The 2016 Federal Budget: Targeting Independent Contractor Misclassification as Part of the “Fissured Workplace”

by Pepper Hamilton LLP
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The President released his Fiscal Year 2016 Budget today, February 2, 2015. In furtherance of the President’s budget request, the Labor Department’s Wage and Hour Division provided a 32-page budget justification to Congress for its planned appropriations. The Wage and Hour Division listed its “Key Enforcement Initiatives” for 2015-2016, and the first item listed is “Addressing the Fissured Workplace.” What exactly does that mean?

The phrase “fissured workplace” is yet another term for independent contractor relationships and other business models that, according to the budget justification (at 17), “function to obscure, or eliminate entirely, the link between the worker and the business.” Some of these other business models include contingent workforce arrangements such as the use of on-demand workers.

The Administrator of the Wage and Hour Division, Dr. David Weil, stated in January that business models that “attempt to change . . . the employment relationship through the use of independent contractors are not inherently illegal, . . . [and] legitimate independent contractors are an important part of our economy . . . .”.  Yet, the message he sent to Congress today is that the Wage and Hour Division (WHD) is targeting industries where the “fissured workplace” is regarded as prevalent.

Page 26 of the budget justification states: “By focusing on priority industries, WHD also increases the likelihood of detecting instances of misclassification. WHD continues to increase its presence in those industries that have evolved business practices to avoid classifying and treating workers as employees, including those in which employees are misclassified as independent contractors. WHD’s priority industries are those industries where the relationship between the workers and the beneficiaries of the labor are more and more attenuated and fissured. Rather than add workers to their permanent payrolls and assume the obligations associated with employment relationships, companies are relying on various contingent workforce solutions to produce goods and services. WHD’s emphasis on conducting investigations [in] priority industries is consistent with the goal of detecting instances of misclassification.”

What else does the Wage and Hour Division have in mind to deter misclassification in the “fissured workplace” in the upcoming fiscal year? The budget justification (at 16) notes that the WHD “aims to prioritize increasing civil monetary penalties for minimum wage and overtime violations under the FLSA [and] FLSA recordkeeping provisions.” The next paragraph notes that such increased penalties will be applied to businesses found to have misclassified employees as independent contractors.

What does this mean for companies that use independent contractors including on-demand workers? If they are in a “priority” industry, they should expect a greater likelihood of a WHD investigation. What are those industries? The Labor Department has not issued a formal list, but public statements, press releases, and congressional testimony by government officials include the following targeted industries:

  • janitorial services,
  • construction,
  • home health care,
  • nursing,
  • staffing,
  • internet services,
  • child care,
  • transportation and trucking,
  • cable companies,
  • security,
  • restaurants,
  • catering services,
  • hotel/motel,
  • ship repair,
  • oil and gas,
  • landscaping and nurseries,
  • car service and limousines,
  • supermarkets.

What should a business in these and other industries do where it makes use of independent contractors and other elements of the “fissured workplace”?  The simple answer is, take action to enhance its independent contractor compliance.  One way to do so is by using IC Diagnostics™, which affords companies a number of alternatives to minimize independent contractor misclassification liability. Those alternatives include restructuring, re-documentation, and re-implementation of independent contractor relationships; reclassification; and redistribution of independent contractors.

The most suitable alternatives for any company will depend on which ones will best support its business objectives.  In view of the continued emphasis on targeted enforcement by the Wage and Hour Division of the U.S. Department of Labor, the only undesirable alternative is not taking any action to enhance independent contractor compliance.

 

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