Employee or contractor?

In October, the Department of Labor issued a Notice of Proposed Rulemaking titled Employee or Independent Contractor Classification Under the Fair Labor Standards Act. This proposed rulemaking would substantially modify the rules for determining whether an individual is classified as an employee or independent contractor under federal law, which is of great interest to roofing professionals.

Under the FLSA, employers are required to provide certain benefits such as wages and overtime compensation to employees. However, employers are not bound by FLSA rules for individuals with whom they contract for services as independent contractors. To determine whether an individual is an employee or an independent contractor, the employer must analyze the relationship with the individual based on regulations issued by the DOL.

Proposed criteria

The regulations governing independent contractor status were most recently modified in January 2021 and are focused on two primary criteria for determining independent contractor status: the level of control an employer has over the work being performed and the opportunity for profit or loss by the individual who is classified as an independent contractor. DOL’s proposed rulemaking would rescind the current standard and replace it with a new, more complex process for determining independent contractor status.

The “totality of circumstances” analysis under the proposed rulemaking contains six equally weighted factors used to determine independent contractor status: the opportunity for profit or loss depending on managerial skill; the level of investments by the worker and the employer; the degree of permanence of the work relationship; the nature and degree of employer control; the extent to which the work performed is an integral part of the employer’s business; and the worker’s use of skill and initiative.

In addition, the new rule would provide for “other factors” unique to a given situation that could be relevant to the final determination of independent contractor status on a case-by-case basis. DOL officials indicate the more complex definition is designed to combat deliberate misclassification of employees as independent contractors.

The independent contractor or subcontractor model of employment has been widely used within the roofing industry for decades. Independent contractors serve a vital function in roofing and other segments of the construction industry by providing specialized skills in a flexible manner. This enables employers that use independent contractors to provide high-quality products and services to consumers at competitive prices. Employers also can more efficiently meet short-term needs and constantly fluctuating changes in the marketplace. In addition, the independent contractor model benefits entrepreneurial workers who desire more flexibility and autonomy in their work.

NRCA’s concerns

For the independent contractor model to continue working effectively for the roofing industry, it is critical federal regulations under the FLSA are clear and unambiguous. NRCA recognizes it is important to prevent the deliberate or inadvertent misclassification of workers, and to do so effectively requires well-defined criteria employers and workers can comprehend without having to employ an army of attorneys.

NRCA is concerned DOL’s expanded criteria for determining independent contractor status will inject greater uncertainty and confusion into the determination process. The regulation provides little guidance regarding how businesses and workers should apply the new criteria with respect to the various types of independent contractor relationships that currently exist. Specifically, the provision that provides for unspecified “other factors” that may be unique to a given situation is of great concern because of its lack of definition.

NRCA is further concerned DOL’s cost estimates to implement the new standard significantly underestimate the costs employers are likely to incur. The anticipated cost analysis assumptions appear unrealistic because the new rule adds more complex and confusing criteria for making independent contractor determinations. This will result in higher costs for businesses attempting to discern how the new criteria will be applied to complex business relationships.

The substantial changes in the criteria to determine independent contractor status likely will make it more difficult and costly to correctly classify workers and consultants who are legitimate independent contractors. The resulting disruption and higher costs would have adverse effects on the roofing industry and its customers.

To address these serious concerns, NRCA filed comments based on member feedback. NRCA’s comments urge DOL to withdraw or dramatically modify the rulemaking to address the roofing industry’s concerns before finalizing the regulation. NRCA will continue to be actively engaged in the ongoing process to minimize regulatory and financial burdens on members.

DUANE L. MUSSER is NRCA’s vice president of government relations in Washington, D.C.

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