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U.S. Department of Labor Reins In Independent Contractor Misclassification

US-DeptOfLabor-SealOn July 15, 2015, David Weil, Administrator for the United States Department of Labor, Wage and Hour Division, issued an “Administrator’s Interpretation” regarding independent contractor misclassification—essentially firing a warning shot at the armada of rising independent-contractor-model businesses navigating the current markets. These companies may be legally required to treat some or all of their contractors as employees, and are thus subject to various minimum wage, overtime compensation, unemployment insurance, worker’s compensation, and other regulatory laws. Indeed, these are the four important workplace protections stressed by Weil, who also pointed out that loss in tax revenues and inequities in business competition (the increased challenge to competing businesses who play by the rules) are also a grave concern.

Granted, the Administrator’s statement did not set forth any startling new interpretations, but it sure served as a bold announcement that an Elliott Ness-style crackdown on “organized misclassification,” if you will, is underway, and businesses would do well to start making the necessary adjustments immediately on their own before they are forced to. The statement has also not gone unnoticed by the investor community, which is taking a few steps back from the flavor-of-the-month startups that have large-scale independent contractor engagement as a core aspect of their business model.

As if in perfectly-timed response, the home cleaning company Homejoy announced two days later that it was shutting down operations due to a class-action lawsuit its was facing regarding worker misclassification. Homejoy is not alone as significant class-action lawsuits were nearly simultaneously filed against Instacart, Postmates, and Try Caviar, back in March. Services like Uber, Washio, and Lyft have also been called to defend their worker policies and practices, and are feeling the brunt of this crackdown.

While this treacherous landscape may lead the nervous investor to flee from what otherwise appear to be great opportunities, others may hold fast or double-down to the extent they are assured that the companies they are invested in are maintaining a strict level of compliance. The key factors for being able to achieve this level of security rest in proper documentation and strict business practices, all of which warrant a thorough reevaluation in this climate.

The company/contractor agreement should be clear and accurate. It should specify the aspects of the relationship that make it fall under the various provisions of independent contractor laws. If there are other aspects to the relationship that cast it more towards one of employer/employee, the company should consider restructuring its policies and approaches to eliminate such gray areas and opportunities for challenges. This may lead to a juggling of roles and responsibilities in the company, and even the conversion of some current contractors to an employee status.

This process may entail some short-term costs but provide much in long-term benefits. Changes to management and policies, and conversion to new contractor agreements, are certainly preferable to becoming hamstrung by legal challenges. When it comes to engaging outside legal resources to ensure that the new documents shore up all the potential holes identified in recent court challenges to others, the company should not skimp.

Whether the existing agreements are deemed satisfactory, or new ones are drafted, management must continue to be vigilant to ensure that the provisions in the agreements that are key to the independent contractor relationship status are actually followed, and that it does not introduce new management directives that undermine the independent contractor status of its service providers.

When reclassifying employees, it is important that the company is looking realistically at its potential tax obligations from prior non-compliance, including penalties and interest. It  may also come under fire by their recently-converted employees, who do not want to come out on the losing end of an agreement they entered into under greatly different business and tax circumstances. Again, expert legal counsel can be a key factor in helping a company achieve compliance while minimizing the need for one-to-one reclassifications and the financial burdens attendant to such.

Depending on the scope of service providers needed, another option for companies may be to minimize their potential liability, and costs of compliance, by foregoing their direct relationship with independent contractors and acquiring the necessary staffing through a third party workforce management company.  Of course, the premium paid to such management companies must be weighed against the savings in other areas to determine if this is an option that is favorable to the company’s bottom line.

For companies that have done their homework, and are strict about compliance, the independent-contractor-model  can lead to many mutually beneficial rewards. The diligent investor should likewise by thorough in an assessment of these companies, as Homejoy will certainly not be the last casualty of the new normal in misclassification enforcement.

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The editors and editorial board of DailyDAC include preeminent restructuring and insolvency professionals, journalists, and editors. They are devoted to providing reliable and plain English education and deal intelligence about assignments, corporate bankruptcy, receiverships, out-of-court workouts and similar topics.

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