Independent Contractors/Employee Classification: Prospects for Reform?

The House Commerce Committee reviewed two major proposals to address employee classification and the controversies and complications surrounding independent contractors this week. Although significant challenges remain ahead, the review suggested that a positive compromise could be possible, at least in the House.

As you might be aware, employers have faced increasing problems in recent years regarding independent contractors owing to statutory language that is out of step with the evolving economy, major court decisions, and insurer and regulator reactions. The combined result has found most employers seeking to make use of independent contractors being required to treat them as full employees for the purposes of unemployment insurance taxes and workers’ compensation premiums.

This has been a serious issue for companies for whom independent contractors can be an important part of their business model and operational needs.

AIV and other organizations have long argued that the statutory tests used to determine an employer’s UI and workers’ compensation obligations for independent contractors/employees must be amended. Over recent years the Department of Labor has been hesitant to embrace such an approach, and a number of organized labor advocates have actively opposed reform efforts.

Following extensive discussions, however, legislation was introduced this week H.773, reflecting proposals from the Department that include amendments to these statutory tests. Some of these changes would be positive, although some would also be counter-productive. It should also be noted that H.773 has a number of enforcement and penalty provisions that will need careful review and potential amendment.

Nevertheless, the fact that the Department has decided to engage on the question of reforming the test is a positive development. It opens the door to blending or swapping provisions between H.773 and another, bipartisan bill introduced last year, H.378, which takes a more comprehensive approach toward replacing the existing test provisions modeled on recent reforms in Maine and has been endorsed by AIV and other business organizations as a key starting point for a final bill.

Key Issues

As this issue is taken up in greater depth by the Commerce Committee next week, there are a number of key topics and questions that will need to be addressed:

Direction and Control. The first key test to define an employee or independent contractor is the level of direction and control the employer has over the work being done. Both H.773 and H.378 have fairly general language relying on precedent for determining the line, and it will be important to explore whether the line can and should be set more clearly to leave less room for subjective determination.

Nature of Work/Usual Course of Business. One of the biggest obstacles to utilizing independent contractors has been the test of whether the contracted work is substantially similar to the usual nature or course of work of the employer. If it is similar, the independent contractor must be treated as an employee.

H.773 addresses this differently for workers’ compensation and UI. For workers’ compensation, and independent contractor can do similar work if he or she is registered as an independent business with the Secretary of State. For UI, the independent contractor must have multiple clients to pass this test. This UI test is problematic.

H.378, on the other hand, addresses this issue by making “outside the usual course of business” an optional test (it is included among five tests, only two of which must be passed).

Multiple Clients. Another key traditional test is whether an independent contractor has multiple clients. H.773 would effectively retain the requirement that an independent contractor have multiple clients in order to not be considered an employee. H.378, however, would only require an independent contractor to be available for multiple clients even if he or she chooses to work for only one.

Number of Independent Contractors. One serious new restriction that would be imposed by H.773 would require that independent contractors be treated as employees if the employer contracts with more than one contractor for the same work on a project or job site. The expressed purpose of this restriction is to address competitive issues in certain limited circumstances, but this would be a very serious problem for a wide variety of employers and business models, and AIV will be opposing such restrictions. To the extent that competitive issues need to be addressed, there should be better alternatives. H. 378 does not impose any such new restriction.

The Road Ahead

As noted above, the Committee will be discussing these issues and proposals in depth next week and AIV will be working closely with the Committee and the Department on this issue. News and Views will be following up with more details about the bills in postings over the coming days, and companies interested in more information and options for engaging in the Committee discussion are strongly encouraged to contact us at info@aivt.org.

To review H.378 and related information, click here.  For H.773, click here.