended to independent contractors.
The tests for determining worker classification are not uniform. Here are some developments to note.
Unemployment compensation for self-employed individuals
By definition, being unemployed means being an employee who has lost a job. Independent contractors are not employees, so whether or not a particular engagement has ended, they are not unemployed. But COVID-19 has changed this for purposes of the Pandemic Unemployment Assistance (PUA), which is the extra weekly benefits under the CARES Act and extended under the Consolidated Appropriations Act, 2021. Employers pay unemployment tax on behalf of their employees; self-employed individuals do not pay unemployment tax and cannot opt into the system (there may be some state exceptions that I haven’t found). Nonetheless, self-employed individuals in the U.S. can qualify for PUA.
To qualify for PUA benefits, independent contractors, including gig workers or part-timers, must not be eligible for regular unemployment benefits and be unemployed, partially unemployed, or unable or unavailable to work because of certain health or economic consequences of COVID-19. Each state may have its own rules for these self-employed individuals.
DOL final rule on independent contractors
On January 6, 2021, the U.S. Department of Labor (DOL) announced a final rule clarifying the standard for making worker classification as an employee or independent contractor for purposes of the Fair Labor Standards Act (FLSA). This determination is vital so that a company knows whether it has to pay workers minimum wage and overtime.
The final rule uses an economic reality test to determine whether a worker is in business for him/herself (an independent contractor) or economically dependent on an employer (an employee). The two key questions to answer for this test is:
- The nature and degree of control over the work
- The worker’s opportunity for profit or loss based on initiative and/or investment
Additional factors taken into account for the economic reality test include:
- The amount of skill required for the work.
- The degree of permanence of the working relationship between the worker and the potential employer.
- Whether the work is part of an integrated unit of production.
There are six examples illustrating the economic reality test.
Note: This final rule is subject to President Biden’s freeze on regulations. Many expect this rule to not be implemented.
NYC Fair Workweek Law
New York City has recently taken steps to limit at-will employment status for fast food industry workers. Under an expansion to the Fair Workweek Law, workers can only be terminated or have their work hours reduced by 15% or more of their regular schedule for “just cause.” Employers must give a “bona fide economic reason” for firing or reducing hours. This expanded rule allows workers who’ve been wrongfully discharged or suffered reduced hours starting in 2022 to take their case to arbitration.
Note: These changes are on top of existing ones designed to protect retail employees as well as providing other protections for fast food workers.
California’s ABC test
California adopted an ABC test to determine worker classification. The A, B, and C conditions were explained in a prior blog. But California isn’t the only state using this test. Alabama, Connecticut, Colorado, Delaware, Georgia, Hawaii, Illinois, Idaho, Indiana, Louisiana, Maryland, Massachusetts, Mississippi, Nebraska, Nevada, New Hampshire, New Jersey, Ohio, Pennsylvania, Vermont, Washington and West Virginia use some version of the ABC test.
What’s new here? Last summer, the California Labor Commission found that Lyft and Uber drivers were employees. A pending court decision will decide on whether the California law can be applied retroactively. A decision should be handed down some time this year.
IRS rules continue to prevail for determining worker classification for purposes of federal employment taxes. However, this could change if a new Congress chooses to codify the tests for determining worker classification.