We’ve got good news and bad news.
Earlier this month, the Department of Labor announced its final rule aimed at reclassifying more contractors as company employees. The rule sets out a stricter formula for determining whether a worker can be considered a contractor, and will likely boost the number of employees some companies have on their books.
This was good news for workers’ rights advocates who say the rule will help ensure more workers are appropriately classified as company employees, guaranteeing them some basic protections.
It was bad news for business groups that claim the rule limits worker autonomy. The rule “will decrease flexibility and opportunity” for those wishing to work as independent contractors, Marc Freedman, Chamber of Commerce VP of workplace policy, said in a statement.
And for some CFOs, it could be expensive news.
The rule will hit some companies in their pocketbooks. The new rule is “widely expected to increase labor costs,” especially in 1099-heavy sectors like trucking and healthcare, or tech-enabled gig work such as food delivery and ridesharing, according to a recent Reuters report. Trucking firms, for instance, may have to raise prices or cut services to cover the added costs of maintaining vehicles that were once the responsibility of contracted drivers, according to another Reuters story.
There could also be legal liabilities for companies to watch out for. Once the rule takes effect on March 11, “the risk of misclassification will skyrocket,” labor and employment law firm Fisher Phillips wrote on its website. “The ramifications can be staggering: class-action lawsuits, large settlement demands, backpay, liquidated damages, interest, penalties, and attorneys’ fees can all quickly add up.”
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But just how much will costs increase? That depends, according to an expert at the American Staffing Association (ASA), a group that represents staffing and recruiting agencies.
“It’ll be a function of how strictly the new rules are enforced,” Ed Lenz, ASA senior counsel, told CFO Brew. “If the regulators go out and audit, and they reclassify a lot of so-called independent contractors into employees, it’s going to increase labor costs, because then those entities will have to do all of the things that employers are supposed to do. And that costs money.”
Those employer responsibilities include paying workers at or above the federal minimum wage and providing extra compensation for working overtime, expenses that companies don’t have to pay contractors, DOL officials noted in a news release.
Lenz said the new worker classification rule won’t impact most traditional staffing firms because most temporary workers are already classified as W-2 employees. Rather, the rule intends to target businesses that inappropriately use independent contractors to perform work that should be done by W-2 employees, he said.
Other impacted fields include construction, hotel operators, and lower-skilled healthcare workers such as certified nursing assistants.
“There’s really no moral judgment to be made here, except if you’re flouting the rules, because there’s nothing inherently bad – and the Department of Labor has said this—there’s nothing bad about independent contractors, but you simply have to be able to show that you’re in business for yourself,” Lenz said.