independent contractor test

The DOL Issues Final Rule Creating New Standard for Classifying Workers as Employees vs. Independent Contractors

On January 9, 2024, the United States Department of Labor (DOL) released its final rule on worker classification under the Fair Labor Standards Act (FLSA). This new rule, effective as of March 11, 2024, signals a return to a standard more likely to classify workers as employees than contractors. Thus, it is more likely that employers will be determined to have misclassified workers as contractors, resulting in liability.

The New Rule: A Deviation From Trump-Era Classification Standards

The final rule, which is consistent with the proposed rule released by the DOL in October 2022, differs significantly from the Trump Administration’s “core factors” test. The Trump-era rule emphasized two primary factors: the nature and degree of control over the work, and the worker’s opportunity for profit or loss. Three other factors—the skill required, the permanence of the relationship, and whether the work is part of an integrated unit of production—were deemed less significant.

The new rule requires a more detailed and comprehensive analysis by establishing the totality-of-the-circumstances economic reality test, a six-factor test giving equal weight to each factor in determining whether a worker is an employee or an independent contractor. The DOL claims that this approach is consistent with how federal courts have evaluated employee vs. independent contractor classification for decades.

The factors outlined in the final rule include:

1. the worker’s opportunity to share profit or loss,
2. the investments by the worker and potential employer respectively,
3. the permanence of the work relationship,
4. the worker’s or employer’s degree of control over the work,
5. the integration of the work into the employer’s business, and
6. the skill and initiative required of the worker.

The final rule also addresses how factors such as scheduling, remote work, and the ability to work for others should be considered under factor four—the control factor—and also provides additional context to other factors as well.

Why This Matters to Michigan Employers

All Michigan employers, as well as employers across the country, who are covered under the FLSA will be impacted by the final rule. Generally speaking, the FLSA applies to employers who have at least two employees and gross $500,000 or more a year. If a worker is classified as an employee as opposed to an independent contractor, then that worker is covered under the FLSA, which sets federal rules for minimum wages and overtime. When the FLSA applies, employers are also required to maintain certain records.An employer who violates the FLSA can be subject to lawsuits, be forced to pay back pay for unpaid overtime, and face fines, among other consequences.

It’s also important for Michigan employers to keep in mind that Michigan has its own standards for independent contractor classification, and the more stringent of the two standards is likely to apply. Currently there is legislation pending in the Michigan legislature that would tighten the definition of “independent contractor” considerably. Under the new bill, an independent contractor is “an individual who performs work” and to whom the following three conditions apply:

- The individual is free from control and direction of the payer in connection with the performance of the work, both under a contract and in fact.
- The individual performs work that is outside the usual course of the payer’s business.
- The individual is engaged in an independently established trade, occupation, or business of the same work performed by the individual for the payer.

The bottom line is that, under federal and state laws, classifying a worker as an employee or independent contractor requires a complex analysis of various factors. And the risks and consequences of misclassifying can be severe.

Businesses and employers should remain diligent in analyzing their workers’ classifications and consult an experienced attorney with any questions. The attorneys at Fraser Trebilcock Davis & Dunlap, PC will continue to monitor these developments and stand ready to guide clients in their compliance with the new regulations set to take effect.

This alert serves as a general summary and does not constitute legal guidance. Please contact us with any specific questions.

Fraser Trebilcock Shareholder Dave Houston has over 40 years of experience representing employers in planning, counseling, and litigating virtually all employment claims and disputes including labor relations (NLRB and MERC), wage and overtime, and employment discrimination, and negotiation of union contracts. He has authored numerous publications regarding employment issues. You can reach him at 517.377.0855 or dhouston@fraserlawfirm.com.

NLRB’s Atlanta Opera Ruling Imposes Stricter Independent Contractor Test on Employers

On June 13, 2023, the National Labor Relations Board (“NLRB”) ruled in the closely watched The Atlanta Opera, Inc. case, restoring the multifactor common-law framework the NLRB established in 2014 for worker classification. The ruling is significant because:

It establishes the test for classifying workers as either employees or independent contractors under the National Labor Relations Act (“NLRA”);
The test—a return to pre-2019 standards—makes it harder to classify workers as independent contractors;
Independent contractors are excluded from the NLRA’s protections for labor organizing activities.

As a result, all employers, and particularly those who utilize independent contractors, should anticipate challenges to their classification of workers as independent contractors, and prepare for the possibility of more labor organizing activities.

The Atlanta Opera, Inc. Decision

The Atlanta Opera decision provides that determining whether a worker is properly classified as an employee or independent contractor should be based on traditional common-law worker classification factors set forth in the Restatement (Second) of Agency. Those factors, set forth below, are not exclusive—other factors may be considered. The NLRB also noted that relevant factors “must be assessed and weighed with no one factor being decisive.”

The factors to be assessed and weighed in the Restatement (Second) of Agency include:

the extent of control which, by the agreement, the master may exercise over the details of the work;
whether or not the one employed is engaged in a distinct occupation or business;
the kind of occupation, with reference to whether, in the locality, the work is usually done under the direction of the employer or by a specialist without supervision;
the skill required in the particular occupation;
whether the employer or the workman supplies the instrumentalities, tools, and the place of work for the person doing the work;
the length of time for which the person is employed;
the method of payment, whether by the time or by the job;
whether or not the work is a part of the regular business of the employer;
whether or not the parties believe they are creating the relation of master and servant; and
whether the principal is or is not in business.

In addition to these and other common-law factors, the NLRB will also consider:

“[E]vidence of entrepreneurial opportunity when assessing whether a putative contractor is, in fact, rendering services as part of an independent business.”
“[W]hether the putative contractor has a significant entrepreneurial opportunity, but also whether the putative contractor: (a) has a realistic ability to work for other companies; (b) has proprietary or ownership interest in their work; and (c) has control over important business decisions, such as the scheduling of performance; the hiring, selection, and assignment of employees; the purchase and use of equipment; and the commitment of capital.”

The NLRB explained that it will distinguish between “actual opportunities, which allow for the exercise of genuine entrepreneurial autonomy, and those that are circumscribed or effectively blocked by the employer.”

The Atlanta Opera decision marks a return to the standards set forth in its 2014 FedEx Home Delivery decision. In 2019, the NLRB, in its SuperShuttle DFW, Inc. decision, overruled FedEx Home Delivery, and held that the more employer-friendly entrepreneurial opportunity standard should be “a principle by which to evaluate the overall effect of the common-law factors on a putative contractor’s independence to pursue economic gain.” Specifically, SuperShuttle held that the NLRB would “evaluate the common-law factors through the prism of entrepreneurial opportunity[.]”

Worker Classification Under Other Federal Rules and Regulations

The NLRB’s decision to focus on common-law factors when evaluating worker classification is consistent with standards set forth by other federal agencies. For example, the U.S. Department of Labor’s proposed regulations set forth a multifactor, totality-of-the-circumstances analysis of the “economic reality” test to determine whether a worker is an employee or an independent contractor under the Fair Labor Standards Act.

In addition, the Internal Revenue Service uses a three-pronged common law test for worker classification. The three factors are:

Behavioral Control: the type and level of control an employer has over how workers accomplish their tasks.
Financial Control: the extent to which an employer controls the economic aspects of a worker’s job.
Relationship of the Parties: The type of relationship between a worker and an employer, which is to be evaluated by certain factors such as the existence of a written contract, employee benefits, permanency of the relationship, and the types of services provided.

Implications for Employers

In light of the NLRB’s decision, employers should work with legal counsel to evaluate and analyze their workforce through the common-law test’s lens to determine which workers, who are currently treated as independent contractors, may now be found covered under the NLRA. Employers should also be prepared for the possibility of more unionization drives among workers who are currently classified as independent contractors, as well as more aggressive enforcement efforts by the NLRB.

If you have questions or require assistance, please contact David Houston.

This alert serves as a general summary and does not constitute legal guidance. Please contact us with any specific questions.

Independent Contractor Bills Introduced in Michigan House of Representatives

Are your workers properly classified?

Even though the Michigan Legislature is currently mired in the often months-long process of passing a budget, there is a package of mostly non-spending bills in the Michigan House of Representatives that businesses should be keeping an eye on. The multi-bill package (HB 4390 et seq.) would create one of the strictest standards for defining an independent contractor and provides for significant penalties for those employers that misclassify workers. The language providing the definition of independent contractor under the legislation is as follows:

“Independent contractor” means an individual who performs work for a payer for remuneration and to whom all of the following apply:

(i) The individual is free from control and direction of the payer in connection with the performance of the work, both under a contract and in fact.

(ii) The individual performs work that is outside the usual course of the payer’s business.

(iii) The individual is customarily engaged in an independently established trade, occupation, or business of the same work performed by the individual for the payer.

This language closely follows the test popularized in California (and found in twenty-some other states to varying degrees), which has come to be called the ABC test. The test boils down to the following questions:

1. 1. Is the worker free from the principal’s management in performing the work?
  2. Are the worker’s services outside the principal’s typical line of business?
  3. Is the worker established in the profession of providing the services?

For examples on California’s application of the test, click here.

As mentioned, in addition to the new, stringent definition for independent contractors in Michigan, the proposed legislation would also drastically increase the penalties for misclassifying a worker; with egregious or repeated offenses leading to years-long prison sentences. The fines for such violations would also be increased ten-fold. While workers would be encouraged to bring their own complaints of misclassification under the legislation (and obtain 3x the amount of wages and fringe benefits wrongfully withheld); the legislation also directs the Attorney General to establish an enforcement unit, complete with approximately 25 investigators. And whistleblowers could get up to 30% of the penalties collected through such enforcement.

To expand the public’s knowledge and compliance with the new regulations, the legislation sets forth new posting requirements, including a requirement that the Department of Treasury send to each 1099-MISC recipient a booklet explaining the factors considered in classifying a worker as an employee or an independent contractor. Furthermore, other bills would require employers to publish or make available to employees information regarding the compensation paid to other similarly situated employees.

Finally, included in the package of bills is a bill that would address the use of noncompete agreements in the State of Michigan. HB 4399 would amend the current statute to include additional restrictions on the types of employee contracts that could include non-compete provisions. Specifically, the bill would prohibit an employer from using an agreement that would “request or obtain” a non-compete from a “low-wage employee.” Low-wage employees would be defined as those earning less than $15.00 per hour. Additionally, HB 4399 includes new notice requirements for employers. The notices would include a posting requirement similar to those conspicuous postings required for current wage and hour regulations and employee safety. And employers would have to disclose the terms of the non-compete agreement before hiring to each applicant for the position with a written notice of the requirement for a noncompete agreement. A similar bill (SB 0143) has also been introduced in the Michigan State Senate.

While passage of all or some of these bills is not certain, now is a great time for businesses to consult with an experienced attorney to review their employment and independent contractor agreements and assess the classification of their workers.

This alert serves as a general summary, and does not constitute legal guidance. Please contact us with any specific questions.

Robert D. Burgee is an attorney at Fraser Trebilcock’s Lansing office with over a decade of experience counseling clients with a focus on corporate structures and compliance, licensing, contracts, regulatory compliance, mergers and acquisitions, and a host of other matters related to the operation of small and medium-sized businesses and non-profits. He can be reached at bburgee@fraserlawfirm.com, or at 517.377.0848.

Five Stories that Matter in Michigan This Week – November 4, 2022

IRS Announces 2023 Cost-of-Living Adjustment for Retirement and Health and Welfare Benefit Plans

The Internal Revenue Service recently announced 2023 cost-of-living adjustments for retirement and health and welfare benefit plans. The significant adjustments reflect the increase in inflation over the last year. The adjustments are detailed in IRS Notice 2022-55. For example, the contribution limit for a Simple 401(k) will increase to $15,500 in 2023 from $14,000 in 2022, and for a Health FSA, limits will increase to $3,050 in 2023 from $2,850 in 2022.

Why it Matters: Business owners and employers should be aware of these adjustments and share this information with employees as we approach the new year. If you have any questions regarding these adjustments, please contact our Employee Benefits team.

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Viridis North, LLC Can Proceed with Lawsuit Against CRA

In November 2021, the CRA (formerly known as the MRA), issued its largest ever marijuana recall because of concerns over safety tests conducted by two companies, Viridis Laboratories, LLC, and Viridis North, LLC. These two companies filed a lawsuit against four individuals who were employed by the CRA in their individual capacities. Last week, U.S. District Court Judge Paul L. Maloney granted an order in part motion to dismiss all claims alleged by Viridis Laboratories, LLC, and Viridis North, LLC, except for, “Plaintiff Viridis North’s claim for violation of its substantive due process rights.” Viridis Labs. v. Kluytman, 1:22-cv-283, 12(W.D. Mich. Oct. 27, 2022).

Why it Matters: The decision by the Court allows Viridis North LLC to proceed with its lawsuit in determining whether or not there was a violation of their substantive due process rights stemming from the November 2021 marijuana recall. Fraser Trebilcock attorneys will monitor the situation as developments continue.

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Year End Gift Tax Planning Perspective

If you’re thinking about beginning an annual gifting program, or want to continue a program you’ve already started, there are some things you should know. From an estate and gift tax planning perspective, the most commonly used method for tax-free giving is the annual gift tax exclusion. This method allows you to give up to $16,000 for 2022 (increasing to $17,000 in 2023) to each donee.

Why it Matters: The method allows you to give up $16,000 without reducing your estate and lifetime gift tax exclusion amount. It’s also important to note that there is no limit to the number of people to whom you may make such gifts, and that the annual gift tax exclusion is applied on a per-donee basis.

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Department of Labor Issues New Proposed Rule on Independent Contractors

The U.S. Department of Labor recently issued a Notice of Proposed Rulemaking that, if adopted, would change the standard for analyzing a worker’s classification as either an employee or independent contractor.

Why it Matters: Employers who misclassify employees can face severe financial consequences. That’s why it is important that organizations remain diligent in analyzing their workers’ classifications. Learn more on the subject.

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EV Company Relocating to MI Recipient of Funds from MSF

A Utah-based electric vehicle company that is set to relocate their headquarters to southeastern Michigan, received a $2.5 million Michigan Business Development Program performance-based grant from the Michigan Strategic Fund to aid in the move.

Why it Matters: Officials in Michigan have been working hard to grow Michigan’s economy, and these programs are an incentive for businesses that are looking to relocate or expand their footprint in the state.

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Five Stories that Matter in Michigan This Week – October 28, 2022

Governor Whitmer Signs Bipartisan Election Bills

Governor Whitmer recently signed a package of election law bills which impact how clerks process ballots, including those coming from members of the military overseas. Michigan Public Act 195 permits clerks to pre-process absentee ballots two days prior to Election Day, changes requirements for ballot drop boxes to increase security, and requires clerks to more frequently review and update qualified voter files to remove dead voters. Public Act 196 allows military members serving overseas to submit ballots electronically.

Why it Matters: Polling shows that voters are highly energized and polarized leading up to the midterm elections. These laws are meant to address certain voting-related issues, such as ballot box integrity, that have led to controversy in the past. If you have questions about these bills, or election law issues in general, please contact a member of our election law team.

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Department of Labor Issues New Proposed Rule on Independent Contractors

Why it Matters: Employee misclassification can result in severe financial consequences. Businesses and employers should remain diligent in analyzing their workers’ classifications. Learn more on the subject.

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Michigan Court of Claims Rules in Prevailing Wage Policy Case

Judge Douglas Shapiro of the Michigan Court of Claims recently ruled in favor of the state’s Department of Technology, Management, and Budget (DTMB), when it implemented its prevailing wage policy. The Associated Builders and Contractors of Michigan (ABC) in July 2022 filed a preliminary injunction claiming that due to the 2018 repeal of Michigan’s prevailing wage law, that the state cannot require the wage rate, which the Court denied and agreed that DTMB did not violate separation of powers when implementing its prevailing wage policy.

Why it Matters: October 31 is the deadline for ABC to appeal the decision. If this decision stays, this signals changes to the way organizations do business with the state of Michigan. Learn more on DTMB’s prevailing wage.

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New CRA Director Vows to Crack Down on Black Market Sales

This week, Brian Hanna, the Cannabis Regulatory Agency’s acting director, spoke to media and highlighted the agency’s focus on cracking down on cannabis that is continuing to illegally enter Michigan’s market.

Why it Matters: Though official numbers have not been confirmed, it is known that illicit cannabis is continuing to enter Michigan’s medical and adult-use cannabis markets, causing widespread effects on prices and profits for legal and law-abiding businesses.

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State Court Administrative Office Proposes New Landlord-Tenant Rules

The State Court Administrative Office unveiled new proposed rules that if enacted, would alter the way eviction cases are handled for both landlords and tenants. Rules such as a requirement that tenants be served in person if a landlord wants an immediate default judgement, and the ability for tenants to get an automatic stay if they have applied for rental aid.

Why it Matters: If enacted, these rules would allow commercial and residential tenants more time to pay their landlords if they fall behind on payments, however landlords are against the new proposed rules as they believe it will make the process of finding new tenants more difficult.

Related Practice Groups and Professionals

Election Law | Garett Koger
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Department of Labor Issues New Proposed Rule on Independent Contractors

The US Department of Labor recently issued a Notice of Proposed Rulemaking that, if adopted, would change the standard for analyzing a worker’s classification as either an employee or independent contractor. The new rules are a reversion to prior tests, which consider certain “economic reality factors;” factors that were originally set out in a pair of cases before the Supreme Court of the United States in 1947 (See United States v. Silk, 331 U.S. 704, and Rutherford Food Corp. v. McComb, 331 U.S. 722).

The six non-exhaustive and unweighted factors flowing from those cases and included in this new rule are:

The worker’s opportunity for profit or loss depending on managerial skill;
The relative investment of the worker and the employer in the equipment, materials, or helpers required for their task;
The degree of permanence of the work relationship
Nature and degree of control – whether the employer has the right to control the manner in which the work is to be performed;
The extent to which the work performed is an integral part of the employer’s business;
Whether the service rendered requires a special skill or initiative.

These proposed rules are open for public comment until November 28, 2022.

Relatedly, the Internal Revenue Service recently “streamlined” its various “20 Factor” and other tests for independent contractor determination. See, IRS Publication, Topic No. 762. The Service now groups the prior multiple factors into three topics. The IRS Publication states the employer in making its determination, “must examine the relationship between the worker and the business. You should consider all evidence of the degree of control and independence in this relationship. The facts that provide this evidence fall into three categories – Behavioral Control, Financial Control, and Relationship of the Parties.” We add, however, that this “restatement” of IRS policy allows consideration of the prior “20 Factors,” or any others. While worker classification is likely to resolve similarly under DOL and IRS rules, the employer of course must consider both, lest it fall short in one regulatory arena or the other.

We all know that employee misclassification can result in severe financial consequences. Businesses and employers should remain diligent in analyzing their workers’ classifications and consult an experienced attorney with any questions. The attorneys at Fraser Trebilcock Davis & Dunlap, PC will continue to monitor these developments and stand ready to guide clients in their compliance with any new regulation.

Robert D. Burgee is an attorney at Fraser Trebilcock with over a decade of experience counseling clients with a focus on corporate structures and compliance, licensing, contracts, regulatory compliance, mergers and acquisitions, and a host of other matters related to the operation of small and medium-sized businesses and non-profits. You can reach him at 517.377.0848 or at bburgee@fraserlawfirm.com.

Five Stories that Matter in Michigan This Week – July 29, 2022

New Laws Phase Out COVID-19 Employer Liability Protections for Employers

Governor Whitmer recently signed three bills into law that initially roll back COVID-19 protections for both employers and employees and then repeal the laws outright on July 1, 2023. For example, one of the laws being repealed granted employers immunity from liability lawsuits if an employee was exposed to COVID-19 at work, provided the employer followed state and federal regulations.

Why it Matters: While these bills signal a continuing shift away from laws and regulations enacted during the onset of the pandemic, employers must keep in mind that they still have obligations to maintain safe working conditions pursuant to OSHA, MIOSHA and other federal, state and local laws and regulations.

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Michigan Minimum Wage Increase May be on the Ballot in 2024

Organizers behind the Raise the Wage MI ballot initiative reportedly secured more than 610,000 signatures and delivered them to Michigan officials in an effort to qualify the proposal for the 2024 ballot. The proposal would raise Michigan’s hourly minimum wage to $15 over the course of five years.

Why it Matters: Last week the Michigan Court of Claims ruled that the state legislature’s adoption and alteration of a 2018 ballot measure that would have raised the minimum wage to $12 by 2022 was unconstitutional. That ruling has been appealed, but even if it gets overturned, Michigan may still see a minimum wage increase if the Raise the Wage MI initiative is passed.

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New Proposed Rule on Independent Contractor Classification Sent to White House

Earlier this month, a new proposed rule from the U.S. Department of Labor regarding the classification of workers as independent contractors was sent to the White House for review. The rule is expected to make it harder for employers to classify workers as independent contractors.

Why it Matters: Under the Fair Labor Standards Act, “employees” are entitled to minimum wage, overtime pay and other benefits. Independent contractors are not entitled to such benefits, nor must employers withhold taxes or pay the employer portion of social security taxes for independent contractors. Penalties for misclassifying workers as independent contractors can result in fines for employers.

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New Michigan Budget Passed for Upcoming Fiscal Year

Governor Whitmer recently signed a $73 billion budget for the upcoming fiscal year beginning October 1, 2022. The budget was passed in the legislature with bipartisan support.

Why it Matters: The budget funds a range of investments meant to support the Michigan economy, including: (i) $55 million to help employers train and upskill their new and existing workforce, (ii) $25 million for the Pure Michigan tourism campaign, (iii) an increase in per-pupil funding to $9,150 per student, and (iv) $55 million for Michigan Reconnect, a program that provides tuition-free paths to higher education or skills training.

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New Law Intended to Crack Down on Organized Retail Crime in Michigan

Public Act 174 of 2022 defines the theft of a product with intent to resell in exchange for profit as a racketeering offense in Michigan.

Why it Matters: This bipartisan legislation is intended to combat the increase in retail crime that has affected many retailers in many large cities across the country.

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