The very words worker misclassification can strike fear in the heart of any business that relies on an independent contractor workforce. To be sure, the negative effects of misclassification can be staggering. One worker claim can trigger an audit of your entire workforce by any number of state and federal agencies. These agencies have the right to issue heavy penalties and interest on taxes and wages, liens, and even injunctions. Not to mention that businesses can still be subject to crippling class-action suits with multi-million dollar consequences.
Recent trends make it painfully obvious that misclassification can affect any company that uses ICs, no matter the size or industry. Meanwhile, the complexity of the misclassification landscape, the number of agencies involved, and a constant stream of evolving guidelines and new court decisions make it difficult to navigate. But there are several critical developments proactive companies should be aware of as this year takes shape.
Developments shaping misclassification enforcement today
1. Trump administration signals shift away from prioritizing classification enforcement
Recent changes in the Department of Labor’s (DOL) suggested interpretation of classification guidelines and a new proposed rule for determining joint-employer status under the Fair Labor Standards Act (FLSA) both indicate that under the Trump administration federal agencies will pull back a little when it comes to pursuing classification enforcement.
However, this shift does not mean that businesses should breathe easy when it comes to misclassification. While administrative priorities seem to be shifting away from worker classification rules, it will take some time for this high-level change in agenda to filter down. Moreover, courts are not bound to follow federal agencies’ interpretative guidance so businesses will remain vulnerable to unfavorable rulings in private lawsuits.
2. State taskforces double-down on industries with large IC workforces
Even if enforcement at the federal level is less vigorously pursued, enforcement at the state and local levels are more aggressive than ever. In general, state rules used to determine worker status have become less favorable to IC classification (for instance, the notorious ABC Test). But some states, like New York and New Jersey, have also begun forming taskforces by executive order to investigate worker misclassification and target the companies and industries that rely heavily on ICs.
3. Growth of gig economy and changing expectations about work
The explosive growth of the gig economy over the past several years is a familiar headline staple, but accompanying this has been a sizable segment of workers actively embracing on-demand work. Anecdotal evidence of this popped up last year when all of a Sacramento barber shops’ IC barbers quit en masse rather than be reclassified as employees under a new court ruling. This indicates a growing tension between workers’ expectations to be able to work on demand and state agencies’ increasingly forceful pursuit of misclassification.
4. New case law favoring IC classification
Three recent decisions have been favorable for classifying workers as ICs. The National Labor Relations Board reversed a stringent test for IC status and replaced it with a more IC-friendly standard. The U.S. Court of Appeals for the Sixth Circuit ruled in favor of insurance agents as ICs in a major case. And in an unemployment claim, the Indiana Supreme Court found a referral company met the state’s ABC test for IC classification.
However, these decisions are part of a larger mixed-bag of rulings that often still favor classifying workers as employees. Combine these with several recent costly class action settlements and the message is clear: stay vigilant about your IC classification practices.
What to expect going forward
These developments demonstrate the fundamental messiness of the misclassification landscape. While some signs are encouraging for IC classification, the contradictions in the rules used by federal, state and local agencies and the tendency—on the whole—to favor employee classification leaves businesses highly vulnerable to expensive misclassification audits. In the coming year, businesses can expect:
- More states to target specific IC-heavy industries through misclassification taskforces
- Continued use of the ABC Test and other tests that favor classification as an employee
- Increased likelihood that one worker claim will trigger a full-blown workforce audit
Having solid best practices in place that support your workers’ independent contractor status is your absolute best bet for avoiding claims in the first place and combating them if they arise.
Get in touch to learn how Openforce can help reduce your risks and get a complementary compliance assessment.