Worker Classification: Administrator Looman Explains Key Changes by USDOL

Gene Marks [00:00:02 - 00:00:35]

Like many of you, THRIVE will be taking a short break this summer, but we'll be returning in September with season five. From policy to people to profits, we'll continue to cover every aspect of business success from the insiders who live and breathe it every day. The goal? Well, it's to provide you with the knowledge you need to transform complex business and HR topics into clear, actionable advice. While we're away, be sure to check out some of our previous episodes and be sure to come back for all new ones this September. And if you still need your weekly dose of THRIVE, not to worry, as I'll be here every Thursday with your Week in Review.

Administrator Jessica Looman [00:00:37 - 00:01:28]

We understand the realities of needing to run a business and that we want to make sure that people have the resources and information that they need so that they can actually be employers and run the business that they want to run, and recognize that there are different standards, different ways that this applies and is analyzed. We are able to adopt regulations specifically related to the Fair Labor Standards Act, and that's the federal Fair Labor Standards Act. And so this rule, while we hope that it is a helpful tool for businesses and employers, this doesn't have any effect on other federal, state, or local standards related to employee classification or employee misclassification. Just so to be really clear, the Fair Labor Standards Act, it doesn't in fact, preempt any of the other laws that protect workers.

Announcer [00:01:31 - 00:01:43]

Welcome to Paychex THRIVE, a business podcast where you'll hear timely insights to help you navigate marketplace dynamics and propel your business forward. Here's your host, Gene Marks.

Gene Marks [00:01:47 - 00:02:24]

Hey, everybody, it's Gene Marks. And welcome back to another episode of the Paychex THRIVE podcast. Thank you so much for joining us. And listen, we have a very, very special guest here, Jessica Looman. She is the Administrator of the Wage and Hour Division at the U.S. Department of Labor. This is the woman who knows all about worker classifications, independent contractors, all the questions that you have about that. I'm going to try and give her some good questions so that she can give us the information that we know so that we are properly classifying our workers, being them independent or employees. So, first of all, Jessica, thank you so much for joining me today.

Administrator Jessica Looman [00:02:24 - 00:02:31]

Thank you so much, Gene, for having me. This is really fun. I'm glad we were able to get on together and have this conversation. It's going to be great.

Gene Marks [00:02:31 - 00:02:36]

Yeah, I completely agree. And we're talking to you from Washington. Is that where you're located right now?

Administrator Jessica Looman [00:02:36 - 00:02:37]

I am in Washington, D.C. today, yes.

Gene Marks [00:02:38 - 00:02:50]

That's great. Before we jump into the worker classification thing, just if you wouldn't mind, just a quick background of yourself and also just a little bit of an explanation as to what your job is at the Department of Labor.

Administrator Jessica Looman [00:02:51 - 00:04:08]

Yes, thanks so much again, my name is Jessica Looman. I am honored and privileged to get to serve as the Administrator of the Wage and Hour Division of the U.S. Department of Labor. I've been here since January of 2021 and obviously really focused on making sure that we're delivering on the priorities of the Biden/Harris administration under the leadership of Acting Secretary Su, where we're really focused on, across the department, on making sure that we're creating and sustaining good jobs, protecting workers. And in the wage and hour division, you know, enforcing fundamental, foundational labor standards protections, including at the Wage and Hour Division, we enforce minimum wage.

The federal minimum wage, as you know, is still $7.25 an hour, and that's a law that we enforce. We enforce overtime. We enforce the Family Medical Leave Act. We enforce the worker protections under Davis-Bacon Act and the Service Contract Act. We also are responsible for enforcing federal child labor costs. So, there are so many, really ways that we touch everyday people, workers all across this country. The laws that we enforce actually protect about 165 million workers at 11 million workplaces across this country. So, it's a huge honor, and I'm really excited to be here with you today.

Gene Marks [00:04:08 - 00:04:43]

I would be honored, as well, and I think your job is absolutely fascinating. And you're right, I mean, the rules, the regulations that you guys pass, the things that you promote, they affect so many people. It's really making a difference. So, this, with all the different types of rules that you mentioned, overtime rules and minimum wage and all of that, you and I could talk for hours. We only have about 20 to 25 minutes to talk. So, we're going to focus on worker classifications. And there was a new or a finalized rule that was issued earlier this year from the Department of Labor. Tell us about that rule. What changed from the past?

Administrator Jessica Looman [00:04:43 - 00:06:34]

I think some context is really important. As I talked about, we enforce a law that's called the Fair Labor Standards Act, and under the Fair Labor Standards Act, the way that the law is written is that employees receive the protections of minimum wage and overtime - those fundamental, foundational, core protections across our economy. Unfortunately, however, workers who are misclassified as independent contractors, lose those protections. And so, it's really critically important that workers are not misclassified. And that's the reason why we adopted this final regulation that did go into effect in March of 2024, which really is about helping to make sure that workers are not misclassified as independent contractors.

We know in this administration and we know across this economy that independent contractors do play a fundamental, foundational role in our economy. And we know that workers who create their own businesses and are in business for themselves are independent contractors for purposes of the Fair Labor Standards Act and the laws that we enforce. But what we're really focused on is making sure that workers are not misclassified when they are, in fact, employees and are entitled to minimum wage and overtime and other worker protections.

So, that's why we developed this new rule, which really provides a framework for analysis of when is a worker independent contractor under the Fair Labor Standards Act, or when is a worker an employee under the Fair Labor Standards Act. And as you said, Gene, this rule really provides that tool to help both workers and employers understand how to conduct that analysis, what the factors are to take into consideration so that workers are not misclassified.

Gene Marks [00:06:34 - 00:07:08]

Fair enough, and, you know, there are a lot of different factors that come into play. And again, like I was explaining before we even started recording this, I mean, I have 10 employees in my company. We have about a dozen independent contractors. And I always fret whether or not I'm classifying them correctly. But it's not like a cut-and-dry decision, and there are a lot of different factors, like I just said, that come into play. What's changed from the past? I mean, people are making a big hubbub about this new finalized rule. So, what's so new and what's so different about it?

Administrator Jessica Looman [00:07:08 - 00:08:44]

Yeah. So, again, the way that this analysis has been conducted by courts, under judicial precedent, and also by the department over time, is that it's what's called the Economic Realities test. And the question that we ask is, as a matter of economic reality, is the worker dependent on the employer for the work, or is the worker really in business for themselves? At the end of the day, that is the ultimate question. And the way that we have provided this framework for analysis of that question is through a, what's called a multifactor-economic realities analysis. And there are six factors in the new rule that we help walk through.

We provide examples in the rule, as well as in a lot of the supporting materials that we have and resources that we have. We walk through what each of the factors are and how that might factor might indicate that an employee, excuse me, that a worker is an employee or that a worker is an independent contractor. I think what's particularly important and answers of your question is that under the Economic Realities test and the final rule, no one factor is more important than any other factor or set of factors. And I think that that's really important is that we have to walk through all the factors to make that determination about whether it indicates an employee or an independent contractor for purposes that Fair Labor Standards Act. So, I'm happy to talk a little bit about those factors if you want.

Gene Marks [00:08:44 - 00:09:33]

Yeah, I actually think I would because they are interested. One of the factors that I get asked about by clients as a CPA is you mentioned the word "integral", whether or not a contractor is integral to a business. So, I have some people that are interpreting that as saying, well, if that contractor is generating revenue for the business, people that are in the trucking industry, they have an independent contractor that's delivering goods and they're billing them out to their customers. So, they're pretty integral to the business, and I'm assuming that would be a pretty big factor. But like you just said, it's just one of the six, so you have to weigh them all together. So if you wouldn't mind, I would love you to just, if you can dig in a little bit more into those six factors and just give us your thoughts on them.

Administrator Jessica Looman [00:09:33 - 00:10:32]

Absolutely. So, all right, we'll just lay it out there because I think that folks on here would be happy to of get more information as a high-level overview. So, again, they're not in any specific order, but I'll just start with one factor is the opportunity for profit or loss depending on managerial skills. Okay, so what that means is that you consider whether the worker has opportunities for profit or loss based on their own skill, initiative, business acumen, judgment that actually affect that individual worker's economic success or failure or failure to perform the work. And again, this is an indicator that when they have the ability to have opportunity for profit or loss, depending on managerial skill, that they are in business for themselves. So, again, I think that that's one of the ways to sort of think about this particular factor.

Gene Marks [00:10:32 - 00:11:12]

And if I can just, if you just to sort of embellish on that. And by the way, these are all, this is high level. All of this depends on the specific business and their specific situation. Neither of us are giving advice or specific guidance here. This is high level. But just on that one thing, when I have a contractor, they're billing me for their services based on their ability to make a profit in their business. They might come back to me and say, I'm not making enough money. I have to change my rates to you. An employee can't do that, but an independent business person could. So, therefore, that determining a profit or loss, I see how that would be one of the factors. Does that make sense?

Administrator Jessica Looman [00:11:12 - 00:12:12]

Yeah, that's a great example. I mean, the way we kind of describe it is, and I want to echo what you said, which is these are high level. All of this information is just in order for people to be able to understand what the rule does. But we are not providing any specific information, guidance, or direction for any specific relationship or employer. But to your point, one of the things that we sort of look at is can the worker sort of determine meaningfully negotiate how much they're going to charge for a service, whether they decline jobs or choose jobs based on their decision about how it advances their business, whether the worker engages in marketing or advertising or other, spends money in order to make money as part of their opportunity for profit or loss. So, those are just some examples that might factor in that might be taken into account when you're analyzing this particular factor.

Gene Marks [00:12:12 - 00:12:46]

That's fine. By the way, we're not going to have time to go through all six. So let me jump to the integral question that I asked about, and just to get your thoughts, again, high level, you know. I use the example of the truckers, my business, I have a few developers that are contract and I pay them $50 an hour and then I bill them out to my clients at $100 an hour. You know what I mean? So that's, I'm generating revenue off of them. They're integral to the revenue that I'm getting from a customer. And I think that has to be evaluated, right? You know, as part of one of the criteria.

Administrator Jessica Looman [00:12:46 - 00:14:07]

Yes. So, just to back up a little bit, so the factor that you're specifically referring to is the extent to which the work performed is an integral part of the employer's business, right? So, that's the factor as we look at it as part of this multifactor economic realities analysis. So, this factor considers whether the work performed is not dependent, whether the work performed is integral to the employer's business. So, what is the employer in the business of doing, right? It doesn't depend on when an individual worker employer is particularly integral part of that business, but rather the function that they perform, right? So, it's about, you know, and the very easy example is that, you know, if the business is in, the employer is in the business of accounting, then an accountant is integral to that business.

If the employer is in the business of making shoes, then people who help make shoes are integral to that business, but an accountant may or may not be integral to that business because they are performing a service that is not necessarily critical, necessary, or central to the employer's principal business. So, that's kind of how we think about that integral factor.

Gene Marks [00:14:08 - 00:14:18]

All right, that is super helpful. While we have time, pick another one of the factors that you might have gotten questions on the most or that you would like to talk about, just to explain further.

Administrator Jessica Looman [00:14:19 - 00:15:18]

I think that the, you know, the other ... I'll just tell you what the other factors are, and then you can look these up as you have more research. So, we talked about the opportunity for profit or loss depending on managerial skill and we talked about the extent to which the work performed is integral part of the potential employer's business. But the other factors include investment by the worker and the potential employer, degree of permanence of the work relationship and the nature, degree and control, as well as the workers ability to exercise skill and initiative. So, those are sort of the six overarching factors, and it's possible that there are other factors that could be taken into account when doing this Economic Realities test. But those are the six factors that we feel like definitely need to be analyzed when we're making this determination about whether an individual worker is, in fact, an employee for purposes of the Fair Labor Standards Act, or a business by themselves, and an independent contractor for purposes of Fair Labor Standards Act.

Gene Marks [00:15:19 - 00:15:49]

Perfect. All right, Jessica, that is great stuff. To add to the confusion about all of this, of course, is that some states have different rules. The IRS has different rules, as well. I'd love to hear your thoughts on that. How do, as a business owner, how do I reconcile what the state says that's an independent contractor versus what Department of Labor is saying versus what the IRS rules are? What advice would you have for us? What takes precedent over another?

Administrator Jessica Looman [00:15:49 - 00:17:30]

It's a great question, and we understand the realities of needing to run a business and that we want to make sure that people have the resources and information that they need so that they can actually be employers and run the business that they want to run. And recognize that, that there are different standards, different ways that this applies and is analyzed. We are able to adopt regulations specifically related to the Fair Labor Standards Act, and that's the federal Fair Labor Standards Act. And so this rule, while we hope that it is a helpful tool for businesses and employers, this doesn't have any effect on other federal, state, or local standards related to employee classification or employee misclassification.

Just so to be really clear, the Fair Labor Standards Act, it doesn't in fact, preempt any of the other laws that protect workers, and so the advice for businesses is that you need to comply with all of the regulations and requirements for your business. And so that means that whichever standard is more protective of the worker, then that's the one that you need to make sure that you're in compliance with so that you can also be in compliance with the rest of the obligations that you have. To be really, really clear, the other thing, this is not, our final regulation is not an ABC test, for example, which we know has been adopted in some states around doing the determination or the analysis of whether a worker is an independent contractor or an employee. The Wage and Hour Division, the U.S. Department of Labor regulation is not an ABC test. It is instead this multi-factor Economic Realities test that we've been talking about today.

Gene Marks [00:17:32 - 00:17:49]

It is confusing, but it's important, isn't it? I mean, these regulations themselves are designed to protect workers. And the more that workers are protected and happier and treated well and fairly, the better workers that they will be for employers. Do you agree? And do you have any comments on that?

Administrator Jessica Looman [00:17:49 - 00:18:44]

Well, I mean, I think I, you know, as a regulatory and enforcement agency, I think our responsibility and obligation is to administer and enforce the Fair Labor Standards Act and to ensure that employees who should be covered under the Fair Labor Standards Act are properly classified and do get the minimum wage overtime protections that they're entitled to under the law. And so that's how we think about this work. And, you know, I certainly defer to you and all the folks on the, on the poll today and the podcast today, who, you know, in terms of how you want to run your business is certainly something that we encourage you to think about; creating and sustaining good jobs, being in compliance with labor standards laws because we agree that that is actually how we create an economy that works for everyone. But this particular rule is really grounded in the law that we enforce, which is the Fair Labor Standards Act.

Gene Marks [00:18:44 - 00:19:31]

Fair enough. Since COVID, there have been tens of millions of business startups under the Biden administration. There's been close to 15 million applications to start new businesses. You and I are living through this period of time now. We've never seen such an explosion in entrepreneurism in this country as we're seeing right now. Very few of them are going to turn into the next, I don't know, Airbnb or Uber, Microsoft or whatever, but there's a lot of people that are doing side gigs and freelancers and there are a lot of independent contractors because it's easier now more than ever to start up a business. What impact do you think these worker classification rules have on all of these new independents and freelancers? What should they be thinking of?

Administrator Jessica Looman [00:19:31 - 00:21:00]

Yeah, I think it's a great question and it's really exciting. To your point, it's a really exciting time, and I'm really excited that 14.6 million folks have decided to start their own businesses and be in business for themselves. I think that that is a testament to this growth in our economy and the opportunities that are available. And again, this rule actually protects people who are in business for themselves and make sure that they can be classified appropriately and properly as independent businesses and independent contractors.

One of the things that we've done specifically because we want to lift this work up is that one of the pieces of guidance that I want to definitely include, encourage people to take a look at, or pieces a resource to encourage people to look at is we've actually done information for potential freelancers about how this particular rule might apply to the work that they're doing, and when they would be properly classified as an independent contractor under this rule. And so that's, we give some examples of people who may be doing certain types of tasks or functions and whether when they're doing those tasks or functions, if they are in fact an independent contractor in business for themselves. And we think it's really that this rule particularly helps make sure that genuine independent contractors actually are also reflected in this rule.

Gene Marks:

[00:21:00 - 00:21:54]

Got it. What do you say to the independent contractor freelancer, and Jessica, I've got a few of these people that they, even though they're sort of on the bubble as to whether they should be an employee of mine, when I ask them, they're like, I don't want to be an employee of yours, Gene, no offense.

Okay, so there are some independent contractors and freelancers that are truly independent. They don't want to be working for or be an employee, and yet the nature of their business or the relationship with their customer might be one where they really should be classified as an employee. What do you say to both parties? What advice would you have to that independent contract or freelancer that really should be classified as an employee but doesn't want to be and to the employer like me, who's saying like, hey, this person should be an employee, but the person refuses to be one, you know? Do you have any advice in that situation?

Administrator Jessica Looman [00:21:55 - 00:23:01]

I think that there's a couple of things that I want to share is that one, which is the protection of the law applies to workers based on whether they're an employee or an independent contractor. And the law is here to protect workers. That's what it does. And we're here to ensure that the law is properly applied and that employers are in compliance with the law. I think the advice that I would give is that in every, and I think you're already doing this, you kind of alluded to this, Gene, is that in any of those relationships where you are in either an employment relationship with someone, a business-to-business relationship, I think utilizing the tools and resources that we have here to make sure that that business relationship really is an independent contractor relationship is the obligation of both parties.

And making sure that you work through this analysis, that you are properly engaging in a business-to-business relationship with people who are in business for themselves, and that you are properly engaging in an employment relationship with workers who should be classified as employees.

Gene Marks [00:23:01 - 00:23:31]

Great. All right. I had two final questions, but actually, I can combine them into one and then let you go. This has been fantastic. Look at me, so I told you before, I've got about 10 employees. I've got about a dozen independent contractors. This is a new, finalized rule that just came out. Jessica, what advice would you have for a business owner like me that has a dozen independent contractors based on this new role? What advice would you have for me, and what resources would be available to help me make sure that I'm classifying them correctly?

Administrator Jessica Looman [00:23:32 - 00:25:40]

Well, first of all, I really appreciate the question, because it is never too late to make sure that you're in compliance with the Fair Labor Standards Act and with other labor protections and labor standards laws. So, thank you for even asking the question. I think the first thing that I would really encourage you to do is to look at the final rule, look at the resources that we have. We have a great small entity compliance guide that helps walk through scenarios in order to make sure that you really understand what the expectations are, what the requirements are under this regulation and under the Fair Labor Standards Act.

Then I would encourage you to do an individualized analysis and assessment of each different relationship that you have because I think that it's really critical that this is an individual application of an analysis. So, the individual relationships all need to be looked at separately, and you need to walk through the multi-factor analysis and make a determination based on that relationship. And again, want to reiterate that if you are in an employment relationship with a worker, that they should be classified as an employee. There's lots of protections under the Fair Labor Standards Act. You can still have flexibility. You can still have all kinds of opportunities to have employment relationships that meet a lot of your business needs. Just want to make sure that those workers are not paid less than $7.25 an hour and are paid overtime when they work more than 40 hours in a work week, week.

And so, if you're in an employment relationship, please reclassify those workers to actually be employees. But again, I want to just reiterate that there's lots of opportunities to do that and still be within the FLSA requirements. And then if you are, in fact, in a business relationship, make sure that you recognize that, that you have all of the, that you meet all of the factors as well as have all of the formalities in order to demonstrate that they are, in fact, in business for themselves and you have a business-to-business relationship with them.

Gene Marks [00:25:41 - 00:26:07]

Great advice. You know, we give each of our independent contractors an independent contractor agreement to sign, which I don't think I've updated since like 1968. So, I'm assuming that one, I should probably be revisiting that agreement. But also, do you think that that is also a good idea for a business owner, you know, if, if they determine that this person is a, you know, you know, arm's length independent contractor to document that in some form of an agreement?

Administrator Jessica Looman [00:26:07 - 00:29:23]

So, I think that it's really important that calling somebody an independent contractor, issuing them a specific type of 1099 or other document or even, or even an independent contractor contract itself. Those things in and of themselves do not create the independent contractor relationship. It is really in practice how you are engaging in that relationship. That's what's going to matter in terms of making sure that you're in compliance with the Fair Labor Standards Act.

That said, there's lots of best practices in terms of making sure that when you have and are actually acting in a relationship that is a business-to-business relationship, there's lots of good practices, including having documentation and an expectation of, of the contractual relationships, just like you would do with anybody else that you were, that you were hiring or purchasing services from. The other thing I want to say so that we don't like and just, this is so critical. If you have questions, please call us, right? If you have specific – we want to, we're here to help you. We're here to help make sure that you're in compliance.

We really think about the work and the Wage in Hour Division in three fundamental ways. One is we want to prevent wage and hour violations from occurring in the first place. So, that's why we're doing things like this today. And we want to do outreach and education. We have a ton of resources available, so we really want to prevent any concerns at all from happening.

And the second is we really feel strongly about providing comprehensive compliance assistance. We want to help early detection and correction of any potential wage and hour violations so that we could get those solved right away so that we don't have ongoing challenges or problems. So, think of us as a compliance partner. We have 54 district offices. We are here to help employers. We are here to help workers.

And then the third thing is we are, in fact, as enforcement agency. And unfortunately, we are continuing to see the ramifications in our enforcement work of misclassification of workers as independent contractors. And so, when workers are not given or are misclassified and they're not given their minimum wage and overtime protections, that results in not only those workers who didn't get the wages that they've earned, but it also is an enforcement action against that employer. So, if we can avoid that, then that's actually our goal.

I think, as I shared with you, we've recovered about $900 million in back wages and damages for workers in this country during a lot during this administration. About 86% of those violations are because of failure to pay overtime. And when workers are misclassified as independent contractors, whether they be construction workers or healthcare workers, or we're even seeing dishwashers in restaurants being misclassified as independent contractors. Really, at the end of the day, that means those workers, workers aren't getting the wages and overtime protections that they deserve and are entitled to under the law. So, I can't stress this enough, if we can prevent these violations from happening in the first place and we can help provide compliance assistance, then we know that employers are going to be able to do the business that they're in the business to do and that workers are going to get the protections that they need.

Gene Marks [00:29:24 - 00:29:57]

And I think just to embellish on what you're saying as well, because I think it's important for all of our listeners and viewers to know that if you are in violation of this and say you've been misclassifying somebody for a few years, I think what you're saying, Jessica, is that the person is entitled to back wages, if they're entitled to back benefits. Maybe you were making contributions to retirement plans, for example, or health insurance benefits or other things that employees were getting that they might be entitled to. And depending on the situation, whether it's civil or criminal, could be fines involved, as well. Am I, am I correct in saying that?

Administrator Jessica Looman [00:29:57 - 00:31:12]

All of those can be consequences to misclassifying workers. But I think what you want folks to know, what I want folks to know is that it is never too late to fix this going forward, is that, you know, if you take a look at this rule, if you take a look at the small entity compliance guide, if you take a look at the information for freelancers, if you take a look at these issues and you say, you know what? I think it's the right thing to do to make sure that these workers are classified as employees. It's never too late to start classifying workers as employees who should be classified as employees under this, under this regulation and under this analysis. And I just want to encourage people to not be afraid to make that, to make, to do the analysis and make those changes so that workers are properly classified going forward.

If in the event that we do an investigation and we find that workers should have been classified as employees, then there could be back wages, damages and other liabilities for failure to comply with the Fair Labor Standards Act. But again, it's never too late to make sure that you have done the analysis and are appropriately classifying all workers who are working with and for your business.

Gene Marks [00:31:14 - 00:31:37]

I've been speaking with Jessica Looman, who is the Administrator of the Wage and Hour Division at the U.S. Department of Labor, responsible for things like minimum wage, overtime wages, as well as we've been talking about worker classifications. Jessica, you guys are doing great work at the department. We really do appreciate the work that you're doing, and I know the workers of this country do, as well. So thank you for that and thank you for your time.

Administrator Jessica Looman [00:31:37 - 00:31:39]

Thank you so much, Gene. Really, really happy to be here with you today.

Gene Marks [00:31:40 - 00:32:14]

Do you have a topic or a guest that you would like to hear on THRIVE? Please let us know. Visit payx.me/thrivetopics and send us your ideas or matters of interest. Also, if your business is looking to simplify your HR, payroll, benefits, or insurance services, see how Paychex can help, visit the resource hub at paychex.com/worx. That's W-O-R-X. Paychex can help manage those complexities while you focus on all the ways you want your business to thrive. I'm your host, Gene Marks, and thanks for joining us. Till next time, take care.

Announcer [00:32:17 - 00:32:21]

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