Updated: Oct 24, 2022
In South Africa, we have become accustomed to using the ‘dependability rule’ as a primary means for ensuring that independent contractors are correctly distinguished from employees and therefore ensuring correct classification. The USA is now set to introduce a similar benchmark, called the “totality-of-circumstances” rule which has in effect the same outcome: is the worker in business for themselves, or is the worker economically dependent on the employer for work? On October 11, 2022, The U.S. Department of Labour (“DOL”) proposed this new rule which, if passed, would redefine which workers are considered “employees,” and which workers qualify as “independent contractors” under the Fair Labour Standards Act (FLSA).
The reasons provided for the change in legislation and making it more difficult for workers to be classified as ‘independent contractors’ include the following: misclassification deprives workers to rights as employees under the federal labour laws; it denies them the right to be paid their full, legally earned wages; and the new law would make it easier to extend such rights to people as it aligns more closely to historical case law. What they are not saying is that it also ensures that more workers are brought in under the employment tax regime, making it easier to assess and withhold the necessary taxes, similar to the effect that SARS Interpretation Note 17 has in South Africa. The cynics amongst us would suggest that it has less to do with affording protection to workers, and more to do with the ease and ambit of tax collection.
The basic assumption made in promulgating such guidelines, is that persons operating as independent contractors necessarily want to be classified as employees and enjoy protection under the labour laws of the countries in which they work. The other assumption relates to the perennial problem of having the means to correctly and fairly implement and preside over such legislation. As we have learnt dearly in South Africa, the laws are only effective when we have the adequate means to enforce such laws. We have already seen in dozens of cases, that petty bureaucrats at SARS, the Department of Labour, and the Commission for Conciliation, Mediation and Arbitration, will independently preside over the same case and come to totally different conclusions as to whether a worker is indeed an employee, and not an independent contractor.
In the final analysis, the USA’s attempt to more tightly regulate classification of workers, ostensibly following on the huge Uber cases in which Uber drivers brought a class action suit against their employer to have their status changed to ‘employees’ is unlikely to resolve the matter. Drawing on our experience in South Africa with similar laws and guidelines, it merely adds another level of complexity to the matter and results in drawn-out hearings and expensive litigation. Without the necessary resources, and given the expensive nature of legal matters, it will inevitably do more harm to the workers than good.
All of this is set to play itself out in the wake of a new dawn of ‘ways of working’ that sees many disenchanted professionals and highly skilled workers looking to free themselves from the shackles of corporate life and to ply their trades as independent contractors and freelance operators. Instead of embracing the new mobility and independence of these classes of workers, the state appears to be desperate to standardise and regulate work in the most irrational manner. One can only conclude, yet again, that it has less to do with affording rights to workers and more to do with its own selfish interests, to fill the state coffers so that he jobs of these petty bureaucrats are secured?
The move by the USA to introduce tighter regulations around the classification of workers is important for the fast-growing freelance, independent contractor, Gig economy. This is because, whether we like it or not, the USA tends to set the trend for the rest of the world and many other countries will no doubt follow in its wake. This begs the question: why would it want to introduce failed regulations in the face of ample proof that the proposed model does not work? Furthermore, why would we not embrace the new momentum toward greater freedom of choice in how people offer their services to the corporate world? Instead of looking to benefit from the new mobility of skills, and provide enabling legislation, our governing entities seek instead to regulate against it?
Without denying the rights of the lesser skilled workers amongst us, it is inevitable that such regulations will only serve to infringe on the rights of professionals and other skilled people to trade freely. Let’s take the case of a highly skilled chemical engineer who wishes to offer his/her services to a large international petrochemical firm as an independent project resource. Typically, these types of projects will take at least five years to complete. The nature of the assignment is such that the engineer would be deployed on an oil-rig for extended periods, unable to offer his skills to any other parties. Both parties are keen to engage in an independent, fixed term contract for the period. Applying the proposed new legislation, would on the face of it, preclude the parties from entering such and agreement. The reasons are as follows, namely:
1. The acid-test would be hard to pass, viz. “whether a worker is in business for themself or is instead economically dependent on the employer for work.” Clearly, such a person would be highly dependent on the company for an extended period of time, at least five years.
2. It would also be very difficult for the employer to prove that the adjoining considerations have been met to enable classification as an independent contractor, given that the test delivers mixed bag of results, viz.
a. It can be argued that given the seniority of this professional, he/she would be able to exercise adequate control over resources to influence a profit or loss outcome through his own actions – the profit or loss would clearly be for the firm’s pocket as no capital investment would have been made by the professional.
b. It is arguable whether a five-year fixed term contract with the possibility to extend (as is the nature of projects) is to be regarded as a fixed-term contract or as a pseudo-permanent arrangement?
c. In this case, it is unlikely that the worker would have their own business, and even if they were billing the company via such a route, most of the income would be attributable to the one client, raising complex taxation issues.
d. The worker may be an independent contractor if their work is not an “integral part” of the employer’s business. In this case, it would be argued that a chemical engineer performing duties at a petrochemical company constitutes an integral part of the latter’s business?
e. A worker may be an independent contractor if the work requires “specialized training or skill that the potential employer does not provide. Clearly, much of the preceding training for such a professional would have been completed prior to taking up the appointment. It is not clear how the regulators would view the inevitable training that would need to be done on the job to ensure that the worker masters the highly complex procedures and outcomes that would ensue as part of the project?
While it remains to be tested once the new legislation comes into effect, pundits are forgiven for predicting that many independent contractors will be reclassified as employees following the implementation of the proposed laws. The example above, would at the very least, prove to be an interesting case study. Not, however, without much wasted time, deliberation, cost, and angst for the participating parties. This does not bode well for the many professionals who are currently plying their trades as independent contractors, and/or who are seeking to do so in increased numbers.
Sadly, should the USA go ahead with this legislation in its current format, it will infringe on the basic rights of professionals across the globe to operate as free agents, outside of the corporate network?