Revisiting worker classification under DOL proposed rule

Authored by Karen Weisz and David Boyle

The landscape of the gig economy and independent contractor classification is changing yet again. Rejecting the 2020 Rule to determine whether a worker is an “employee,” the US Department of Labor issued a Notice of Proposed Rule Making (NPRM) to return to a more comprehensive legal framework and analysis used to distinguish an employee from an independent contractor.

As organizations continue to rely on independent contractors and, in some cases, place them at the cornerstone of their business model, it is critical that they understand the implications this proposed rule has on the employment and tax compliance aspects of utilizing independent contractors, and the overall effect it may have on their Workforce Ecosystem. In this article, we will discuss the proposed rule in more detail, its implications for organizations, and how a Workforce Ecosystem approach presents opportunities for organizations navigating this shifting landscape.

See here to learn more about orchestrating your Workforce Ecosystem.

The Proposed Rule

The proposed rule is intended to combat employee misclassification and to ensure employees are protected under employment-related regulations. The DOL argues that classification should be based on a long-held standard of using the totality of the circumstances analysis based on the economic realities of the relationship between the business and the worker.

Employers should also be aware of state-specific regulations that may provide additional rules regarding independent contractors.

Workforce Ecosystem Approach

Employers who frequently use independent contractors, including gig workers, should consider the implications this proposed rule has on their Workforce Ecosystem. Organizations in industries such as construction, real estate, home care, and transportation, and those that rely on the sharing economy, will be most impacted. Even so, many other organizations are increasingly relying on third parties to deliver some of their most essential services.¹

Given the ubiquitous use of independent contractors, we believe it’s critical that organizations attend to the risks presented by misclassification of workers within the context of this proposed rule. Organizations should evaluate their full Workforce Ecosystem, which includes employees and independent contractors (among other worker types) and develop strategies to manage potential misclassification risks under the proposed rule. In particular, organizations should evaluate their policies and conduct scenario planning, develop a governance and operating model, and mature their workforce planning capability to increase their visibility to their workforce ecosystem, and influence behavioral change to cement any new practices in place.

Risk & Policies: Organizations should identify potential risk exposures in an array of areas and develop scenario planning to comply with the proposed rule requirements in the event the rule goes into effect. Given the nature of the proposed rule, organizations should model scenarios that compare the following aspects of utilizing independent contractors versus employees.

• Wage and hour issues: A misclassified employee may result in FLSA violations that can result in fines or penalties imposed on the organization by federal and state governments and through class-action lawsuits. 
• Brand & Reputation: Many organizations have been the subject of unflattering publicity because of labor issues that have arisen within their workforce. Negative publicity from reports of employee misclassification can result in customer and workforce attrition.
• Tax Consequences: Organizations that have misclassified portions of the workforce may be responsible for federal payroll tax for Social Security and Medicare under FICA (Federal Insurance Contributions Act), as well as income tax withholdings, and any federal and state civil penalties incurred, as a result of failing to pay appropriate payroll taxes. 
• Benefit Plans, Insurance Premiums, and Medical Expenses: Organizations may be ordered to pay excise taxes for failure to provide the required benefit plan, insurance, and medical expense coverage entitled to employees who were misclassified as independent contractors. 
• Workers’ Compensation: Organizations can be retroactively responsible for workplace injuries occurring to misclassified independent contractors, in addition to applicable civil penalties and fines.
• Unemployment Insurance: As with taxes, organizations may be responsible for unpaid unemployment insurance for all employees who were misclassified as independent contractors.
• Employee Negligence: Negligence on the part of a misclassified worker would be missed by an organization since organizations are not liable for the actions of independent workers. In these cases, organizations risk exposure to additional liability.

Organizations should inspect the potential for their current independent contractors to qualify as employees under the proposed rule and make the necessary adjustments to their policies to avoid the potential risks of misclassification.

Governance & Operating Model: We believe organizations should take this opportunity to define roles and ownership, develop capabilities, and invest in technology to best manage their workforce ecosystem, inclusive of their independent contractors. Given that only 30% of managers agree their organization is sufficiently preparing to manage a workforce that will rely more on external contributors,² and given the potential impact this proposed rule may have on organizations, now is the time to act. Organizations that are proactive in developing governance and operating models designed to manage their entire workforce ecosystem stand to increase their visibility and reduce misclassification risks of their independent contractors.

Workforce Planning: HR has typically focused only on planning for internal workers and jobs. Organizations considering their full ecosystem should integrate this business process with other functional business areas in order to plan inclusively for the entire workforce. Doing so will increase visibility and tracking of both employee and non-employee populations, provide insight into skills the organization has access to, and define the skills gap the organization must fill to achieve its business goals. A mature workforce planning function that considers an organization’s entire workforce ecosystem enables the business to continue operations by planning for any changes the proposed rule may have on its workforce.

Change Management: Once potential risks have been identified, governance and operating models have been defined, and processes and policies have been refined, organizations must embark on the change journey necessary to influence organizational behaviors. Efficient change management contributes to the development of the institution by preserving harmony with the strategic and operational processes already in place and by developing processes that will change employee behavior and perceptions. This is critical as organizations take a workforce ecosystems approach since many organizational practices do not account for independent contractors or the risk of misclassification.

Conclusion

In taking a Workforce Ecosystems approach, organizations can holistically evaluate the risks and opportunities inherent in the shifting regulatory landscape. Ultimately, it is up to each organization to evaluate and classify each position in their business based on applicable federal and state regulations. Correct worker classification is essential not only to compliance, but also to maintaining the continuity and optimizing the full value of an organization’s Workforce Ecosystem, and to overall organizational success.

Authors:

• Karen Weisz
• David Boyle

Contributors:

• Jon Jon Engel 
• Jeff Lucas
• Kalpita Ainapure 
• Liz Speidel 
• Reem Janho 
• Sedona Georgesc 
• Sheila Townsend  
• Vida Samii

References:

¹ E.J. Altman, D. Kiron, R. Jones, and J. Schwartz, “Orchestrating Workforce Ecosystems: Strategically Managing Work Across and Beyond Organizational Boundaries,” MIT Sloan Management Review and Deloitte, May 2022

² Ibid.