New Employment Regulations Might Complicate Things for Small Business Owners

New Employment Regulations Might Complicate Things for Small Business Owners

The Department of Labor (DOL) is looking to change the way independent contractors are classified under the Fair Labor Standards Act (FLSA) “to be more consistent with judicial precedent and the Act’s text and purpose,” according to the Federal Register. Updates to the rule, proposed by the Biden administration in October 2022, has a goal to ultimately reduce the number of workers currently misclassified as independent contractors—thus considering them employees, and granting them the vast labor protections that employees see through their employers. This misclassification is predominantly seen for those working in the gig economy, for companies such as Uber and Lyft.

Under President Trump, the Department of Labor began weighing the 6 factors that determine how an independent contractor is defined a bit differently—focusing more on worker’s control over their work and their opportunity to make profits. The new rule proposed by President Biden would revert back to the previous weighing model in which all factors are considered equally.

Today, an independent contractor is defined by Investopedia as “a self-employed person or entity contracted to perform work for—or provide services to—another entity as a non-employee.” Independent contractors are required to pay their own social security and Medicare taxes, meaning these items are not deducted directly from their paychecks. Because they are self-employed, independent contractors also generally are not given the benefits regular employees of a company would receive, including health insurance or retirement accounts. Per the International Revenue Service (IRS) if an individual can “perform services that can be controlled by an employer,” meaning what’s done and how it’s done, they are not considered an independent contractor. According to Forbes, “Without labor laws to protect them, independent contractors are more vulnerable to exploitation and harassment.” The article goes on to note “twice as many freelancers, contractors and side-hustlers rely on government assistance programs than employees.”

Since the beginning of the pandemic in 2020, the number of small business applications being filed across the country has increased significantly. In 2021, there was a 53 percent increase in applications from 2019. A lot of these news businesses are staffed by independent contractors. Recent numbers from freelancing site Fiverr note that when it comes to how businesses plan on approaching hiring in the near term, “A majority (78%) say they are more likely to engage with freelance talent to fill in gaps in their workforce during times of economic uncertainty.” We also learned from UpWork’s 2021 Freelance Forward survey that “84 percent of freelancers are living their preferred lifestyle, as opposed to 54 percent of traditional employees.” So, the numbers seem to suggest that yes—independent contractors are acting in this employment capacity because they want to.

There is a lot of pushback to this proposed update—mostly from the companies whose business models are based heavily on hiring independent contractors. Reclassifying an Uber driver as an employee would, for example, pose a financial and legislative burden on the company itself. Public comments were accepted on the proposal until November 2022, and an official ruling is expected sometime this year. There’s no guarantee that this ruling will pass; but if it is, there are likely to be a lot of legal challenges.

Stay up-to-date on the latest small business rules, regulations, tips and trends at the Financial Pantry from ARF Financial.  We understand there is a sea of red tape and ever-shifting legislation surrounding small businesses in the United States, and we aim to make that information as easy as possible to access. Browse our articles by industry or category, get the news you need, and go back to running your business. Leave the research to the experts at ARF!