In recent commentaries published by Travel Market Report, I have been critical of the complexity of the Department of Transportation’s proposed rules on ancillary fees (DOT’s Ancillary Fees Rulemaking – A Work of Staggering Complexity).
Now that I have read the Department of Labor’s Notice of Proposed Rulemaking on Employee or Independent Contractor Classification Under the Fair Labor Standards Act, 87 FR 62218, DOT’s NPRM seems quite tame. Comments are due to DOL on December 13, 2022.
A recent article in Travel Weekly stated that “industry experts agree that even if the new rule is implemented as written, it is unlikely that Labor would audit employers in an industry like travel, where the employer-IC relationship is preferred by both parties.” I am inclined to the same view regarding the Labor Department, primarily because it has bigger targets that it believes are egregiously mischaracterizing the status of workers.
I have never believed that the government was the primary threat to travel businesses associating with independent contractors. The greater threat comes from two other sources: (1) disgruntled workers who were satisfied enough as ICs, but upon ending of work relationships decide to claim they were employees all the while and thus entitled retroactively to the benefits of the FLSA, and (2) class-action attorneys looking to pressure businesses into settlements rather than face the crushing gauntlet of litigation over the classification issue. In such cases the law set out in these rules will have a large impact on the outcomes.
Misclassification can be very costly because it deprives workers of the benefits of the Fair Labor Standards Act, including paying non-exempt workers the Federal minimum wage along with overtime pay (at 1.5 times the regular rate). The consequences of misclassification include payment of back pay to make up for past compensation below the minimum wage and overtime pay due. This can be a sufficiently large amount to threaten the viability of a business that has been disregarding the rules for a long time.
So, what is going on at DOL that should interest travel advisors and the businesses with which they are associated? Is the 58-page, obtuse, redundant, and tedious NPRM on worker classification a threat?
First, some background. DOL has gone to extraordinary lengths to analyze and explain every nuance of the classification issues because its proposals represent a fundamental change from the rules that DOL changed during the Trump administration. Some judges have taken very conservative positions on the extent to which an agency must justify changes to rules. DOL thus has gone to extremes to explain why every change from the prior rule is, in its expert judgment, necessary to comport with the extensive case law on worker classification under the FLSA.
Here then is a distillation of the proposed regulation and some of its implications. Buckle up.
The central idea of the rules is that the FLSA favors “employee” status over “independent contractor” status. The core test for evaluating which category applies to specific situations is whether the worker(s), as a matter of “economic reality” is “economically dependent” on the employing business for work or “are in business for themselves.”
You may immediately sense a linguistic disconnect between those two concepts. For DOL, “economically dependent” is the opposite of “in business for oneself” as opposed to “not economically dependent.” That disconnect permeates the new rules. To understand them, we must set aside such niceties of our language and focus on the concepts as DOL uses them. We must also accept, with a measure of skepticism, the DOL assurance that “This proposed rulemaking is not intended to disrupt the businesses of independent contractors who are, as a matter of economic reality, in business for themselves.” Whatever the intent, the risk of disruption is present and, given the DOL approach, possibly unavoidable. The proposed rules are complex and subject to great variation in application because they contain so many subjective elements. Prudence certainly will require thorough evaluation of all IC relationships in the travel advisor space to avoid becoming targets of legal action.
DOL is fully aware that the regime it is proposing differs dramatically from the tests used by the Internal Revenue Service to determine the proper classification of workers. Having two regimes govern the same conduct is inefficient and confusing, but DOL believes it has no choice given the treatment of these issues by the Supreme Court and the circuit courts:
Because of its focus on control, the common law test is more permissive of independent contracting arrangements than the economic reality test….
The benefits of uniform standards must be foregone, DOL concludes, because using the common law would not simplify the analysis:
courts and enforcement agencies applying a common law test for independent contractors have considered a greater number and different variation of factors than the six or so factors commonly considered under the economic reality test.
Also, of considerable interest following the battle over the ABC test adopted in California, from which travel advisors were ultimately exempted, DOL says it is “legally constrained from adopting an ABC test. “The U.S. Supreme Court has held that the economic reality test is the applicable standard for determining workers’ classification under the FLSA.” If there is any good news in all this, that would appear to be it.
Turning back to the central idea of the rules, the courts and DOL have used a “totality-of-the-circumstances” analysis applying multiple factors to the economics of each situation to determine whether a worker is an employee or an independent contractor. No factor has more weight than the others although their weight will in fact change from case to case, based on the “totality of the circumstances.”
DOL also warns that “the factors are not exhaustive, and no single factor is dispositive,” the factors are merely “guideposts” and that “additional factors may be relevant when applying the test to a particular case. It is also expected that outcomes may vary somewhat among workers in the same profession, for example, because the test demands a fact-specific analysis and facts like job titles may not be probative of the economic realities of the relationship.” Everything depends on everything.
The six primary governing principles in the NPRM are:
- Opportunity for Profit or Loss Depending on Managerial Skill
- Investments by the Worker and the Employer
- Degree of Permanence of the Work Relationship
- Nature and Degree of Control
- Setting a Price or Rate for Goods or Services
- Ability To Work for Others
- Extent to Which the Work Performed is an Integral Part of the Employer’s Business
- Skill and Initiative
DOL added a seventh category: Additional Factors & Primacy of Actual Practice
I will try to summarize some of the main ideas behind DOL’s view of each category.
Opportunity for Profit or Loss Depending on Managerial Skill
This factor is about “whether the worker exercises managerial skill that affects the worker’s economic success or failure in performing the work.” Merely taking more jobs or working more hours is irrelevant.
Factors involved in this analysis include whether the worker:
(a) determines the charge or pay for the work provided (or at least can meaningfully negotiate it);
(b) accepts or declines jobs or chooses or can meaningfully negotiate the order and/or time in which the jobs are performed;
(c) engages in marketing, advertising, or other efforts to expand their business or secure more work;
(d) makes decisions to hire others, purchase materials and equipment, and/or rent space (as opposed to the amount and nature of the worker’s investment), and
(e) has a true opportunity for a loss.
Investments by the Worker and the Employer
To indicate independent contractor status, worker investments must be capital or entrepreneurial in nature. Such investments increase the worker’s ability to do different types of or more work, reducing costs, or extending market reach. Costs of tools to perform the job and the worker’s labor are not relevant. [How will this apply to travel advisor ICs who pay for computers and other technology services versus employed agents who are provided with those tools by their agency?]
Note that “the worker’s investments should be evaluated on a relative basis with the employer’s investments” and that “investments that establish status as an IC should ‘‘be large expenditures, such as risk capital, capital investments, and not negligible items or labor itself.” The worker’s investment “need not be on par with the employer’s investment” but “it should support an independent business.” The relevant company’s investment in the comparison is its total investment, including office rental space, advertising, software, phone systems, and insurance. [What are the implications of this for host agencies and their IC advisors?]
Degree of Permanence of the Work Relationship
This is a particularly problematic element of the DOL framework.
Some key factors include:
(1) “a worker’s lack of a permanent or indefinite relationship with an employer is not necessarily indicative of independent contractor status if it does not result from the worker’s own independent business initiative;”
(2) having more than one job or working irregularly on one’s own schedule is not dispositive; an “employee” may have more than one “employer;”
(3) providing services under a contract that is routinely or automatically renewed suggests permanence and an indefinite working arrangement associated with employee status; and
(4) an IC must be in business for himself and “market their independent services or labor to multiple entities.” [How will these principles apply to IC advisors who market their services to individuals?]
The ”permanence” issues are closely related to the question whether a worker is free to, and in fact does, work for “others.” When the legal or practical circumstances of the relationship effectively negate the possibility of working for others, the proposed rules will almost certainly dictate that the relationship is an “employee” and not an IC. DOL foresees situations in which working for multiple businesses simply makes the worker an employee of all of them.
DOL posits a distinction between “work relationships where a worker has multiple jobs in which they are dependent on each employer and do not exercise the control associated with being in business for oneself, and relationships where the worker has sought out multiple clients in furtherance of their business.” An example cited is the case where “one worker holds multiple lower-paying jobs for which they are dependent on each employer for work in order to earn a living, and a different worker services multiple clients due to their business acumen and entrepreneurial skills.” DOL states, “there are qualitative and legally significant differences in how these two scenarios should be evaluated under the economic reality test. Thus, the mere fact that an employer allows workers to work for others does not transform an employee into an independent contractor.” [If an IC’s relationship with agency X allows it to work for other agencies, but, exercising its independent business judgment, it chooses not to do so, will it lose its IC status under the rules?]
DOL unhelpfully adds:
the question [a] court must resolve is whether a [worker’s] freedom to work when she wants and for whomever she wants reflects economic independence, or whether those freedoms merely mask the economic reality of dependence.’’
Nature and Degree of Control
This factor is reminiscent of the “control” standard used by the IRS and gets extended discussion in the NPRM. Multiple aspects are addressed: (1) Scheduling, (2) Supervision,
(3) Setting a Price or Rate for Goods or Services, and (4) Ability To Work for Others [note that some criteria apply in multiple categories under the proposed rules]
In this case, as with the others, common sense understanding of terms may not apply. DOL states that “an employer’s compliance with legal obligations, safety or health standards, or requirements to meet contractual or quality control obligations, for example, may in some cases indicate that the employer is exerting control, suggesting that the worker is economically dependent on the employer.”
The focus is on “whether the employer still retains control over meaningful economic aspects of the work relationship such that the control indicates that the worker does not stand apart as their own business, not simply whether the employer lacks control over discrete working conditions (e.g., scheduling) or whether the employer failed to exercise physical control over the workplace.” Further, “certain instances of control should not be excluded as irrelevant to the economic reality analysis only because they are required by business needs, contractual requirements, quality control standards, or legal obligations.”
The reasons for the employer asserting control over the workers are irrelevant: “If the nature of a business requires a company to exert control over workers . . . then that company must hire employees, not independent contractors.”
It is not unusual for sophisticated IC contracts in the travel advisor field to include standards of performance and other requirements, but under DOL’s regime, “When an employer, rather than a worker, controls compliance with legal, safety, or other obligations, it may be evidence that the worker is not in fact in business for themself because they are not doing the entrepreneurial tasks that suggest that they are responsible for understanding and adhering to the legal and other requirements that apply to the work or services they are performing such that they are assuming the risk of noncompliance.”
Thus, requiring proof of insurance that is mandated by state law is not entirely indicative of employer control, but a requirement that an IC use a particular insurance carrier would be problematic. Mandating compliance with safety or related requirements may be acceptable if other factors in the economic reality analysis do not dictate otherwise.
The degree of scheduling flexibility bears on the issue of economic independence but does not alone establish it. Much depends on how the flexibility is used to further the “independent business.” If you sense some circularity in this reasoning, you are correct. As I said earlier, in a real sense, under the DOL regulation, everything depends on everything.
“Flexible work arrangements that allow workers to, among other things, work for others, are not exclusive to independent contractors and do not preclude a finding that an employer has sufficient control over a worker in other ways such that this factor weighs in favor of employee status.”
Lack of supervision is not alone indicative of independent contractor status. For instance, the nature of an employer’s business or the nature of the work may make direct supervision unnecessary. A lack of supervision in those circumstances, without further inquiry, does not compel a finding that the control factor weighs in favor of independent contractor status.
And “the right of the employer to supervise at its discretion is evidence of control, even if the employer rarely exerts supervision.”
On the positive side, DOL recognizes that ‘workers in business for themselves are generally able to set (or at least negotiate) their own prices for services rendered.” In the travel advisor world, this factor would relate to the setting of transaction, consulting, and similar service fees. On the other hand, “It is evidence of employee status when an entity other than the worker sets a price or rate for the goods or services offered by the worker, or where the worker simply accepts a predetermined price or rate without meaningfully being able to negotiate it.”
Extent to Which the Work Performed is an Integral Part of the Employer’s Business
You may recognize this as the place where the ABC test creeps back into the room. Under DOL’s framing of this factor, the question whether the worker’s work is an ‘‘integral part’’ of the employer’s business refers to whether the work is critical, necessary, or central to the employer’s business. It believes this approach ‘better reflects the economic reality case law and is more consistent with the totality-of-the circumstances approach to classification. Even then, DOL acknowledges that “it is not always true that workers whose work is integral are employees.” Again, everything seems to depend on everything.
One somewhat helpful example provided is whether the employer could function without the service performed by the workers. If not, then the service they provide is integral. “Such workers are more likely to be economically dependent on the employer because their work depends on the existence of the employer’s principal business, rather than their having an independent business that would exist with or without the employer.” [How does this principle apply to host agencies that provide most of the tools for ICs to use in marketing their services and booking travel?]
If an employer’s primary business is to make a product or provide a service, then the workers who are involved in making the product or providing the service are integral.
Here, though, much, perhaps everything, depends upon how the “primary business” is characterized. This is a complex issue that gets no real attention in the NPRM but is, I believe, one of the keys to surviving the obstacles created by the proposed regulations.
Unhelpfully, DOL states that “the focus of the integral factor is on the work performed, not the individual worker. This approach evaluates whether the worker performs work that is central to the employer’s business, not whether the worker possesses some unique qualities that render them indispensable as an individual.”
Worse, in terms of a compliance strategy, “It is to be expected that not every factor will ‘‘align’’ with the ultimate result in many cases.”
Skill and Initiative
This factor considers “whether a worker uses specialized skills to perform the work and whether those skills contribute to business-like initiative that is consistent with the worker being in business for themselves instead of being economically dependent on the employer.”
It is insufficient to merely have specialized skills. The worker must use those skills “in connection with business-like initiative that indicates that the worker is an independent contractor instead of an employee.”
That the work does not require prior experience, that the worker is dependent on training from the employer to perform the work, or that the work requires no training are indicators that the worker lacks specialized skills.
The principles of “business-like initiative” and use of those skills in “any independent way” are, unfortunately, not well developed in the NPRM. DOL emphasizes that we should not ‘‘overlook whether the worker is exercising business skills, judgment, or initiative,’’ a phrase that refers to the “amount of initiative, judgment, or foresight in open market competition with others required for the success of the claimed independent contractor.’’
When evaluating the skill factor, the focus should be whether the worker uses any specialized skills to exercise business-like initiative. When applying the opportunity for profit or loss factor, for example, the focus is whether the worker uses managerial skill—a type of initiative—to affect the worker’s opportunity for profit or loss. Thus, the focus of each factor is different….
specialized skills possessed by carpenters, construction workers, and electricians are not themselves indicative of independent contractor status; rather, it is whether these workers take initiative to operate as independent businesses, as opposed to being economically dependent, that suggests independent contractor status
Once again, there is a clear element of circular reasoning in that formulation. This issue will likely be involved in any litigation resulting from adoption of the new rules.
On the other hand, the DOL narrative states that, “To indicate possible independent contractor status, the worker’s skills should demonstrate that he or she exercises independent business judgment. Further, the fact that a worker is in open market competition with others would suggest independent contractor status.” That should help any travel advisor embroiled in enforcement or a lawsuit over these rules, but the application of these principles to the services provided by host agencies is troublesome.
The NPRM makes clear there are more than six factors governing economic dependency. Number 7 is tellingly entitled “Additional Factors” and DOL addresses it in some detail.
One element traditionally thought relevant in the travel advisor space is the worker’s ‘‘degree of independent business organization and operation.’’ DOL expressly dismisses that factor and adds,
it is important to inquire into whether the worker’s license or incorporation are reflective of the worker being in business for themselves as a matter of economic reality … For example, if an employer requires a worker to obtain a certain license or adopt a certain form of business in order to perform work for it, this may be evidence of the employer’s control, rather than a worker who is independently operating a business.
DOL says it must rely on economic “realities” rather than formal business/legal structures. [How will these concepts be applied to host agency requirements that affiliated ICs comply with all state and local laws?]
Having appropriate legal structures around an agency business is always a good idea and may be helpful, despite DOL’s dismissal, for both general legal reasons and as evidence of a separate economically independent business.
Related to this issue is DOL’s treatment of what it calls the “Primacy of Actual Practice.” DOL acknowledges that “contractual or other reserved rights should be considered like any other fact under each factor to the extent they indicate economic dependence.”
Every fact that is relevant to economic dependence should be considered in the analysis. Because the entirety of the economic reality must be considered, both the actual practices of the parties and the contractual possibilities must be considered. Within each factor of the test, there may be actual practices that are relevant, and there may also be contractual provisions that are relevant. The significance of each in the overall analysis should be informed by their relevance to the economic realities. This examination will be specific to the facts of each economic relationship and cannot be predetermined.
If there is good news in this, it probably lies in the explicit statement of the principles DOL will use to determine classification. Those same principles will be cited in other circumstances since they represent the agency’s expert assessment of the legal principles applied by the courts over many years. Every travel advisor that wants to operate as an independent contractor and every agency that associates with ICs would be well advised to evaluate their operations under these rules when they are finalized.
While it’s beyond the scope of this already long explanation, I do believe that host agencies and associated retail advisors can structure their affairs to comply with DOL’s often highly subjective regulations. The final version of the rules and the explanation of any changes from the NPRM will be highly instructive and should be watched closely.