Category: Latest News

Publications and Presentations

Select Books and Published Articles on Taxation and Contingent Workforce Topics

Books

  • Co-Author: Employer’s Handbook: Independent Contractor vs. Employee, Thompson Publishing Group, with Edward N. Delaney
  • Author: Alternate Staffing, PJC Publishing LLC
  • Author:Hollrah’s State Guide on Independent Contractors, PJC Publishing LLC
  • Contributing Author: The Taxpayer Relief Act of 1997, American Bar Association Section of Taxation and American Law Institute-American Bar Association (1998)
  • Contributing Author:Partnering Between Inside and Outside Counsel, West Group

Published Articles

  • Updated Guidance Complicates Independent Contractor Safe Harbor, TaxNotes Federal, Vol. 186, No. 10 (Mar. 10, 2025)
  • Special Safe Harbor Can Protect Businesses in IRS Audits of Independent Contractor Relationships, Maryland Bar Journal, Vol. 6, Issue 2 (Fall 2024)
  • The Time Has Come for Congress to Finish Its Work on Harmonizing the Definition of “Employee,” Brooklyn Law School Journal of Law and Policy,Volume XXVI, No. 2 (2018) with Patrick Hollrah
  • New Passthrough Deduction Creates Tax Benefit for Self-Employed, TaxNotes, Vol. 158, No. 8 (Feb. 19, 2018) with Patrick Hollrah
  • The Tax Executive’s Guide to Contemporary Work Relationships, The Tax Executive, Nol. 46, No. 6 (November-December 1994)
  • Registry-Supplied Nurses Reduce Tax Headache for Hospitals,Healthcare Financial Management (Nov. 1993)
  • Nationwide v. Darden: Restoring to the Term “Employee” Its Common-Law Meaning, The Tax Executive, Nol. 44, No. 3 (May-June 1993)
  • Shell’s Allocation Methods for Establishing Taxable Income from its Property, Oil & Gas Tax Quarterly, Matthew Bender & Co, Inc., Vol. 41, No. 2 (Dec. 1992)
  • The Tax Treatment of Independent Contractors: Where We Are, and Where We’re Headed, The Tax Executive, Vol. 43, No. 5 (September-October 1992), reprinted in The Monthly Digest of Tax Articles (August 1992).
  • Purchasing a Worker’s Services From an Intermediary: How to Ensure Avoidance of Potential Employment Tax Liabilities,Tax Management Compensation Planning Journal, Nol. 20, No. 6 (July 5, 1992)
  • ERISA Protection Extended to Independent Contractors, Tax Management Compensation Planning Journal, Nol. 19, No. 6 (July 7, 1991)
  • Supreme Court Sheds Light on Self-Insured Benefit Plans, Journal of Compensation and Benefits, Warren, Gorham & Lamont (May-June 1991)
  • Refund of Unconstitutional State Taxes: Taxpayer’s Right or State’s Prerogative, The Tax Executive, Vol. 42, No. 4 (July-August 1990)

Presentations on Taxation or Contingent Workforce Topics

  • American Bakers Association
  • American Moving & Storage Association
  • American Payroll Association
  • American Trucking Associations
  • Association of Language Companies
  • ATA Litigation Center
  • Coalition to Promote Independent Entrepreneurs
  • Direct Selling Association
  • Driver Employer Council of America
  • Drug Information Association
  • Field Marketing Services Association
  • Independent Bakers Association
  • Independent Contractor Association of America
  • Independent Mystery Shoppers Coalition
  • International Warehouse Logistics Association
  • Joint National Committee for Languages
  • Lexis/Nexis
  • Littler Mendelson National Employer Conference
  • Mayland Bar Association
  • MSPA Americas
  • National Association of Attorneys General
  • National Association of Chemical Distributors
  • National Association of Concessionaires
  • National Association of Computer Consultant Businesses
  • National Association of Demonstration Companies
  • National Association of Government Labor Officials
  • National Association of Independent Insurers
  • National Association for Retail Marketing Services
  • New York State Land Title Association
  • Pennsylvania Homecare Association
  • Private Care Association
  • Tax Section of the American Bar Association
  • Tax Section of the Bar Association of the District of Columbia
  • Thompson Publishing Group
  • Transportation Law Institute
  • Washington Employee Benefits Group

U.S. Supreme Court Decision Offers Pathway for Developing Arbitration Provisions that Can Protect Companies Against Having to Litigate in Court any California Labor Code PAGA Claims

For companies doing business with independent contractors on a multistate basis that operate with arbitration provisions in their independent contractor agreements, California has presented a vexing challenge by its Labor Code Private Attorneys General Act of 2004 (“PAGA”), Cal. Lab. Code § 2698 et seq.

California’s PAGA empowers an employee (including an individual classified as an independent contractor but claims to be a misclassified employee) – who alleges that the employee’s employer violated specified California Labor Code provisions – to file a lawsuit against the employer and use the violation as a gateway to assert claims alleging a potentially limitless number of other Labor Code violations sustained by other employees of the employer.  California courts have interpreted PAGA claims as Labor Code claims that an employee brings on behalf of California’s Labor and Workforce Development Agency (“LWDA”) to recover civil penalties that are otherwise recoverable only by the state in a LWDA enforcement action.

An employee who institutes a PAGA lawsuit asserts two types of claims on behalf of the LWDA, namely, (i) claims alleging specified Labor Code violations sustained by the employee, and (ii) claims alleging specified Labor Code violations sustained by other employees. In a successful PAGA action, the LWDA is entitled to 75% of the award and the remaining 25% is distributed among the affected employees. 

What makes PAGA claims especially vexing for companies that operate with arbitration provisions is that California courts have held that an arbitration provision does not protect a company against having to litigate in court any PAGA claims. But this outcome was recently changed.

A June 15, 2020, decision by the U.S. Supreme Court in Viking River Cruises, Inc. v. Moriana, 2022 WL 2135491 (June 15, 2022), created a new opportunity for a company to protect itself against having to litigate in court any PAGA claims. The specific issue before the Court was whether the Federal Arbitration Act (“FAA”), 9 U.S.C. § 1 et seq., preempts a rule of California law that invalidates contractual waivers of the right to assert representative claims under PAGA.

Through a complex analysis of federal civil procedure, the FAA, and the PAGA statute, the U.S. Supreme Court in Viking River Cruises, Inc. held that a pre-dispute arbitration provision governing a PAGA claim that an individual asserts on the individual’s own behalf with respect to Labor Code violations sustained by that individual (and “individual PAGA claim”) is protected by the FAA and can be enforced. The Court also held that an “individual PAGA claim” can be split off from, and arbitrated separate and apart from, the representative PAGA claims the individual brings with respect to other employees. Finally, the Court held that once the “individual PAGA claim” is dismissed from litigation and resolved through arbitration, the individual loses the standing required to assert representative PAGA claims in court on behalf of other employees for Labor Code violations they sustained. This means that a carefully drafted arbitration provision can insulate a company against having to litigate in court any PAGA claims.

In light of the Viking River Cruises, Inc. decision, any company that operates with independent contractors in California and has arbitration provisions in its independent contractor agreements should consider consulting with a litigation attorney to ensure that its arbitration provisions are drafted in a manner that will allow it to avoid having to litigate in court any PAGA claims asserted against it.

Importantly, the U.S. Supreme Court acknowledges in its analysis that the California Legislature could amend the PAGA statute to change this outcome.

*          *          *

If you have any questions or comments concerning the foregoing, please let me know, at rhollrah@hollrahllc.com or (202) 659-0878.

The foregoing is intended solely as general information and may not be considered tax or legal advice; nor can it be used or relied upon for the purpose of (i) avoiding penalties under any taxing statute or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. You should not take any action based upon any information contained herein without first consulting legal counsel familiar with your particular circumstances.

COVID-19 Emergency Temporary Standard Creates Potential Risk and Uncertainty for Employers that Perform Project-Based Work

Employee-based companies that perform project-based work could face significant costs and uncertainty in complying with the U.S. Department of Labor’s Occupational Safety and Health Administration (“DOL’s OSHA”) new Emergency Temporary Standard (“ETS”) to protect employees from the spread of the coronavirus on the job.

The ETS applies only to employees. But it creates an additional dimension of risk to companies that do business with large numbers of independent contractors, by exposing such companies to another set of potential penalties if the individuals whom it classifies as independent contractors are determined to have been misclassified for purposes of the ETS.

As applied to employee-based companies that perform project-based work, the ETS is unclear concerning the identification of “employees” who need to be counted for purposes of determining whether a company is a “covered employer” and who need to be included in a roster of “employees” that  a “covered employer” is required to maintain, which shows the vaccination status of all it “employees.”

The ETS was officially published on Friday, November 5, 2021. It became effective immediately upon its publication. Covered employers must comply with most requirements of the ETS within 30 days of publication (December 5, 2021) and with its testing requirements within 60 days of publication (January 4, 2022).

The following discusses certain aspects of the ETS. It is not intended to be comprehensive.

1.         General Overview of the ETS

The ETS requires a covered employer to develop, implement, and enforce either (i) a mandatory COVID-19 vaccination policy, or (ii) a policy requiring employees to choose to either (a) be vaccinated, or (b) undergo regular COVID-19 testing – every seven (7) days – and wear a face covering at work.

The ETS defines a covered employer as an employer with 100 or more employees at any time the ETS is in effect. 

For purposes of the ETS, an employee is considered fully vaccinated (i)  2 weeks after completing primary vaccination with a specified COVID-19 vaccine, or (ii) 2 weeks after receiving the second dose of any combination of two doses of specified COVID-19 vaccines. In either case, an employee is not considered to satisfy this condition until 2 weeks after receiving the complete dosage of an acceptable vaccine.

Importantly, the ETS requires a covered employer to provide its employees with:

  • up to four hours of paid time to get vaccinated (for each dose), and
  • up to two days of paid leave to recover from any side effects from each dose.

The ETS also requires a covered employer to:

  • determine the vaccination status of each employee,
  • obtain acceptable proof of vaccination status from vaccinated employees,
  • maintain records of each employee’s vaccination status, and
  • maintain a roster of each employee’s vaccination status.

A covered employer must require its employees to promptly notify the employer if they test positive for COVID-19 or receive a COVID-19 diagnosis. The employer must then remove the employee from the workplace, regardless of vaccination status, and not allow the employee to return to work until satisfying specified criteria.

Salient aspects of the ETS are discussed in greater detail below, based on the ETS and its accompanying Preamble.

2.         ETS Coverage Issues

As noted, the ETS only applies to a covered employer, defined as an employer with 100 or more employees at any time the ETS is in effect. Independent contractors do not count towards the total number of employees.

For purposes of determining whether an employer satisfies the 100-employee threshold, all temporary, part-time, and seasonal employees – directly employed by the employer – are counted. For these purposes, an employer must count the total number of workers it employs regardless of where they report for work on a particular day. Thus, for example, if a company has more than 100 employees spread out over multiple sites, that employer is covered under this ETS even if it does not have 100 or more employees present at any one worksite.

The determination of whether an employer satisfies the 100-employee threshold is initially made as of the effective date of the standard, i.e., November 5, 2021. If the employer has fewer than 100 employees on that date, the standard will not apply to that employer as of that date, but if the same employer subsequently satisfies the 100-employee threshold, the ETS would continue to apply to the employer for the remainder of the time the ETS is in effect, regardless of fluctuations in the size of the employer’s workforce.

Employees of a temporary staffing firm who provide services for an employer are counted by the staffing firm that directly employs them, but not by the employer for which they perform services.

In a traditional franchisor-franchisee relationship in which each franchise location is independently owned and operated, the franchisor and franchisees would be separate entities for coverage purposes. Thus, the franchisor would only count “corporate” employees, and each franchisee would only count employees of that individual franchise.

In other situations, two or more related entities may be regarded as a single employer for OSHA[1] purposes if they handle safety matters as one company, in which case the employees of all entities making up the integrated single employer must be counted.

The ETS requirements do not apply to employees of a covered employer who satisfy any of the following criteria:

  • who do not report to a workplace where other individuals such as coworkers or customers are present;
  • while working from home; or
  • who work exclusively outdoors.

These provisions are intended to exempt workplace settings where workers do not interact indoors with other individuals, and to exempt work performed in the employee’s home regardless of whether other individuals may be present in the home.

Practice Pointers:  An open issue of particular concern to a company that hires large numbers of employees and offers them project-based work is how to determine which individuals to count as an employee.  It is not unusual for some individuals to complete the employment process with such a company but not accept projects on a regular basis. Also, it is rare for a company to formally terminate such an employee.  So, for an individual to be counted as an employee, it is not clear whether the individual would need to have performed at least one project within the last month, within the last six months, within the last year, or within the last five years. Moreover, it is possible that a company would need to count as an employee any individual whom the company has employed and not formally terminated. The ETS provides no clear guidance on this issue. But the answer could have a profound impact on whether a company is compliant with the ETS for purposes of determining coverage and also for purposes of the recordkeeping requirements discussed below in Section 7.

3.         Required Paid Time Off for Obtaining the Vaccine or Recovering from Side Effects

The ETS requires a covered employer to provide its employees:

  • reasonable time, including up to four hours of paid time off, at the employee’s regular rate of pay, to receive each primary vaccination dose, and  
  • reasonable time and paid sick leave to recover from side effects experienced following each primary vaccination dose.  
    • The paid sick leave can be in the form of an employee’s accrued sick leave, if available.
    • If the employee does not have available sick leave, leave must be provided.
    • Employers may set a cap on the amount of paid sick leave available to employees to recover from any side effects. The Preamble accompanying the ETS states that up to two days of paid sick leave per primary vaccination dose for side effects would be sufficient.

The Preamble accompanying the ETS clarifies that reasonable time to receive each primary vaccination dose may include, but is not limited to, time spent during work hours related to the vaccination appointment(s), such as

  • registering, completing required paperwork,
  • all time spent at the vaccination site (e.g., receiving the vaccination dose, post-vaccination monitoring by the vaccine provider), and
  • time spent traveling to and from the location for vaccination (including travel to an off-site location (e.g., a pharmacy), or situations in which an employee working remotely (e.g., telework) or in an alternate location must travel to the workplace to receive the vaccine).

Employers are not, however, obligated to reimburse employees for transportation costs (e.g., gas money, train/bus fare, etc.) incurred to receive the vaccination.

If an employee chooses to receive a primary vaccination dose outside of work hours, an employer is not required to grant paid time to the employee for the time spent receiving the vaccine during non-work hours. However, even if an employee receives a primary vaccination dose outside of work hours, the employer must still afford the employee reasonable time and paid sick leave to recover from side effects that the employee experiences during scheduled work time.

Practice Pointers:  The foregoing indicates that an employer is obligated to provide paid time off in connection with an employee obtaining a vaccine dose in two circumstances: (i) if the employee obtains the dose during work hours,  and (ii) if the employee experiences side effects from a dose during scheduled work time. Thus, it appears thatan employer would have no such obligation if an employee obtains a vaccine dose outside of work hours and is not scheduled to work during the days subsequent to obtaining the dose when the employee experiences side effects from the dose.

4.         Mandated COVID-19 Vaccination Policy

The ETS provides an employer with two different options to satisfy the mandated COVID-19 vaccination policy requirement.

Option #1:

A covered employer can satisfy the COVID-19 vaccination policy requirement by establishing, implementing, and enforcing a written mandatory vaccination policy. Such a policy requires each employee to be fully vaccinated, except those who fall into one of three categories:

(1) those for whom a vaccine is medically contraindicated,

(2) those for whom medical necessity requires a delay in vaccination, or

(3) those who are legally entitled to a reasonable accommodation under federal civil rights laws because they have a disability or sincerely held religious beliefs, practices, or observances that conflict with the vaccination requirement.

The policy must also require all new employees to be vaccinated as soon as practicable.

Option #2

Alternatively, a covered employer can satisfy the COVID-19 vaccination policy requirement by establishing, implementing, and enforcing a written policy allowing any employee to choose either to:

(1) be fully vaccinated against COVID-19, or

(2) provide proof of regular testing for COVID-19 every 7 days and wear a face covering.[2]

The ETS imposes the following requirements with respect to an employee who is not fully vaccinated:

  • An employee who reports at least once every 7 days to a workplace where other individuals, such as coworkers or customers, are present:
    • must be tested for COVID-19 at least once every 7 days; and
    • must provide documentation of the most recent COVID-19 test result to the employer no later than the 7th day following the date on which the employee last provided a test result.
  • An employee who does not report during a period of 7 or more days to a workplace where other individuals, such as coworkers or customers, are present (e.g.  teleworking for two weeks prior to reporting to a workplace with others):
    • must be tested for COVID-19 within 7 days prior to returning to the workplace; and
    • must provide documentation of that test result to the employer upon return to the workplace.

If an employee does not provide documentation of a COVID-19 test result, the employer must keep that employee removed from the workplace until the employee provides a test result.

Practice Pointers: From a compliance perspective, Option #1 would be simpler to administer and would expose a company to less risk of being responsible to provide employees paid time off in connection with obtaining a COVID vaccine. But this option would deny the company access to individuals who are not fully vaccinated. Option #2 would provide a company with greater access to individuals who are not fully vaccinated but would expose the company to the risk of such individuals scheduling a vaccination dose during working hours, to qualify for paid time off for obtaining the vaccine dose, or on a day preceding a scheduled work time, to qualify for paid time off to recover from side effects experienced following the vaccination dose.

5.         Employer’s COVID-19 Vaccination Policy Must be Written

The ETS requires an employer to first determine its ETS policy and then create a written record of that policy. The employer must then ensure that it is following the policy and enforces the requirements of the policy with respect to its workforce, through training and the use of such mechanisms as work rules and the workplace disciplinary system, if necessary.

A written ETS policy should address all of the applicable requirements, including, among others:

  • requirements for COVID- 19 vaccination;
  • applicable exclusions from the written policy (e.g., medical contraindications, medical necessity requiring delay in vaccination, or reasonable accommodations for workers with disabilities or sincerely held religious beliefs);
  • information on determining an employee’s vaccination status and how this information will be collected;
  • paid time and sick leave for vaccination purposes;
  • notification of positive COVID-19 tests and removal of COVID-19 positive employees from the workplace;[3]
  • information on how the employer is making that information available to employees;  
  • how the policy will apply to new employees;
  • disciplinary action for employees who do not abide by the policy;
  • all relevant information regarding the policy’s effective date;
  • who the policy applies to;  
  • deadlines (e.g., for submitting vaccination information, for getting vaccinated); and
  • procedures for compliance and enforcement.

6.         Requirement to Notify Employees of COVID-19 Vaccination Policy

A covered employer is required to inform each employee, in a language and at a literacy level the employee understands, about:

(1) The requirements of the ETS as well as the employer’s policies and procedures established to implement the ETS;

(2) COVID-19 vaccine efficacy, safety, and the benefits of being vaccinated, by providing the document, “Key Things to Know About COVID-19 Vaccines,” available at https://www.cdc.gov/coronavirus/2019- ncov/vaccines/keythingstoknow.html;

(3) Specified regulatory prohibitions against the employer discharging, discriminating, or retaliating against an employee for reporting a work-related injury or illness, and against the employer discriminating or retaliating against an employee for exercising rights under, or as a result of actions that are required by, the ETS; and

(4) Specified statutory provisions which provide for criminal penalties associated with knowingly supplying false statements or documentation.

An employer can communicate this information to employees using any effective methods that are typically used in its workplace and may choose any method of informing employees so long as each employee receives the information in a language and at a literacy level they understand. For example, an employer may provide this information to employees through email communications, printed fact sheets, or during a discussion at a regularly scheduled team meeting.

7.         Recordkeeping Requirements

The ETS requires a covered employer to:

  • determine the vaccination status of each employee; 
  • maintain records of each employee’s vaccination status;
  • preserve acceptable proof of vaccination for each employee who is fully or partially vaccinated; and
  • maintain a roster of each employee’s vaccination status.
    • The roster must list all employees and indicate whether each employee is:
      • fully vaccinated,
      • partially (not fully) vaccinated,
      • not fully vaccinated because of a medical or religious accommodation, or
      • not fully vaccinated because they have not provided acceptable proof of their vaccination status. 

The employer’s maintenance of these records is subject to applicable legal requirements for confidentiality of medical information.  Required records of vaccination status can be maintained physically or electronically, but the employer must ensure it has access to the records at all times.

Practice Pointers: The requirement to maintain a roster listing all employees and their respective vaccination status presents a significant issue to a company that hires large numbers of employees and offers them project-based work. This issue, discussed above in Section 2 Practice Pointers, concerns how to determine which individuals qualify as “employees” and must be included on the roster. As noted, the ETS does not appear to answer this question.   But a covered employer’s failure to include all “employees” on its roster could cause the employer to be noncompliant with the ETS.

8.         Conflicts with State Laws

Several states have enacted laws that conflict with the ETS requirements by prohibiting an employer from imposing a COVID-19 vaccine mandate. In these states, a company that complies with the ETS would violate the state law, and a company that complies with the state law would violate the ETS.

The ETS and its accompanying Preamble explicitly state that the ETS preempts and invalidates any State or local requirements that ban or limit an employer’s authority to require vaccination, face covering, or testing. The Preamble states that the ETS is intended to preempt all State and local workplace requirements that “relate” to these issues, except pursuant to a State Plan that OSHA approves – even to the extent such laws regulate employers with fewer than 100 employees, notwithstanding that the ETS requirements only apply to employers with at least 100 employees.

Practice Pointers: Legal challenges to the ETS already have been filed and at least one federal court has temporarily barred DOL from enforcing it.  If the ETS ultimately is upheld by the courts, its effective date generally will be the stated effective date in the ETS. The same likely would be true of a state law. The uncertain legality of the ETS places covered employers in such states in a difficult dilemma. If such an employer believes the ETS will be upheld and complies with the ETS (in violation of state law), but the ETS is ultimately invalidated, the employer could be subject to penalties under applicable state law for imposing a COVID-19 vaccine mandate in violation of state law.  On the other hand, if such an employer believes the ETS will be invalidated and complies with the state law (in violation of the ETS), but the ETS is ultimately upheld, the employer could be subject to penalties under the ETS for noncompliance. 

9.         Beware Penalties

The Preamble accompanying the ETS makes clear that the specific measures the ETS requires covered employers to implement will make it easier for DOL’s OSHA to determine whether an employer has intentionally disregarded its obligations or exhibited a plain indifference to employee safety or health. In such instances, according to the Preamble accompanying the ETS, DOL’s OSHA can classify the citations as “willful,” allowing it to propose higher penalties, with increased deterrent effects.

*     *     *

If you have any questions or comments concerning the foregoing, please let me know.

The foregoing is intended solely as general information and may not be considered tax or legal advice; nor can it be used or relied upon for the purpose of (i) avoiding penalties under any taxing statute or (ii) promoting, marketing, or recommending to another party any transaction or matter addressed herein. You should not take any action based upon any information contained herein without first consulting legal counsel familiar with your particular circumstances.

[1] OSHA refers to the Occupational Safety and Health Act of 1970, as amended.

[2] The ETS does not require a covered employer to pay for testing or face coverings. But it notes that an employer may be required to pay for such items to comply with other laws, regulations, or collectively negotiated agreements.

[3] Employees who are confirmed to have COVID-19 must be removed from the workplace to prevent transmission to other employees. An employer must require each employee to promptly notify the employer when the employee receives a positive COVID-19 test or is diagnosed with COVID-19 by a licensed healthcare provider. This notification must occur regardless of employee’s vaccination status. The employer should establish notification procedures and inform employees about these procedures, so that employees are aware of the appropriate method for providing this notification to their employer. ETS does not require an employer to provide paid time to any employee for removal as a result of a positive COVID-19 test or diagnosis of COVID-19. The ETS notes, however, that paid time may be required by other laws, regulations, or collective bargaining agreements or other collectively negotiated agreements.

Recent Developments Affecting Brokers/Referral Agencies that Contract with Independent Contractors to Provide Services to Third-Party Clients

Two recent developments would directly affect companies that contract with independent service contractors to provide services to third-party clients.

Two recent developments would directly affect companies that contract with independent service contractors to provide services to third-party clients. One involves recent legislation enacted in New Jersey that dramatically increases the financial consequences of worker misclassification, generally. The other is a court decision that provides helpful insight into how a broker/referral agency can bolster the defensibility of its independent-contractor relationships and thereby reduce the risk of worker misclassification. Each is discussed below.

  1. New Jersey Escalates the Financial Consequences of Misclassification

Three recently enacted bills in New Jersey escalate the remedies available to the government if it determines a company has misclassified an individual as an independent contractor. A company doing business with independent contractors in New Jersey should carefully review its independent-contractor relationships to ensure that the relationships are defensible under New Jersey’s “ABC” test.[1]

AB 5890 provides that if the New Jersey Commissioner of Labor and Workforce Development determines that an employer has violated any state wage, benefit and tax law, the Commissioner shall (i) notify the employer of the determination, and (ii) conduct an audit of the employer within 12 months of the determination.

The bill also authorizes the Commissioner to bring an enforcement action for a violation of any state wage, benefit and tax law – by either (i) bringing an administrative action, or (ii) filing a lawsuit in Superior Court. The Commissioner is empowered to bring a lawsuit in the form of a class action.  It can seek any fines, penalties or administrative assessments authorized by law. And, if a prevailing plaintiff, the Commissioner can recover all remedies available on behalf of the individuals deemed to have been misclassified and “shall” be awarded attorney’s fees and litigation and investigation costs. If appropriate, the Commissioner can ask a court to issue an injunction prohibiting a company from continuing to misclassify individuals as independent contractors for purposes of state laws. 

While the Commissioner already possessed the right to issue a “stop work” order against a company determined to have misclassified individuals as independent contractors, the bill clarifies that if a company requests a hearing on such an order, the request does not automatically stay the effect of the order. And if a stop-work order becomes final, the affected company would be required to pay any “employee” who loses work on account of the work stoppage 10 days of lost earnings.  An employer that violates a stop-work order can be assessed a civil penalty of $5,000 per day. A.B. 5890 was signed into law on July 8, 2021. It became effective immediately.

A.B. 5892 created a new type of violation resulting from worker misclassification. The new violation occurs when a person purposely or knowingly (i)  makes a false or misleading statement, representation, or submission, including failing to properly classify employees, in violation of state wage, benefit and tax laws for the purpose of evading the full payment of insurance benefits or premiums, or (ii) coerces, solicits, or encourages any individual to make a false or misleading statement, representation or submission concerning any fact that is material to a claim for insurance benefits, or the payment of insurance benefits or insurance premiums, for the purpose of wrongfully obtaining the benefits or of evading the full payment of the insurance benefits or insurance premiums (or employs, contracts, or otherwise conspires with a person to coerce, solicit, or encourage a person to do so).

The penalty for violating this provision “shall be” $5,000 for the first violation, $10,000 for the second violation and $15,000 for each subsequent violation.  A.B. 5892 was signed into law on July 8, 2021. It will become effective on the first day of the sixth month next following the date of enactment.

A.B. 5891 created a new Office of Strategic Enforcement and Compliance in New Jersey’s Department of Labor and Workforce Development (with a $1 million appropriation to fund the office). The new office is charged with overseeing and coordinating the strategic enforcement of state wage, benefit and tax laws. A.B. 5891 also was signed into law on July 8, 2021. It became effective immediately.

The foregoing new laws appear intended to send a clear message that New Jersey is a high-risk jurisdiction for doing business with independent contractors. 

  1. Court Decision Reveals How a Broker/Referral Service Can Avoid Being Deemed the ‘Employer’ of Contractors Who Perform Projects for Third-Party Clients

A court decision involving a company that contracts with independent service providers to perform projects for third-party clients offers helpful insight into how such a company can avoid being deemed the “employer” of the service providers. Practice Pointers are inserted, where appropriate, to emphasize practical implications of the court’s analysis.

The decision in Vendor Surveillance Corporation v. Henning, 62 Cal.App.5th 59 (2021), involves an appeal by a company (“Company”), from an unemployment insurance tax assessment by California’s Employment Development Department (“EDD”). The issue is whether certain “project specialists” contracted by Company between January 1, 2011 and December 31, 2013 (the audit years) were employees or independent contractors.  

The California appeals court held that the common-law test established by S.G. Borello & Sons, Inc. v. Department of Industrial Relations, 769 P.2d 399 (1989), continues to govern unemployment insurance taxes assessed for work performed before January 1, 2020, rather than California’s recently enacted “ABC” test.[2]

Practice Pointers:

  • While this court decision applies to the pre-AB-5[3] era, it nonetheless remains relevant in California, as it offers helpful guidance on satisfying the “A” factor of California’s “ABC” test, which is the factor representing a common-law test. In addition, many of the statutory carve-outs from California’s “ABC” test created by the enactment of AB 2257[4] still require that a relationship satisfy the Borello test. 
  • The court decision also is relevant in other jurisdictions, and for purposes of certain federal laws, where an individual’s status, as an employee or independent contractor, is determined by a common-law test.

According to the court’s findings in Vendor Surveillance Corporation, Company maintains a database of “project specialists” who are qualified to perform “source inspections.” Company is a wholly owned subsidiary of a parent company (“Parent”). Parent provides management services, including source inspections, to aerospace and defense manufacturers. Aerospace manufacturers use component parts made by third-party suppliers that must be fabricated to exacting specifications. To identify potentially defective parts, the manufacturer inspects (or contracts with a vendor to inspect) the parts at the supplier’s facility. The industry calls this “source inspection.” 

When a Parent customer requests a source inspection, Parent negotiates the services to be performed and the corresponding fee. If the customer requires part-time, project-based, on-demand source inspections, Parent subcontracts with Company to provide a qualified “project specialists.” Company classifies project specialists as independent contractors. Parent also has a staffing subsidiary, (“Staffing Affiliate”).  If a Parent customer needs full time work (including but not limited to source inspection) in one location exceeding three months, Parent subcontracts with Staffing Affiliate to provide qualified personnel. Staffing Affiliate classifies its personnel as employees.

For a project subcontracted to Company, Company identifies qualified project specialists from its database and informs them about the project. A project specialist is free to decline work with impunity. Company submits the resumes of project specialists who express interest in a project to Parent, which forwards them to its customer to choose from.

Applying the common-law Borello test to determine the status of source inspectors under contract with Company, the court of appeal affirmed a superior court’s judgment that the source inspectors were employees of Company and not independent contractors.  The following outlines the court’s rationale for its decision.

a. Company had the right to control and exercised actual control

The court observed that under the Borello test the most important factor in distinguishing employees from independent contractors is the putative employer’s right to control the manner and means of accomplishing a desired result. The appeals court affirmed the trial court’s determination that Company had the requisite right of control for this factor to weigh in favor of employment.

The court rejected Company’s claim that it only connected project specialists with suppliers and primary contractors, based principally on findings that:

  • Company determined the manner and means of reporting source inspection results;
  • Company provided supervision and advice upon a project specialist’s request;
  • customers expected supervision by Company; and
  • Company’s agreement with source inspectors authorizes Company to terminate a project specialist without cause.

The court contrasted the foregoing findings with the facts in Varisco v. Gateway Science & Engineering, 83 Cal.Rptr.3d 393 (2008), which involved a company that provided quality assurance services that hired an inspector to check construction undertaken by a school district. The court determined the inspector to be an independent contractor. In that case:

  • the company paid the inspector by the hour and sent him to the job site, but that is all it did;
  • the company did not train the inspector;
  • if questions arose, the inspector addressed them to the school district, not to the company;
  • the inspector reported results to the school district on its forms, not the company’s; and
  • the inspector supplied his own tools and equipment.

The court in Vendor Surveillance Corporation reasoned that the project specialists under contract with Company differ from the Varisco inspector in the following significant respects:

  • Company provided a customer orientation to project specialists;
  • a Parent program leader instructed project specialists on how to use suppliers’ reporting systems;
  • using Parent educational materials, Company mandated that project specialists pass an ethics test based on Company’s code of ethics;
  • Company required that project specialists pass a safety test based on educational materials used by both Parent and Company;
  • Company arranged work-related travel for project specialists;
  • Company provided project specialists with Company branded business cards;
  • Company trained project specialists on certain international regulations;
  • customers expected Parent to supervise, oversee, and manage project specialists; and
  • Company provided software for project specialists to record time and upload the results of the source inspection. 

Company also could terminate a project specialist without cause by providing 30 day’s advance notice. Rejecting Company’s argument that this right does not evidence control because of the 30-day notice period, the court reasoned that, even with a 30-day notice period, a right to discharge without cause would reasonably be expected to compel a project specialist desiring future assignments to obey Company’s directives.

Practice Pointers:

  • Any training or orientation of an independent contractor should be provided by a third party, e.g., an industry association or a client, but not by the company that contracts with an independent contractor to perform a project.
  • The company that contracts with an independent contractor should not supervise or monitor the independent contractor’s work.
  • Contracts with clients should not contemplate any supervision or training of independent contractors.
  • The company that contracts with an independent contractor should not have the contractual right to terminate the independent contractor.
  • If the company that contracts with an independent contractor is owned by a parent company, the company should operate with complete autonomy relative to the parent company; the parent company should not have any direct interaction with the independent contractors, and the independent contractors should not be given any parent-company-developed training or testing materials or project-related information.
  • The company that contracts with an independent contractor should not provide an independent contractor with any logo-wear, badge, business cards, or similar item that identifies the company or that is in any way suggestive of the independent contractor working on behalf of or for the benefit of the company.

b. Project Specialists are not engaged in a distinct business

The appeals court affirmed the trial court’s conclusion that this factor slightly favors employment, reasoning that though some project specialists had created their own business entities, others did not, and even those who did worked predominantly for Company. The court reasoned that its determination is supported by the following findings:

  • one project specialist had a business entity but no website, no e-mail address, no business cards, and no employees except himself;
  • another project specialist had a business entity but no other employees, no clients besides Company, no website, no advertising, and no business cards; and
  • other project specialists had not created separate entities.

Practice Pointers:

  • An independent contractor’s creation of an entity can be of little value if the independent contractor does not also take other actions consistent with operating a separate business.
  • A best practice is for an independent contractor to complete a document in which the independent contractor makes affirmative representations to the contracting company concerning the specific actions the independent contractor has taken that are consistent with operating a separate and distinct business.

c. No evidence on whether the work is usually done in the locale without supervision

The court affirmed the trial court’s determination that EDD prevails on this issue because the evidence on this factor favored neither side – and Company bore the burden of proof. The trial court noted that neither side offered any expert testimony on whether, in the relevant locale, source inspection is typically done using the business model used by Company, or rather done by employees of prime contractors.

While Company argued that the only evidence offered on this point is that project specialists were not supervised while conducting inspections, the court explained that this argument misses the point, because the factor focuses on how the work is usually done in a given locale, not on how the work actually was done in this particular case.

Practice Pointers:

  • The court’s analysis of this factor emphasizes the importance of carefully reading and understanding the meaning of each factor of a test for independent contractor status.
  • The requisite expert testimony that was missing in this case could have been provided a trade association representative of other individual who is knowledgeable about the industry practice at issue.

d. Project specialists are highly skilled

The court affirmed the trial court’s determination that this factor weighs in favor of independent-contractor status, based on findings that many project specialists had years if not decades of experience.

e. Neither Company nor project specialists supplied the tools and instruments

The court rejected the trial court’s determination that this factor “slightly favored EDD,” based on findings that measuring instruments used in a source inspection are supplied by neither Company nor the project specialists, but instead by the supplier.

The appeals court reasoned that ownership of tools is probative because ownership implies a right to control their use. But since neither Company nor the project specialists own the instruments, nor as a practical matter could they, this factor does not apply.

Practice Pointers:

  • The court’s analysis of this factor is helpful, as it indicates that in an industry that does not require an independent contractor to provide very much in the way of tools or equipment, this factor would not necessarily weigh in favor of employment, so long as the company that engages an independent contractor can demonstrate that it does not provide any such items.

f. The work is continuous

The court affirmed the trial court’s determination that this factor supports employment, based on findings that many project specialists had ongoing long-term relationships with Company (some had worked exclusively for Company for 11, 18, 20, and 28 years) and several worked near full time 40-hour weeks. The appeals court determined that these findings outweighed countervailing findings that (i) the Agreement provides that continuity of relationship is not contemplated; (ii) project specialists could (and did) decline work without negative repercussions; and (iii) some project specialists choose to work only part time.

Practice Pointers:

  • Any independent contractor who works 40-hour weeks for one company for an extended period of time is inherently a high-risk independent contractor.
  • For project-based engagements, it is advisable for the agreement with an independent contractor to emphasize that each project constitutes a separate contractual relationship and that upon the independent contractor’s completion of a project, the independent contractor has no obligation to perform another offered project.

g. Project specialists are paid by the hour, not by the job

Based on findings that Company paid project specialists by the hour, which was determined to be the industry standard, the court affirmed the trial court’s determination that this factor favors an employee relationship.

While acknowledging Company’s counterargument that in the modern economy, there is no logical connection between hourly pay and distinctions between employee and independent contractor, the appeals court nonetheless reasoned that common experience teaches that a worker who receives hourly wages is likely (but not necessarily) an employee, and a worker who receives payment by the task is likely (but not necessarily) an independent contractor.

Practice Pointers:

  • For project-based engagements, it is advisable for independent contractors to be paid a fixed project fee and not an hourly rate.

h. Source inspection is a part of Company’s regular business

Rejecting Company’s assertion that its business is maintaining a database of highly skilled self-employed project specialists, and does not include the performance of source inspections, the appeals court affirmed the trial court’s determination that source inspections work is at the core of what the Parent group of companies provides to its aerospace customers. This was based principally on findings that Company’s only client is Parent and Parent’s clients are the aerospace and defense contractors who benefit from the labor provided by project specialists. The court reasoned that Company is not just a database manager; rather, it is part of a unitary business providing staffing solutions to its aerospace clients.

The appeals court reasoned that Company’s business is similar to the business examined in People v. Uber Technologies, 56 Cal.App.5th 266 (2020), which concluded that the drivers performed services in the regular course of Uber’s business. The court explained that the analysis in Uber supports its conclusion that this factor weighs in favor of employment, based on the following similarities:

  • Uber offers a mobile phone application that matches those in need of a ride to drivers available to give them rides using their own vehicles.
    • Similarly, Company offers a database to match those in need of a source inspection with a project specialist available to perform the work.
  • Uber drivers need not accept any minimum number of rides, are free to work for competitors and to decline work. Uber monitors its drivers and may use low ratings to deactivate them.
    • Similarly, project specialists are free to decline offered work, Company monitors a project specialist’s performance and, in response to customer complaints, can terminate a project specialist and remove the person from its database.
  • Uber asserted that it was not in the business of providing rides, but instead merely provides a platform to connect drivers and riders.
    • Company similarly claimed that it is not in the business of providing project specialists, but instead is merely a database to connect project specialists with customers. Also, Company earns all of its revenue from providing project specialists to Parent.

Practice Pointers:

  • The decision also reveals the risk that an affiliated group of companies can be viewed as one unified business, which would be problematic for purposes of this factor – and for the “B” factor of an “ABC” test.[5] To mitigate this risk:
    • the subsidiary companies should enter into contract with at least some clients directly, to demonstrate independence from the affiliated entities;
    • the subsidiary companies should maintain their own websites and market their services directly to end-user clients;
    • each subsidiary should operate with complete and absolute autonomy relative to the affiliates; and
    • the parent company’s website should not suggest that the subsidiary companies are part of the parent company’s business but instead should identify them, if at all, as affiliated but separate businesses.
  • The court’s analysis reveals the difficulty of a company successfully arguing that the services an independent contractor provides are outside the usual course of the company’s business if the company monitors the independent contractor’s performance and can terminate the contractor for not meeting performance metrics that the company, itself, establishes.

i. The parties believed they were creating an independent contractor relationship

While the court affirmed the trial court’s determination that this factor “easily favored” an independent-contractor relationship, the court accorded it diminished weight, reasoning that courts ignore the parties’ characterization if their actual conduct establishes a different relationship.

j. Company operates as a business, not an individual

The court recounted that Company acknowledged that it operates as a business and accordingly determined this factor to “lean” towards establishing an employer-employee relationship.

  1. Conclusion

The developments in New Jersey reflect a philosophical shift that has manifested itself throughout the country toward increased skepticism of independent-contractor relationships. Any company doing business with independent contractors should be mindful of this shift and ensure that its independent-contractor relationships are defensible. The decision in Vendor Surveillance Corporation offers helpful guidance for improving the defensibility of such relationships.

*     *     *

If you have any questions or comments concerning the foregoing, please let me know.

The foregoing is intended solely as general information and may not be considered tax or legal advice; nor can it be used or relied upon for the purpose of (i) avoiding penalties under any taxing statute or (ii) promoting, marketing, or recommending to another party any transaction or matter addressed herein. You should not take any action based upon any information contained herein without first consulting legal counsel familiar with your particular circumstances.

[1] N.J. Stat. Ann. § 43:21-19 provides that services performed by an individual for remuneration shall be deemed to be employment for purposes of New Jersey unemployment unless and until it is shown to the satisfaction of the division that:

(A) Such individual has been and will continue to be free from control or direction over the performance of such service, both under his contract of service and in fact; and

(B) Such service is either outside the usual course of the business for which such service is performed, or that such service is performed outside of all the places of business of the enterprise for which such service is performed; and

(C) Such individual is customarily engaged in an independently established trade, occupation, profession or business.

The New Jersey Supreme Court held that the same test should be used to determine the nature of an employment relationship under both the New Jersey Wage Payment Law and the New Jersey Wage and Hour Law. Hargrove v. Sleepy’s, LLC, 220 N.J. 289, 106 A.3d 449 (2015). 

[2] California’s “ABC” test provides that a person providing labor or services for remuneration shall be considered an employee rather than an independent contractor unless the hiring entity demonstrates that all three of the following conditions are satisfied:

(A) The person is free from the control and direction of the hiring entity in connection with the performance of the work, both under the contract for the performance of the work and in fact.

(B) The person performs work that is outside the usual course of the hiring entity’s business.

(C) The person is customarily engaged in an independently established trade, occupation, or business of the same nature as that involved in the work performed.

[3] AB 5 refers to the first law California enacted to statutorily adopt an “ABC” test for determining worker status.

[4] AB 2257 refers to a law California enacted that in some respects supersedes AB 5 and created numerous carve-outs from the “ABC” test that AB-5 enacted.

[5] See above note 2.

FLSA Regulations Clarifying Test for IC Status Benefit All Stakeholders Except Trial Attorneys

The final regulations on Independent Contractor Status under the Fair Labor Standards Act (“FLSA”), which the U.S. Department of Labor (“DOL”) issued on January 6, 2021, are in substance a restatement and refinement of the law, based on court decisions interpreting the term “employee” for purposes of the FLSA. These regulations, scheduled to become effective March 8, 2021, bring new clarity and predictability to the application of the “economic realities” test that courts traditionally have used in determining an individual’s status as an employee or independent contractor under the FLSA.

The current state of the law governing courts’ interpretation of the “economic realities” test is in need of clarification.  Beyond the fact that different federal circuits apply different iterations of the test,[1] the Preamble accompanying the final regulations identifies examples of courts reaching contradictory decisions concerning individuals in substantially similar work relationships.[2]  The Preamble also documents how courts have strayed from the U.S. Supreme Court’s initial formulation of the “economic realities” test.[3]

A clarification of the “economic realities” test is certainly helpful to independent entrepreneurs and their clients in structuring an independent-contractor relationship. But it also is helpful in exposing those companies that engage in worker misclassification.  

By clarifying the test, the DOL made it easier to identify instances of worker misclassification as well as to confirm legitimate independent-contractor relationships. The only stakeholders whose interests are harmed by clarification are the trial attorneys who otherwise would litigate the ambiguous and uncertain cases. Reducing the number of these ambiguous and uncertain cases should reduce the amount of litigation concerning an individual’s status under the FLSA, as neither plaintiffs nor defendants typically choose to litigate a case that they know they will lose. The clearer and more predictable a test, the fewer cases there will be in which the outcome under the test is uncertain and that require litigation to ascertain the answer.  

Even DOL will benefit, as the newly clarified test will enable it to make determinations in worker-classification investigations with greater certainty and, in those cases in which it determines a company to have misclassified individuals, the violating company would more likely acquiesce to the determination rather than litigate a case it would not likely win under the clarified test.

As to whether the final regulations articulate a test that privileges either employee status or independent contractor status, DOL made clear in its Preamble accompanying the final regulations that it endeavored to articulate a test that fairly reflects the decided court decisions interpreting the test.[4] In this regard, DOL officials presumably were mindful when developing these regulations that they would be effective during a Biden Administration and that this was no opportunity to develop a clarified test that privileges independent-contractor status.  A fair reading of the final regulations and accompanying Preamble confirms this.

As a threshold matter, the final regulations categorically adopt the “economic realities” test for determining worker status under the FLSA. But this is no trivial concession. While there is no question that courts have nearly unanimously (but not always[5]) applied an economic realities test for determining worker status under the FLSA, there is a compelling argument to be made that the proper test that courts should apply is the common-law test.[6]  The final regulations’ adoption of the economic realities test will make it more difficult to convince a court to apply a common-law test for determining worker status under the FLSA.

Another evidence of DOL’s objectivity in this undertaking, and its effort to develop a restated test that accurately reflects the decided court cases – without privileging either status – is provided by DOL’s criticism of the reasoning of court decisions that upheld the independent-contractor status of plaintiffs[7] or vacated trial court decisions holding plaintiffs to be independent contractors.[8] In addition, the Preamble, and text of the final regulations, explicitly reject an arguably pro-independent-contractor analysis of “economic dependence” as including consideration of an individual’s investment in business ventures unrelated to the specific services at issue.[9]

These regulations represent perhaps one of the clearer examples of a regulatory process free of capture by interested stakeholders. Employer groups submitted numerous comments urging DOL to modify its proposed test in ways that would narrow the definition of employee, but such comments are were nearly unanimously rejected. Likewise, worker advocates and organized labor submitted comments urging DOL to modify its proposed test in ways that would expand the definition of employee, but they too were generally, but not always,[10] rejected.

The two “core” factors[11] in the newly articulated test is a novel feature. But the Preamble indicates that DOL attorneys who reviewed the reported court decisions interpreting the “economic realities” test discovered that when these two core factors point in the same direction with respect to a work relationship – whether toward employee status or independent-contractor status – courts consistently have determined the work relationship to be the status to which those two core factors point.[12]   And this feature cuts both ways. It creates as much new certainty for exposing worker misclassification as for confirming legitimate independent-contractor relationships. 

Finally, by elevating the importance of the actual practice of the parties involved over what may be contractually or theoretically possible,[13] the final regulations vitiate a company’s ability to convert an employment relationship into one of independent-contractor status through its contracts and other arguably artificial means.[14]

The final regulations represent a vast improvement in the state of the law governing the determination of an individual’s status for purposes of the FLSA. This guidance will promote the development of a unified test for all federal circuits and substantially reduce the probability of similarly situated relationships being classified differently.  The regulated community deserves the clarity these regulations provide, to both protect the good actors and more readily expose those engaged in worker misclassification.

[1] For example, courts in the First and Fifth Circuits have applied a four-factor version of the “economic realities” test, e.g., Baystate Alternative Staffing v. Herman, 163 F.3d 666 (1st Cir. 1998), Orozco v. Plackis, 757 F.3d 445 (5th Cir. 2014); whereas courts in the Second and Fifth (which is split on this issue) Circuits have applied a five-factor version of the test, e.g.,  Brock v. Superior Care, Inc., 840 F2d 1054 (2d Cir. 1988), Thibault v. BellSouth Telcoms, Inc., 2010 U.S. App. LEXIS 15267 (5th Cr. 2010); and courts in the Third, Fourth, Sixth, Seventh and Ninth Circuits have applied a six-factor version of the test, e.g., Martin v. Seker Bros., Inc., 949 F.2d 1286 (3d Cir. 1991), Schultz v. Capital Int’l Sec., Inc., 466 F.3d 298 (4th Cir. 2006), Imars v. Contractors Mfg. Servs. Inc., 165 F.3d 27 (6th Cir. 1998), Secretary of Labor v. Lauritzen, 835 F.2d 1529 (7th Cir. 1987), Donovan v. Sureway Cleaners, 656 F.2d 1368 (9th Cir. 1982).

[2] E.g., 86 Fed. Reg. 1168, 1170 (Jan. 7, 2021), wherein the Preamble compares “Sec’y of Labor v. Lauritzen, 835 F.2d 1529, 1534–35 (7th Cir. 1987) (applying six-factor economic reality test to hold that pickle pickers were employees under the FLSA), with Donovan v. Brandel, 736 F.2d 1114, 1117 (6th Cir. 1984) (applying the same six-factor economic reality test to hold that pickle pickers were not employees under the FLSA).” Similarly, at 96 Fed. Reg. 1168 at 1173, the Preamble compares “Cromwell v. Driftwood Elec. Contractor, Inc., 348 F. App’x 57 (5th Cir. 2009) (holding that cable splicers hired by Bellsouth to perform post-Katrina repairs were employees), and Thibault v. BellSouth Telecommunication, 612 F.3d 843 (5th Cir. 2010) (holding that cable splicer hired by same company under a very similar arrangement was an independent contractor)…. The Thibault court distinguished its result from Cromwell in part by highlighting Mr. Thibault’s significant income from (1) his own sales company that had profits of approximately $500,000, (2) ‘eight drag-race cars [that] generated $1,478 in income from racing professionally[,]’  and (3) ‘commercial rental property that generated some income.’ Thibault, 612 F.3d at 849.”

[3] E.g., 86 Fed. Reg. 1168 at 1170, wherein the Preamble observes that “Silk analyzed workers’ investments, 331 U.S. at 717–19. However, the Fifth Circuit has revised the ‘investment’ factor to instead consider ‘the extent of the relative investments of the worker and the alleged employer.’ Hopkins, 545 F.3d at 343. Some other circuits have adopted this ‘relative investment’ approach but continue to use the phrase ‘worker’s investment’ to describe the factor. See, e.g., Keller v. Miri Microsystems LLC, 781 F.3d 799, 810 (6th Cir. 2015); Dole v. Snell, 875 F.2d 802, 805 (10th Cir. 1989),” and that “Rutherford Food’s consideration of whether work is ‘part of an integrated unit of production,’ 331 U.S. at 729, has now been replaced by many courts of appeals by consideration of whether the service rendered is ‘integral,’ which those courts have applied as meaning important or central to the potential employer’s business. See, e.g., Verma v. 3001 Castor, Inc., 937 F.3d 221, 229 (3rd Cir. 2019) (concluding that workers’ services were integral because they were the providers of the business’s ‘primary offering’).”

[4] E.g., 86 Fed. Reg. 1168 at 1194, wherein the Preamble recounts that “The Department’s review of appellate cases since 1975 involving independent contractor disputes under the FLSA supports this criticism. The Department generally found that, in cases where the ‘‘integral part’’ factor was addressed, the factor aligned with the ultimate classification when the ultimate classification was employee.”  Also, at 86 Fed. Reg. 1168 at 1196, the Preamble notes that “The NPRM further explained that focusing on the two core factors is also supported by the Department’s review of case law. The NPRM presented a remarkably consistent trend based on the Department’s review of the results of appellate decisions since 1975 applying the economic reality test. Among those cases, the classification favored by the control factor aligned with the worker’s ultimate classification in all except a handful where the opportunity factor pointed in the opposite direction.” And, the Preamble, at 86 Fed. Reg. 1168 at 1198, states that “Among the appellate decisions since 1975 that the Department reviewed, whenever the control factor and the opportunity factor both pointed towards the same classification— whether employee or independent contractor—that was the worker’s ultimate classification.”  Moreover, at 86 Fed. Reg. 1168 at 1206, the Preamble states that “The final rule takes into account facts and factors that have historically been part of the economic reality test, and decades of appellate decisions indicating that the two core factors frequently align with the ultimate determination of economic dependence or lack thereof.”  Finally, at 86 Fed. Reg. 1168 at 1240, the Preamble observed that “because the Department’s analysis of appellate case law since 1975 has found workers’ control and opportunity for profit or loss to be most predictive of a worker’s classification status, the finalized standard provides more accurate guidance.”

[5] E.g., Tetzlaff v. United States, No. 15-161C, 2015 U.S. Claims LEXIS 1577 (Fed. Cl. Nov. 25, 2015), wherein the U.S. Court of Federal claims reasoned in a lawsuit involving worker status under the FLSA that “’the existence or absence of an employment relationship is to be ascertained . . . by applying the common-law rules realistically, [namely, by] looking to the substance of the arrangement and giving weight to all relevant factors.’ Ill. Tri-Seal Prods., Inc. v. United States, 353 F.2d 216, 173 Ct. Cl. 499, 518 (1965).”

[6] As the Preamble acknowledges, at 86 Fed. Reg. 1168 at 1169, the first federal statute for which the U.S. Supreme Court adopted an “economic realities” test is the National Labor Relations act (“NLRA”) in NLRB v. Hearst Publications, Inc., 322 U.S.111 (1944), and the next federal statute for which the Court adopted an “economic realities” test is the Social Security Act (“SSA”), in United States v. Silk, 331U.S. 704 (1947), and Bartels v. Birmingham,332 U.S. 126 (1947).  Congress subsequently repudiated the Court’s adoption of an “economic realities” test for purposes of these two statutes. Building on these decisions, the Court adopted an “economic realities” test for purposes of the FLSA, in Rutherford Food Corp. v. McComb, 331 U.S. 722, 728 (1947).  To justify the application of an “economic realities” test to determine an individual’s status, as an employee or independent contractor, under the FLSA, courts commonly make much of the fact that the FLSA defines the term “employ,” at 29 U.S.C. §203(g), to include “to suffer or permit to work.” What such court decisions typically do not mention is the fact that neither the NLRA nor the SSA — which, as noted are the statutes for which the Court initially adopted an “economic realities” test — do not statutorily define the term “employ.”  Thus, it seems incongruous that courts rely on the statutory definition given the term “employ” in the FLSA to justify their application of an “economic realities” test for purposes of the FLSA when the Court initially developed the “economic realities” test in the context of two different federal statutes that do not statutorily define the term “employ.” Added to this incongruity is the fact that Congress statutorily defined the term “employee” with identical language in the FLSA and the Employee Retirement Income Security Act of 1974 (“ERISA”), but courts routinely apply a common-law test when interpreting the term employee in the context of ERISA but the quite different “economic realities” test when interpreting the term employee – with the identical statutory definition – in the context of the FLSA.

[7] E.g., 86 Fed. Reg. 1168, 1173, wherein the Preamble “highlighted the decision in Parrish v. Premier Directional Drilling, 917 F.3d 369, as an example of inconsistent articulation of economic dependence,” and at 96 Fed. Reg. 1168, 1174, “highlighted a case in which a court found that workers exercised enough on-the-job initiative for the control and opportunity factors to point towards independent contractor status, but nonetheless found the ‘skill and initiative factor points towards employee status’ due to ‘the key missing ingredient . . . of initiative.’ ’’ 85 FR 60607 (quoting Express Sixty-Minutes Delivery, 161 F.3d at 303).”

[8] E.g., 86 Fed. Reg. 1168 at 1198, wherein the Preamble cited with approval “Agerbrink v. Model Service LLC, 787 F. App’x 22, 25–27 (2d Cir. 2019) (denying summary judgement based solely on disputed facts regarding plaintiff’s ‘control over her work schedule, whether she had the ability to negotiate her pay rate, and, relatedly, her ability to accept or decline work’). The Third Circuit in Razak v. Uber Technologies took a similar approach [emphasizing facts and factors that are more probative of the economic dependence inquiry] by emphasizing disputed facts regarding ‘whether Uber exercises control over drivers’  and had ‘the opportunity for profit or loss depending on managerial skill’ to deny summary judgment. 951 F.3d at 145–47.”

[9] E.g., 86 Fed. Reg. 1168 at 1173, wherein the Preamble rejected the reasoning in Thibault v. BellSouth Telecommunication, 612 F.3d 843 (5th Cir. 2010) (holding that cable splicer hired by same company under a very similar arrangement was an independent contractor)… The Thibault court distinguished its result from Cromwell in part by highlighting Mr. Thibault’s significant income from (1) his own sales company that had profits of approximately $500,000, (2) ‘eight drag-race cars [that] generated $1,478 in income from racing professionally[,]’ and (3) ‘commercial rental property that generated some income.’ Thibault, 612 F.3d at 849.”

[10]  E.g., 86 Fed. Reg. 1168, 1199, wherein the Preamble states that “The Department therefore revises § 795.105(c) to more clearly distinguish between a core factor’s probative value as a general matter and its’ weight in a specific case and to clarify that the core factors’ greater probative value means that they typically (but not necessarily) carry greater weight.”

[11] 29 CFR 795.105(d)(1).

[12]  The Preamble at 86 Fed. Reg. 1168 at 1197, reports that “the Department did not uncover a single court decision where the combined weight of the control and opportunity factors was outweighed by the other economic reality factors. The Preamble, at 86 Fed. Reg. 1168 at 1196, recounts that “The NPRM further explained that focusing on the two core factors is also supported by the Department’s review of case law. The NPRM presented a remarkably consistent trend based on the Department’s review of the results of appellate decisions since 1975 applying the economic reality test. Among those cases, the classification favored by the control factor aligned with the worker’s ultimate classification in all except a handful where the opportunity factor pointed in the opposite direction.”  Moreover, at 86 Fed. Reg. 1168 at 1198, the Preamble reported that “Among the appellate decisions since 1975 that the Department reviewed, whenever the control factor and the opportunity factor both pointed towards the same classification— whether employee or independent contractor—that was the worker’s ultimate classification. Put another way: In those cases where the control factor and opportunity factor aligned, had the courts hypothetically limited their analysis to just those two factors, it appears to the Department that the overall results would have been the same.   And at 86 Fed. Reg. 1168 at 1206, the Preamble affirms that “The final rule takes into account facts and factors that have historically been part of the economic reality test, and decades of appellate decisions indicating that the two core factors frequently align with the ultimate determination of economic dependence or lack thereof.” Finally, at  86 Fed. Reg. 1168 at 1240, the Preamble states that “because the Department’s analysis of appellate case law since 1975 has found workers’ control and opportunity for profit or loss to be most predictive of a worker’s classification status, the finalized standard provides more accurate guidance.”

[13] 29 CFR 795.110.

[14] The Preamble expressed this intention at 86 Fed. Reg. 1168 at 1204, wherein DOL observed that “In many instances, the actual practices of the parties will establish the existence of an employment relationship despite what a ‘‘skillfully devised’’ contract might suggest on paper. Silk, 331 U.S. at 715; see, e.g., Scantland, 721 F.3d at 1313– 14 (‘‘Though plaintiffs’ ‘Independent Contractor Service Agreements’ provided that they could ‘decline any work assignments,’ plaintiffs testified that they could not reject a route or a work order within their route without threat of termination or being refused work in the following days.’’).”

California AB 5 Restricts an Individual’s Right to Work as an Independent Contractor

On September 18, 2019, California’s Governor Gavin Newsom signed into law Assembly Bill 5, which launched California into a grand experiment that restricts an individual’s right to work in that state as an independent contractor.

On September 18, 2019, California’s Governor Gavin Newsom signed into law Assembly Bill 5, which launched California into a grand experiment that restricts an individual’s right to work in that state as an independent contractor.

Click Here for a copy of our analysis of California AB 5.

If you have any questions or comments concerning our analysis, please contact us at (202) 659-0878.

Tax Reform Creates New Benefit for Self-Employed

The Tax Cuts and Jobs Act created a new tax deduction – of up to 20% – for pass-through entities, which include certain independent contractors. The provision, codified as new Internal Revenue Code section 199A, applies for tax years beginning after December 31, 2017, but before January 1, 2026.


The Tax Cuts and Jobs Act created a new tax deduction – of up to 20% – for pass-through entities, which include certain independent contractors. The provision, codified as new Internal Revenue Code section 199A, applies for tax years beginning after December 31, 2017, but before January 1, 2026.

CLICK HERE for an article we wrote for Tax Notes that analyzes the new Code section 199A deduction as it applies to independent contractors.

House Small Business Committee Hearing Considers Taxes and the Sharing Economy

At a recent hearing before the U.S. House of Representatives Committee on Small Business, certain Members and witnesses expressed concern that current tax laws are outdated and burdensome to companies in the “sharing economy.”

At a recent hearing before the U.S. House of Representatives Committee on Small Business, certain Members and witnesses expressed concern that current tax laws are outdated and burdensome to companies in the “sharing economy.” The hearing, titled, “The Sharing Economy: A Taxing Experience for New Entrepreneurs, Part I” was held on May 24, 2016.

Committee Chairman Steve Chabot (R-OH) observed that “sharing economy” companies are running into an outdated tax law that is working against this segment of the economy. Similarly, Committee Ranking Member Nydia Velazquez (D-NY) characterized the common law test, used to determine worker status, as difficult to administer in the context of the “sharing economy.”

Testifying before the Committee were representatives from TaskRabbit, ACT/The App Association, the Information Technology and Innovation Foundation, and a professor at American University.

The witnesses made similar assessments during their testimony, characterizing current tax laws as having been developed in a different time, being ill-suited to the modern on-demand economy and hindering economic growth.

One witness recommended increasing the consistency between state and federal laws that determine worker status, but also suggested establishing a new third worker classification to better reflect work relationships in the “sharing economy.”

Interestingly, a couple witnesses asserted that current laws make it difficult for “sharing economy” companies to interact with and train independent contractors, and thought the laws should be changed to permit this.

If you have any questions or comments regarding the foregoing, please let us know.

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The foregoing is intended solely as general information and may not be considered tax or legal advice; nor can it be used or relied upon for the purpose of (i) avoiding penalties under any taxing statute or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. You should not take any action based upon any information contained herein without first consulting legal counsel familiar with your particular circumstances.

NLRB Contends Worker Misclassification is a Violation of the NLRA

By Russell A. Hollrah

The National Labor Relations Board (“NLRB”) appears to be creating a new source of regulatory risk to companies doing business with independent contractors. On April 18, 2016, the Regional Director of the NLRB’s Los Angeles office issued a Complaint against a transportation company

By Russell A. Hollrah

The National Labor Relations Board (“NLRB”) appears to be creating a new source of regulatory risk to companies doing business with independent contractors. On April 18, 2016, the Regional Director of the NLRB’s Los Angeles office issued a Complaint against a transportation company alleging, among other things, that it is an unfair labor practice in violation of the National Labor Relations Act (“NLRA”) to misclassify an individual as an independent contractor.

By way of background, the International Brotherhood of Teamsters on August 10, 2015, filed with the NLRB’s Los Angeles regional office an unfair labor practice charge against that same transportation company, premised in part on an allegation that the company misclassified individuals as independent contractors.[1] The regional office conducted an investigation and determined that the charge has merit. Subsequently, the Regional Director issued the aforementioned Complaint.

The Complaint alleges that because the transportation company misclassified individuals as independent contractors,[2] it has “inhibit[ed] them from engaging in Section 7 activity[3] and depriv[ed] them of the protections of the [NLRA].” A hearing before an NLRB administrative law judge is scheduled for June 13, 2016.[4]

In the month prior to the Regional Director filing the Complaint in this matter, the NLRB’s General Counsel issued General Counsel Memorandum 16-01, regarding Mandatory Submissions to the Division of Advice, which identifies matters that involve General Counsel initiatives and/or priority areas. Two salient matters the memorandum identifies are (i) “Cases involving the employment status of workers in the on-demand economy,” and (ii) “Cases involving the question of whether the misclassification of employees as independent contractors violates Section 8(a)(1).”[5] The memorandum directs Regional Directors to contact NLRB Headquarters for guidance and centralized consideration when investigating these matters.

The recent General Counsel Memorandum and Complaint suggest that the NLRB is making worker misclassification a higher priority. The Complaint might well portend the aggressiveness with which Regional Directors intend to pursue this priority. Firms that do business with independent contractors need to be aware of this new emerging regulatory threat.

The hearing scheduled for June 13 concerning the transportation company could provide important insight into the legal and factual arguments that will be used to support the contention that worker misclassification is an unfair labor practice, and as to whether this contention has merit.

If you have any questions or would like to discuss this development, please let us know.

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The foregoing is intended solely as general information and may not be considered tax or legal advice; nor can it be used or relied upon for the purpose of (i) avoiding penalties under any taxing statute or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. You should not take any action based upon any information contained herein without first consulting legal counsel familiar with your particular circumstances.

 

 

[1] The test generally used for determining whether an individual is an employee or independent contractor for purposes of the NLRA is the common-law, right-of-control test. See, e.g., Corporate Express Delivery Sys. v. NLRB, 292 F.3d 777 (D.C. Cir. 2002).

[2] Independent contractors are not covered by the NLRA. See, NLRA section 2(3).

[3] NLRA section 7 provides:

Sec. 7. [§ 157.] Employees shall have the right to self-organization, to form, join, or assist labor organizations, to bargain collectively through representatives of their own choosing, and to engage in other concerted activities for the purpose of collective bargaining or other mutual aid or protection, and shall also have the right to refrain from any or all of such activities except to the extent that such right may be affected by an agreement requiring membership in a labor organization as a condition of employment as authorized in section 8(a)(3) [section 158(a)(3) of this title].

[4] Case number 21-CA-157647.

[5] NLRA section 8(a)(1) provides:

(a) [Unfair labor practices by employer] It shall be an unfair labor practice for an employer—

(1) to interfere with, restrain, or coerce employees in the exercise of the rights guaranteed in section 7 [section 157 of this title];