The Confusing Nature of the Biden Plan for Independent Contractor Misclassification

Locke Lord LLP
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President-elect Joe Biden’s campaign issued a comprehensive labor plan that seems to focus on empowering unions. But while the title of this campaign platform is “The Biden Plan for Strengthening Worker Organizing, Collective Bargaining and Unions,”[1] buried inside is a proposal addressing the misclassification of independent contractors that is internally inconsistent. Was it purposeful, reflecting the Biden campaign’s effort to court union voters, while maintaining a moderate view of the vital role played in our economy by the contingent workforce and businesses that have played by the rules? Or is it just confusing? And what should businesses that use independent contractors do in the meantime?  We answer these questions below.

Summary

The first reference to independent contractors in the Biden plan reflects the bipartisan position that the Biden administration should vigorously enforce existing laws against employers that intentionally misclassify employees as independent contractors. Yet later on in the proposal, the Biden plan specifically endorses the recent California law that establishes a new test for independent contractor status, which changed decades of settled law in that state.  That new standard is so challenging to meet that it instantly turned hundreds of thousands if not millions of legitimate freelancers and the companies that retained their services into law breakers. This engendered a backlash so loud that the sponsor of the new law felt compelled, almost immediately after the new law went into effect in California, to sponsor an amendment — which was eventually signed into law — that appeased some of those whose outrage with the new law was reported in the media and then became the subject of intense lobbying in Sacramento, California.  The Biden Plan also seems to disregard the views of one of the principal stakeholders: the freelancers themselves, who have registered their overwhelming support for retaining their independent contractor status in a number of government surveys and polls.  Finally, while the political landscape is taking shape, there are steps that prudent businesses using independent contractors may wish to undertake, as noted in the “takeaway” below.

The Biden plan focuses on intentional misclassification and stricter enforcement of existing laws.

The Biden plan starts off by restating the position of the Obama administration: vigorously enforce existing laws against companies that intentionally misclassify employees as independent contractors. It says: “As president, Biden will put a stop to employers intentionally misclassifying their employees as independent contractors.”

How would he do so?

“He will enact legislation that makes worker misclassification a substantive violation of law under all federal labor, employment, and tax laws with additional penalties beyond those imposed for other violations. And, he will build on efforts by the Obama-Biden Administration to drive an aggressive, all-hands-on-deck enforcement effort that will dramatically reduce worker misclassification. He will direct the U.S. Department of Labor to engage in meaningful, collaborative enforcement partnerships, including with [federal agencies] and state tax, unemployment insurance, and labor agencies.”[2]

These steps were precisely the same type of efforts undertaken by the U.S. Department of Labor in the Obama administration and supported by President Barack Obama. The proposed law that the Biden plan is likely referring to is the Employee Misclassification Prevention Act,[3] which was later reintroduced[4] twice as the Payroll Fraud Prevention Act.[5]

The all-hands-on-deck enforcement effort was precisely what Obama sought to accomplish by means of funding set forth in a number of his annual budgets[6] for the DOL, which was intended to pay for more DOL and IRS investigators. The collaborative enforcement partnerships with federal and state workforce and tax agencies was accomplished in memoranda of understanding between the DOL and as many as 35 state agencies[7] as well as the IRS.[8]

This focus on intentional independent contractor misclassification is precisely what former Labor Secretary Thomas Perez and former Wage and Hour Administrator David Weil consistently endorsed when they were carrying out their duties at a national level to accommodate the valid interests of both workers and businesses.

As Perez testified on March 18, 2015, before the House Education and Labor Committee: “I believe that there’s an important place for independent contractors, but I also believe that there’s ample evidence that that’s been abused.”[9]

Similarly, Weil, when he served as the wage and hour administrator, stated in January 2015 that although an independent contractor relationship should not be used to evade compliance with federal labor law, “the use of independent contractors [is] not inherently illegal [and] legitimate independent contractors are an important part of our economy.”[10]

There is little question that an increase in enforcement would effectively put a dent in independent contractor misclassification and also propel companies to take steps to ensure they comply with the law. The DOL and state counterparts have issued reports over the years noting that, as part of their coordinated enforcement efforts, they have identified or recovered for workers tens of millions of dollars in unpaid unemployment and payroll taxes.[11]

Increased enforcement efforts at the federal and state level would also serve to level the playing field for those businesses using an employee model that cannot compete against companies that intentionally misclassify workers as independent contractors.

The Biden plan then endorses California’s A.B. 5., but a similar law at the federal level would eliminate opportunities for most independent contractors.

The Biden plan then contradicts itself in the second section of the campaign proposal located near the end of the document. The heading of this second misclassification section, “Ensure workers in the ‘gig economy’ and beyond receive the legal benefits and protections they deserve,” would simply suggest that gig economy workers should not be overlooked, but it goes much further.

It proposes legislation that, unlike the Employee Misclassification Prevention Act, would dramatically change the test for independent contractor status and expose the entire nation to the type of misclassification chaos that currently exists in California. Here is what the Biden plan says about independent contractors in a second section of the campaign platform:

“Employer misclassification of ‘gig economy’ workers as independent contractors deprives these workers of legally mandated benefits and protections. … States like California have already paved the way by adopting a clearer, simpler, and stronger three-prong “ABC test” to distinguish employees from independent contractors. The ABC test will mean many more workers will get the legal protections and benefits they rightfully should receive. As president, Biden will work with Congress to establish a federal standard modeled on the ABC test for all labor, employment, and tax laws.”

The ABC test referred to in this section of the Biden plan comes from the infamous A.B. 5 legislation that took effect in California on Jan. 1, 2020. A.B. 5 created a test for independent contractor status that many in that state regard as unattainable to meet, essentially eliminating an overwhelming number of independent contractor positions in that state.

A.B. 5 spared about 50 industries, which obtained exemptions from the new test but would still have to demonstrate that the independent contractor relationship was legitimate under the decades-old test that freelancers and businesses had relied upon for years.

However, most freelancers in that state — those who were not exempted, including those that have nothing to do with the gig economy — soon received termination notices from large and small companies and households that had used their services in the past, essentially putting them out of business. Even the media sources that are regarded as sympathetic to liberal causes immediately reported these calamitous consequences and lobbyists started to seek further exemptions from A.B. 5’s ABC test.[12]

This backlash in California was felt across the country: Legislators and the governors in New Jersey and New York who were considering their own A.B. 5-type laws backed away after lobbyists and the local news media alerted them to the unsettling situation in California among freelancers.[13]

On Sept. 4, a new version of A.B. 5 called A.B. 2257[14] was enacted; it created another 15 or so exemptions, but it left in despair hundreds of industries where freelancers predominate.[15]

The Biden plan suggests that the ABC test is clearer, simpler and stronger than the current federal tests for independent contractor status. It may be stronger but it is hardly clearer and especially not simpler.

As noted in a reasoned Law360 guest article by professor Edward Zelinsky of the Benjamin N. Cardozo School of Law titled “Complexity Is the Cost of California’s Worker Classification Law,” many of the exemptions in A.B. 5 — most of which have been continued in A.B. 2257 — are opaque and ambiguous.

For example, quoting A.B. 5, Zelinsky notes that the exemption for individuals performing marketing services only applies if they engage in “work [that] is original and creative in character and … depends primarily on the invention, imagination, or talent of the [individual].” He also points out, “it will often be unclear whether marketing activity is creative enough or imaginative enough to qualify the marketer as an independent contractor for purposes of this … exemption.”

Zelinsky also examined a few other equally opaque and ambiguous exemptions, including the professional services exemption, where a business must show that the professional service provider “customarily and regularly exercises discretion and independent judgment in the performance of the services.” He commented, “this open-ended standard will entail substantial interpretive ambiguity, leaving the boundaries of this exemption unclear.”

I also recently pointed out that “the same can now be said for AB2257’s definition of [the exemption for] ‘consulting’ services — litigation will likely ensue as to whether the individual’s services ‘requires the exercise of discretion and independent judgment.'”[16]

Zelinsky concluded his article as follows: “A.B. 5 [now A.B. 2257] does not make the law of employee status clearer, simpler or more uniform. Indeed, [it] makes the law more complex and less uniform than it was before.”

Another key deficiency of the A.B. 5/A.B. 2257 exemptions is that many require that every one of a long list of up to 12 specified conditions be met. However, only a few of the businesses and contractors that might be covered by these exemptions can realistically satisfy every single one of the dozen or so conditions for an exemption from the ABC test.

The California Legislature could have followed the lead of other states that have set forth an equally comprehensive list of factors for independent contractor status, but only require that a specified number of the factors be met.[17]

The addition of 15 exemptions hardly fixes the numerous flaws in A.B. 2257. There is no articulated reason why independent contractors in 65 specific industries may be eligible for an exemption from the ABC test, yet contractors engaged in providing services in hundreds or thousands of other industries are not.

A perfect example is that licensed psychologists are exempted as professionals, but other licensed professionals who provide mental health therapy — such as licensed marriage and family therapists, social workers, professional clinical counselors, and educational psychologists — were not included.

Thus, the Biden plan has it wrong when it says that the California example would be clearer and simpler; in fact, A.B. 2257 is far more complex than the decades-old test it supplanted. It is also underinclusive in the types of professions and industries it exempts from the ABC test and overly rigid in terms of requiring businesses and contractors to fit into a fixed, multifactor business structure if they wish to qualify for an exemption from the ABC test.

This second and contradictory section in the Biden plan on independent contractor misclassification would mirror the bill introduced on Sept. 24 in the U.S. Senate and the U.S. House of Representatives. The bill, S.4738, called the Worker Flexibility and Small Business Protection Act,[18] would create an ABC test like the one in A.B. 5 for the entire country. As drafted, it has no exemptions that are written into A.B. 5/A.B. 2257, thereby making it even more disruptive to an even greater number of freelancers and businesses than the California law.

Maintaining existing laws would be welcomed by the overwhelming number of independent contractors.

The position in the Biden plan on independent contractors is not only confusing but also seems to have ignored the position of one of the key stakeholders: the freelancers themselves. Seeking to change the test in order to curtail independent contractor relationships and instead promote the employment of freelancers appears to be out of touch with the overwhelming preference of those service providers — at least according to two independent studies conducted by the federal government.

In 2015, the U.S. Government Accountability Office, in a 72-page report to Congress titled “Contingent Workforce: Size, Characteristics, Earnings and Benefits,”[19] stated that it had asked an array of workers the question, “would you prefer a different type of employment?” Just over 85% of independent contractors responded “no.”

Similarly, when the independent contractors were asked if they were satisfied with their jobs, 92% said they were satisfied with their jobs, with 56.8% saying they were very satisfied. In contrast, only 45.3% of full-time employees reported that they were very satisfied with their jobs.

In June 2018, the Bureau of Labor Statistics issued a study titled “Contingent and Alternative Employment Arrangements.”[20] One question asked whether independent contractors preferred their alternative work arrangement or would prefer a traditional work arrangement.

Of those independent contractors — estimated in the report to be 10.6 million workers or 6.9% of the total U.S. workforce — who had an opinion, 89.9% said they preferred their alternative work arrangements, while only 10.1% said they would prefer traditional employment. This is a critical factor that many legislators, commentators and those in academia seem to overlook or minimize.

In August 2018, Gallup released a comprehensive survey that found “36% of U.S. workers participate in the gig economy through either their primary or secondary jobs.”[21] The survey report states:

“Independent gig workers (such as online platform workers and independent contractors) experience high levels of work-life balance, flexibility, autonomy, meaningful feedback and creative freedom. In fact, they score much higher on all these factors compared with traditional workers and other types of gig workers.”

Fourteen work characteristics were analyzed and the data showed that independent gig workers exceeded traditional employees in 13 of the 14 factors.

A more recent Gallup poll from December 2019 found that 92% of self-employed tax filers also are employed in regular employment and are simply seeking to supplement their income.[22] Those workers reported a far higher satisfaction rate for their working arrangements that those who were limited to W-2 income.

The article concludes:

“Workers rather than employers seem to be driving the trend in self-employment, since the increase comes from people combining self-employment with traditional employee relationships. Some politicians [in states] like California, have sought to curb self-employment, on the theory that employers have created the gig economy in an effort to evade their tax and regulatory obligations. The reality is more complicated.”

Conclusion and Takeaways

In sum, the question is not, what should be done to combat independent contractor misclassification? It should be recharacterized as, what should be done to combat intentional independent contractor misclassification. All stakeholders agree that those who flout existing laws should be required to pay for their failure to abide.

The answer is stricter enforcement of existing laws. That will fully protect businesses that comply with the law, adequately protect workers, raise a tremendous amount of tax revenues, level the playing field, permit legitimate independent contractors to remain self-employed, and allow small- and medium-sized companies with legitimate independent contractor relationships to remain open for business.

Regardless of what transpires in the area of independent contractor law in Washington, D.C., once the Biden administration is sworn in, businesses that use independent contractors should reexamine their level of compliance with such laws at the federal and state levels and take steps to minimize misclassification liability.

A great deal of the companies found to have misclassified independent contractors are in that position because they have not crossed their t’s and dotted their i’s in the manner in which they maintain those relationships. Prudent businesses have taken steps to restructure, redocument and/or reimplement their independent contractor relationships to maximize compliance and reduce their risk of misclassification exposure, using a process such as IC Diagnostics™.[23]

Today, this area of law is not only in flux, but may be changing considerably at the federal and state levels. Elevating compliance with existing independent contractor laws should be viewed as an imperative.

This blog post is based on an article by the author that was published in Law360.com on November 10, 2020. © Copyright 2020, Portfolio Media, Inc., publisher of Law360.  It is republished here with permission. 

[1] See https://joebiden.com/empowerworkers/.

[2] The Biden plan continues: “Biden will fund a dramatic increase in the number of investigators in labor and employment enforcement agencies to facilitate a large anti-misclassification effort.”

[3] See https://www.independentcontractorcompliance.com/2011/10/17/congress-reintroduces-the-employee-misclassification-prevention-act-making-misclassification-of-employees-as-independent-contractors-a-federal-offense/.

[4] See https://www.independentcontractorcompliance.com/2013/11/13/preview-into-the-2013-version-of-the-payroll-fraud-prevention-act-yet-another-congressional-effort-to-crack-down-on-independent-contractor-misclassification/.

[5] See https://www.independentcontractorcompliance.com/2015/08/03/senate-democrats-re-introduce-the-payroll-fraud-prevention-act-of-2015-soon-after-hillary-clinton-seeks-to-insert-ic-misclassification-as-an-election-issue-in-2016/.

[6] See https://www.independentcontractorcompliance.com/2015/02/02/the-2016-federal-budget-targeting-independent-contractor-misclassification-as-part-of-the-fissured-workplace/.

[7] See, e.g., https://www.dol.gov/sites/dolgov/files/WHD/legacy/files/nc.pdf. See also https://www.dol.gov/agencies/whd/state/misclassification.

[8] See https://www.dol.gov/sites/dolgov/files/WHD/legacy/files/irs.pdf.

[9] See https://www.independentcontractorcompliance.com/2015/04/05/march-2015-independent-contractor-compliance-and-misclassification-update/, at “Regulatory and Enforcement Initiatives.”

[10] See https://www.independentcontractorcompliance.com/2015/01/13/florida-is-19th-state-to-partner-with-u-s-department-of-labor-to-combat-unlawful-independent-contractor-misclassification/.

[11] For example, the New York Joint Enforcement Task Force on Employee Misclassification issued a report on February 1, 2015 citing that task force agencies conducted over 12,000 audits and investigations, resulting in detection of employee misclassification involving over 133,000 workers, culminating in the discovery of $316 million in unreported wages, leading to the assessments of $40.4 million in unemployment insurance contributions. And while the U.S. Department of Labor under the Trump Administration may not be enforcing the nation’s labor laws with the same degree of vigor as the Labor Department did prior to this Administration, the Wage and Hour Administrator and the Solicitor of Labor have demonstrated a commitment to enforcing the laws where they believe they have been violated, as demonstrated by its record $322 million recovery last year in unpaid wages. See “News Release – U.S. DEPARTMENT OF LABOR DELIVERS RECORD $322 MILLION IN RECOVERED WAGES FOR WORKERS IN FISCAL YEAR 2019.”

[12] See https://www.cnbc.com/2019/12/11/californias-new-employment-law-is-starting-to-crush-freelancers.html.

[13] See https://fortune.com/2019/12/03/ab5-law-gig-economy-california-new-jersey/.

[14] See https://leginfo.legislature.ca.gov/faces/billTextClient.xhtml?bill_id=201920200AB2257.

[15] See https://www.independentcontractorcompliance.com/2020/09/07/ab2257-not-much-better-than-ab5-for-most-industries-in-california-using-independent-%e2%80%8econtractors/.

[16] See https://www.independentcontractorcompliance.com/2020/09/07/ab2257-not-much-better-than-ab5-for-most-industries-in-california-using-independent-%e2%80%8econtractors/.

[17] See, e.g., Florida test for IC status under the state’s workers’ compensation law, where 4 of 6 factors may be met to qualify for IC status. Fla. Stat. 440.02. Under Wisconsin’s test for independent contractor status for unemployment insurance benefits, only 6 of 9 factors need be met. See Wisc. Stat. 108.02(12)(bm).

[18] See https://www.congress.gov/bill/116th-congress/senate-bill/4738/text?r=1&s=1.

[19] See https://www.gao.gov/assets/670/669766.pdf.

[20] See https://www.bls.gov/news.release/pdf/conemp.pdf.

[21] See https://www.gallup.com/workplace/240929/workplace-leaders-learn-real-gig-economy.aspx.

[22] See https://www.nytimes.com/2019/12/18/upshot/multiple-jobs-united-states.html.

[23] See https://www.independentcontractorcompliance.com/legal-resources/ic-diagnostics/.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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