Employee or contractor? Labor seeks to clarify rules

When are workers employees? When are they contractors?

The Labor Department issued new guidance Wednesday that could limit the ability of many companies to designate their workers as contractors. That could spell trouble for sharing-economy firms such as Uber and TaskRabbit, which rely on independent workers, often for short-term projects.

It comes amid a wave of lawsuits against companies such as FedEx, ride-hailing service Lyft and online cleaning service provider Handy, brought by workers who say they should have been treated as employees rather than contractors.

Labor unions and activists have for years argued that companies in many industries — construction, hotels, and janitorial services, among others — have sought to hold down labor costs by calling workers independent contractors. Contractors aren't eligible for overtime pay, unemployment insurance or workers' compensation. They typically pay all their Social Security taxes, compared with employees, who split that cost with employers.

The guidance was issued by the Labor Department's wage and hour division, headed by David Weil. It doesn't represent new regulation or have the force of law, but is intended to clarify how companies and courts should interpret the rules.

"We very much believe that misclassification is a problem that has been growing," Weil said. "It undermines all the legitimate employers who are doing the right thing … but they are put at a competitive disadvantage."

Yet attorneys that represent employers say the directive reflects a very broad interpretation of what constitutes an employee, and will likely encourage more lawsuits.

"It is an unapologetic effort to restrict the use of independent contractors," said Richard Alfred, a partner at Seyfarth Shaw, a law firm that typically represents employers. The guidance "ignores many of the realities of the modern workplace, and different relationships that workers and businesses want to have."

The issue has also emerged in the presidential campaign, after Hillary Clinton promised earlier this week to "crack down" on companies that wrongly classify workers as contractors. She praised the "gig economy" for "creating exciting opportunities" but also said it is "raising hard questions about workplace protections."

The move comes as the department steps up its enforcement of classification rules. Last year, it forced companies to pay $79 million in back wages to 109,000 workers in the janitorial, temporary help, food services, day care and hotel industries.

The Economic Policy Institute, a liberal think-tank, estimates that 10 percent to 20 percent of employers misclassify at least one worker.

The department's directive emphasizes that a worker who is "economically dependent" on the employer should be treated as an employee. By contrast, a worker must be in business for himself or herself to be an independent contractor.

That is a broader standard than guidelines followed by many states and the IRS, according to Michael Droke, an employment law partner at Dorsey and Whitney. They generally focus on how much control a company has over how a worker does the job.

The directive also says that an agreement between an employer and worker that designates the worker as an independent contractor "is not relevant" to the classification question.

That is an "extremely surprising" view, Alfred said. Such agreements should at least be considered, he added.

Prior to taking the post at Labor in May 2014, Weil was a professor at Boston University and wrote a book titled "The Fissured Workplace," which examined ways that companies have sought to outsource or subcontract many functions. That has increased the misclassification of workers, Weil said.

Uber lost a high-profile case in California last month when the state's labor commission ruled that a driver for the company was an employee, not an independent contractor. The case was limited in scope, applying to one driver who sought unpaid wages and expenses and was awarded $4,152. Uber is appealing the decision.

The company has said that its drivers like its business model, which enables them to choose when and how much to work.

"The No. 1 reason drivers choose to use Uber is because they have complete flexibility and control," the company said last month.