Small Business on Standby as New Rule May Reclassify Independent Contractors as Employees.

A newly proposed rule under The Fair Labor Standards Act could bring changes that affect Government contractors. The Employee or Independent Contractor Classification under the Fair Labor Standards Act was published on October 13, 2022 for public comment.

The Department of Labor (DOL) proposes to rescind a March 2021 independent Contractor Rule and replace it with this new rule. In the previous rule, only two core factors were considered to determine if a worker was an employee, including: the level of control over the work and the opportunity for profit or loss. These two factors carried greater weight in determining the status of independent contractor. Under the new rule, if passed, a contractor’s ability to designate a worker as an independent contractor will narrow and include additional factors that must be considered in determining the distinction between an independent contractor and an employee.

With the new Rule, a company must consider all the following factors, equally weighted, to determine a person’s Independent Contractor Status:

1. 1. The extent to which the services rendered are an integral part of the principal’s business;
   2. The permanency of the relationship;
   3. The opportunities for profit or loss;
   4. The initiative, judgment, or foresight exercised by the one who performs the services;
   5. The amount of investment; and
   6. the degree of control by the employer over the worker

Some of these factors could be highly subjective in distinguishing between an independent contractor an employee. For example, the permanency of the relationship is not defined; a Government contractor could engage with an independent contractor for the life of a given contract. Would the use of an independent contractor through the life of a five-year contract constitute an employment situation? If an independent contractor is available under an IDIQ would permanency be defined by the number of years on the IDIQ or the amount of time actually utilizing the independent contractor on given task orders? How does one define or quantify degree of control, given that the Government contractor is responsible for service delivery utilizing an independent contractor?

Independent contractors who could be affected include many service providers like janitors, homecare workers, writers, Editors, and translators. It also includes business professionals who serve as accountants, bookkeepers, public relations, graphic designers, web developers, videographers, marketers, and consulting engineers. In Government contracting, it could affect Subject Matter Experts, proposal writers, and consultants, as well.

Companies usually do not provide independent contractors with benefits and protections that employee status provides workers including paying overtime, contributions towards a worker’s Social Security taxes and unemployment insurance. Employers do not withhold taxes from independent consultants as they do from employees pay.

While the rule is intended to avoid employers from misclassifying employees as independent contractors, its impacts to small businesses can be substantial. Small businesses that depend on independent contractors may now be faced with finding employees in a climate of high wages and a labor shortages. In addition, many independent contractors enjoy the flexibility and increased income that serving various clients provide. In fact, when a similar rule passed in California, small woman owned businesses felt the impact.

Everyone has an opportunity to provide feedback on this proposed rule. The deadline for comments is November 28, 2022. After the comment deadline, the Department will issue a final ruling on whom it will apply to and how it will be enforced. Coley will continue to monitor the updates on this rule and will provide insights on how small businesses could be affected and strategies for working within the environment that could be created by the new rule.

For over 20 years Coley has helped companies acquire and manage GSA Schedule contracts. Our expert consultants help companies understand and comply with the terms and conditions of their contract.  Even through the ever-changing challenges that government contractors are subjected to, Coley can support contract holders throughout their contracting journey. For additional questions on how we can support your contracting needs, please reach out by email at hello@coleygsa.com or by phone at 210.402.6766.