New DOL Guidance on Independent

Contractors: Multi-Factor Test for

Determining Worker Classification

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THURSDAY, OCTOBER 18, 2018

Presenting a live 90-minute webinar with interactive Q&A

Anne Cherry Barnett, Principal, Polsinelli, San Francisco

John E. Duke, Senior Counsel, Constangy Brooks Smith & Prophete, Boston

Chad Edward McDaniel, Attorney, Constangy Brooks Smith & Prophete, Boston

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New DOL Guidance on Independent Contractors: Multi-

Factor Test for Determining Worker Classification

Strafford CLE

October 18, 2018 at 1:00 p.m. EST

Anne Cherry Barnett, ShareholderPolsinelli LLP abarnett@polsinelli.com

John E. Duke, Senior CounselConstangy Brooks Smith & Prophetejduke@constangy.com

Chad E. McDaniel, AttorneyConstangy Brooks Smith & Prophetecmcdaniel@constangy.com

Misclassification of workers classified as independent contractors continue to receive significant attention by federal and state agencies.

Widespread use of independent contractors in the United States has led to reduced tax collections, contributions to unemployment insurance, disability and workers’ compensation funds.

Independent contractors do not receive overtime compensation, do not receive unemployment or workers’ compensation benefits.

Significant tax savings can result if IC relationship established properly.

However, significant risk of misclassification (back taxes, back wages and various penalties).

Scrutiny on Independent Contractors

6

DOL Guidance Pre-2015

DOL 2015 Administrative Opinion

significant shift of direction for DOL and departure from IRS standards. Lack of control over the worker was not a determining factor for finding independent contractor status. DOL concluded that “most workers are employees under the FLSA’s broad definitions.”

2018 Field Assistance Bulletin (FAB 2018-4)

History of DOL’s Guidance on Independent Contractors

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June 2017, DOL withdraws the 2015 Administrative Interpretation on independent contractors.

DOL did not replace with any other guidance. Reiterated that withdraw “did not change the legal responsibilities of employers under the FLSA.”

June 2017- Withdrawal of DOL’s Prior Guidance on Independent Contractors

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Issued July 13, 2018- “Determining Whether Nurse or Caregiver Registries Are Employers of the Caregiver.”

Issued to guide Wage and Hour Division field investigators on how to determine whether nurse/caregiver registries are employers under the FLSA.

Although FAB focuses on caregiver registry industry, it provides employers with view into what factors the DOL now deems essential in determining whether a worker is an employee or independent contractor.

DOL returns to the traditional multi-factor balancing test, with a primary focus on the control of the worker.

Field Assistance Bulletin (FAB) 2018-4July 2018

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DOL abandoned strict application of the “economic realities” test, DOL will consider the “totality of the circumstances to evaluate whether an employment relationship exists.” May favor IC analysis.

Evaluate on case-by-case basis. DOL will evaluate all factors, including control of the work performed by the individual. No single dispositive factor determines the outcome.

Registries may avoid being identified as an employer of the caregiver if the agency avoids controlling and/or becoming involved in the client-caregiver relationship.

Totality of the Circumstances

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Focus on registries may suggest that DOL intends to increase scrutiny on employment relationships in the home health care industry.

FAB does specifically acknowledge that registries don’t automatically defeat the independent contractor relationship:

Registries Do Not Defeat Independent Contractor Relationship

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Conducting background and reference checks Hiring and firing Scheduling and assigning work Controlling the caregiver’s work Setting the pay rate Receiving continuous payments for caregiver services Paying wages Tracking caregiver hours Purchasing equipment and supplies Receiving EINs or 1099s

Factors considered by the DOL in FAB 2018-4

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Generally, a registry does not exercise control over hiring and firing a caregiver; the registry informs its client that a potential caregiver meets the client’s parameters and preferences, and then the client may choose to hire the caregiver.

Some registries may participate more actively in the hiring process or may fire caregivers who violate the law or industry standards. An active role in the hiring and firing process may indicate control over the process and suggest an employment relationship.

Hiring and Firing

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While a registry often facilitates initial communications between a client and a caregiver, the subsequent conversations to structure the terms of the working relationship are independent of the registry, indicating that the registry is not an employer of the caregiver.

A registry may play a more involved role in the process, offering specific work assignments to a subset of caregivers based on the registry’s discretion and judgment. This more involved role may indicate an employment relationship as the caregiver may economically depend on the registry’s subjective preferences and decisions.

Scheduling and Assigning Work

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A registry does not exercise control over a caregiver by monitoring the caregiver’s work habits, providing training, or evaluating performance.

Control over caregiving services (e.g., disciplining a caregiver for performance issues, prohibiting a caregiver from working directly with a client outside of the registry, setting policies requiring the caregiver to provide services in a particular manner, etc.) may indicate the existence of an employment relationship.

Controlling the Caregiver’s Work

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A registry may provide advice concerning typical pay rates to serve as a benchmark during wage negotiations or may act as a liaison between a client and a caregiver during such negotiations, but the client and caregiver independently determine the caregiver’s rate of pay.

If a registry designates a set wage range or offers tailored direction concerning what a caregiver should charge for specific services, an employment relationship may exist.

Setting the Pay Rate

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A registry may charge a client a one-time, upfront fee for the service of matching the client and a caregiver. It may also charge fees for administrative functions, such as processing payroll or producing tax documents. Such charges do not indicate that a registry is a caregiver’s employer.

However, if the caregiver’s pay depends in part on the amount the registry charges, such charges may indicate that the registry is the caregiver’s employer.

Receiving Continuous Payments for Caregiver Services

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A registry’s operational expenses (e.g., investments in office space, payroll software, timekeeping systems, etc.) do not indicate an employment relationship. Similarly, a registry may provide caregivers the option to purchase discounted equipment or supplies without indicating an employment relationship.

Contrarily, a registry making an investment in a caregiver’s training, licensure, insurance, or other tools necessary for the caregiver to perform the job may indicate an employment relationship.

Purchasing Equipment and Supplies

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The fact that a registry requires an Employer Identification Number issued by the Internal Revenue Service or distributes an IRS 1099 form to a caregiver is immaterial in ascertaining whether the registry is an employer of the caregiver under the FLSA.

Receiving EINs or 1099s

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FAB 2018-4, although specifically addressing the relationship between registries and caregivers, appears to indicate that the DOL is returning to a “totality of the circumstances” standard and will consider “all factors” in reaching an appropriate conclusion.

The 2018 Bulletin does two things for the regulated community. First, it provides employers with a view into what factors the DOL now

deems important in determining whether a worker is an “employee” or an “independent contractor.”

Second, it applies these factors to health care registries, an industry which has been at the forefront of this issue.

Key takeaways from FAB 2018-4

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More tolerant approach to IC status.

Current Administration’s Approach

Primary focus on control of worker

Impact of California Supreme Court Dynamex Operations v. Superior Court decision (4 Cal. 5th 903 (2018).)

Employer must prove each of the three “ABC test” prongs:

(A) the worker is free from control and direction of the hirer in connection with performing the work, both under contract and in fact; (B) the worker performs work outside the usual course of the hiring entity’s business; and (C) the worker customarily engages in an independently established trade, occupation or business of the same nature as the work performed for the hirer

Differences in legal standards

(Fed/State/Taxes/Wage and Hour)

How to Structure IC Relationship?

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Acosta v. Jani-King of Oklahoma, Inc., No. 17-6179, 2018 WL 4762748 (10th Cir., Oct. 3, 2018)

“It is well settled that the economic realities of an individual’s working relationship with the employer—not necessarily the label or structure overlaying the relationship—determine whether the individual is an employee under the FLSA.”

Lynn v. ARC of Fayette Cty., No. 17-474 (W.D. Pa. Sept. 11, 2018) Plaintiffs worked in connection with ARC’s facilitation of care and support services to

Medicaid funding-eligible, intellectually disabled client in Fayette County through in-home services.

Referenced FAB 2018-4 and determined that administrator interpretations, though not afforded conclusive weight, are entitled to significant deference in accordance with Skidmore, and the assessment of the case will be made under precedent of the circuit court [3rd Circuit has adopted the ‘economic realities test’], FLSA, the final rule, and guidance of the DOL.”

Post FAB 2018-4 Case Law

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DOL Priority: Enforcement or compliance assistance?

Will courts agree with the DOL’s position?

What about joint employer status?

Unanswered Questions

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When in doubt, classify as employees.

Avoid classifying former employees as independent contractors.

Use independent contractors who are incorporated and market their services to the public.

Do not be an independent contractor’s first or only customer.

Do not require exclusivity.

Best Practices

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Pay by invoice and negotiate the rate.

No training, reporting obligations, evaluations, or handbook.

Do not permit independent contractors to make employment decisions for your employees.

Do not let your employees make employment decisions for the independent contractor or the independent contractor’s employees.

Best Practices (cont.)

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Limit supervision and control.

Do not require set work hours.

Do not provide supplies, tools, or equipment.

Do not reimburse work-related expenses.

Avoid the outward appearance of an employment relationship.

Treat similar workers the same.

Best Practices (cont.)

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Have a signed agreement (but not determinative of status).

Confirm status

No benefits

Pay by project (not hourly)

Indemnity

File Form 1099-MISC.

Best Practices (cont.)

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Perform an assessment of any purported “independent contractors” Get in compliance with any “employees” even if they don’t

want to be considered employees If You Use Independent Contractors, Be Prepared to Prove It:

Contracts Beware of “forms.” Develop one that reflects the actual facts.

Keep A File With Supporting Records/Evidence Don’t count on being able to obtain/rely on the IC’s

testimony.

Best Practices (cont.)

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Questions?

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