Employers are set to face new federal guidelines on classifying their workforce, a change that could have an outsized impact on construction contractors.
As of March 11, 2024, to be in accord with the Fair Labor Standards Act (FLSA) businesses will have to follow a U.S. Department of Labor (DOL) rule outlining a new set of criteria for determining whether workers are brought on as employees or independent contractors (1099 workers). The new rule succeeds one DOL crafted under the Trump administration and issued in 2021. The department under the Biden administration subsequently determined it was not consistent with interpretations of FLSA guidelines on determining worker status.
In better aligning them with FLSA, DOL says the new rule’s guidelines will help ensure workers are not misclassified, a risk heavily weighted toward employers wrongfully designating workers as independent contractors rather than employees. By some estimates, the practice has a long history and remains commonplace in the construction industry; a 2020 study determined 12% to 20% of the construction workforce was improperly classified as independent contractors or working off the books.
Announcing its intent in October 2022 to craft a new rule, DOL called the practice of misclassifying workers as independent contractors “a serious issue that denies workers’ rights and protections under federal labor standards, promotes wage theft, allows certain employers to gain an unfair advantage over law-abiding businesses, and hurts the economy at-large.” While acknowledging the economic importance of legitimate independent contractors, it said “we have seen in many cases that employers misclassify their employees as independent contractors, particularly among our nation’s most vulnerable workers.”
Under the new rule, employers will use a non-weighted, six-factor test to determine whether a worker is economically dependent on them, in which case they’re rightfully employees. The test will consider opportunity for profit or loss depending on managerial skill; investments by the worker and the potential employer; degree of permanence of the work relationship; nature and degree of control; extent to which the work performed is an integral part of the potential employer’s business; and skill and initiative. DOL provides detailed guidance on applying each factor and others that may be present.
In contrast, the 2021 rule was less rigorous, effectively lowering the bar for designating a worker a contractor, DOL says. Reviewing the differences, DOL says the new rule is focused on a “totality of circumstances” analysis rather than one that gave more weight to select factors favoring a contractor designation; considers investments made by both parties; emphasizes the factor of “control” over work; resurrects the consideration of whether the work is integral to the employer’s business or is an integrated unit of production; and fleshes out analysis of permanency, exclusivity, initiative and skill in the context of the work performed.
DOL’s new rule is exposing a rift in the construction industry. Associated Builders and Contractors (ABC) and Associated General Contractors (AGC) have come out against the change, saying it will rob contractors of needed flexibility in staffing by curtailing their legitimate use of independent contractors and raise costs. Other groups, including the National Electrical Contractors Association (NECA), have voiced support, saying it will level the playing field.
In a January 12 press release, ABC, which represents non-union contractors, framed it as a hit against properly classified independent contractors who could “lose opportunities for work.” The group has also complained that the new rule is “ambiguous” and “difficult to interpret” and “will jeopardize the ability of construction firms to continue the industry’s longstanding practice of utilizing legitimate independent contractors.”
In a joint statement , NECA and the International Brotherhood of Electrical Workers (IBEW) backed the DOL action, saying it was needed to ensure workers aren’t exploited and that companies that play by the rules in classifying workers aren’t harmed.
“In the construction industry, misclassification is a cost-cutting tool used by unscrupulous contractors to cheat the system, shirk legal responsibility and tax obligations, and underbid law-abiding contractors to win both public and private construction projects,” the statement read.
ABC has signed on to an effort to block the new rule, a motion in the U.S. Circuit Court of Appeals for the Fifth Circuit to have the new rule struck down on procedural grounds and the 2021 rule restored.