News March 14, 2024
New Federal Rule on Independent Contractors Takes Effect. Now What?
This primer explains the regulation and its possible implications for the industry.
A controversial new federal rule that stands to impact the promotional products market and other industries just took effect.
The regulation from the U.S. Department of Labor establishes how to determine if a worker is an employee or an independent contractor (IC) under the Fair Labor Standards Act (FLSA).
The rule has sparked a firestorm of criticism, including legal challenges, with some saying it will wipe out livelihoods in promo and other markets, destroying the IC model. Even so, the regulation has also gained support from proponents who believe it will help reduce exploitation of workers, especially in the so-called “gig economy.”
What’s in the rule? What might it mean for promotional products companies? What challenges to it are in play? ASI Media answers those questions and more here.
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Q: What does the rule mandate?
A: In January, the Labor Department adopted the new rule after receiving public comment (that included opposition from promo) and a finalization period that played out for more than a year. It replaces a regulation adopted in 2021, which designated two “core factors” – control over work and opportunity for profit or loss – with a six-factor test to assess whether a worker is an employee or an IC.
The Labor Department said the rule aims to help workers currently classified as ICs when they should be employees, which generally enjoy greater protections under law.
“This rule will help protect workers, especially those facing the greatest risk of exploitation, by making sure they are classified properly and that they receive the wages they’ve earned,” said Acting U.S. Secretary of Labor Julie Su.
Most broadly, the rule says a worker is not an IC if they’re economically dependent on an employer for work. From there, the rule establishes the aforementioned six nonexclusive factors that must be analyzed to determine if a worker is an employee or IC under FLSA.
“This rule will help protect workers, especially those facing the greatest risk of exploitation.” Julie Su, Labor Department
The factors are the degree to which the worker has the opportunity for profit or loss depending on managerial skill; the financial stake and nature of any resources a worker has invested in the work; the degree of permanence in the work relationship; how much control the employer has over the work; the skill and initiative required of the worker; and the extent to which work performed is an integral part of the employer’s business.
IC status is to be determined based on the “totality of the circumstances” found in an examination of the stated factors – and potentially others.
“No factor or set of factors among this list of six has a predetermined weight, and additional factors may be relevant if such factors in some way indicate whether the worker is in business for themself (i.e., an independent contractor), as opposed to being economically dependent on the employer for work,” the Labor Department said.
Notably, the Labor Department’s final rule only applies to employee/IC considerations under FLSA. It’s not applicable to other laws – federal, state or local – that use different standards for employee classification.
Q: Has enforcement started? What happens if violations occur?
A: Yes. The Labor Department’s Wage & Hour Division (WHD) was empowered as of March 11 to begin ensuring employers comply with the rule.
The WHD often conducts an investigation into a potential violation following a complaint; this means an IC in promo – or any industry – who feels they should be an employee has the power to prompt an investigation. WHD could also select a business for investigation. In picking investigations, WHD tends to focus on low-wage industries because of what the agency says are high rates of violations or egregious violations.
“Worker misclassification is a serious issue that can result in civil money penalties for companies found in violation.” Jake Andrejat, Labor Department.
Misclassifying employees as ICs under the FLSA can result in significant financial repercussions for businesses.
“Worker misclassification is a serious issue that can result in civil money penalties for companies found in violation,” Jake Andrejat, a Labor Department spokesperson, told ASI Media. “It’s also worth noting that companies found in violation are required to pay back wages to the employees that they improperly classified as independent contractors.” Back taxes could be owed, too.
Q: Is the rule being challenged?
A: At least five lawsuits have been filed in opposition to the Labor Department rule. While exact particulars vary a bit, the goal of the suits is to have the rule voided, ending its enforcement.
Filed the first week of March, one of the most recent suits came from groups that include the U.S. Chamber of Commerce. The suit says the new regulation creates confusion and uncertainty for businesses trying to determine whether they have properly classified their workers as employees or ICs.
“The Department of Labor’s rule would deprive millions of Americans the freedom to choose to work as an independent contractor.” Marc Freedman, U.S. Chamber of Commerce
The Chamber believes the rule threatens the IC model, “which allows companies to scale operations up or down, and to retain expertise as needed while providing workers with flexibility and control of their work activities.”
“The Department of Labor’s rule would deprive millions of Americans the freedom to choose to work as an independent contractor,” said Marc Freedman, vice president of the U.S. Chamber of Commerce’s Employment Policy Division.
In another lawsuit, four freelance writers who are the co-founders of Fight For Freelancers USA, a nonpartisan grassroots group that advocates to protect the choice of self-employment, want a federal judge to declare the Labor Department’s rule unlawful – and toss it out.
“This clear-as-mud rule gives the department carte blanche to impose regulatory wrath on any of our clients as it sees fit,” the freelance writers said. “Our clients then can face serious fines and penalties for working with us as independent contractors, and our freelance businesses go poof.”
A couple of congressmen are trying to kibosh the rule, too. Sen. Bill Cassidy, a Louisiana Republican, and Rep. Kevin Kiley, a California Republican, introduced a joint Congressional Review Act (CRA) resolution the first week of March that aims to overturn the rule.
20
The number of federal rules that Congress has overturned using the CRA.(Congressional Research Service)
For the Labor Department rule to be nullified via CRA, the repeal resolution would have to pass in the House and Senate and be signed by President Joe Biden. Were Biden to block the resolution, Congress would have to override the presidential veto.
“The Biden administration’s priority…should be to increase individual freedom and opportunity,” said Cassidy. “This new Biden rule does the opposite, jeopardizing 27 million workers’ ability to make their own hours and make a living without being pressured into joining a union.”
Q: How could the rule impact distributors?
A: The answer isn’t black and white. Effects could depend on the precise nature of the relationship between the distributorship and the IC with whom the company works, according to promo executives.
It’s not uncommon for distributors to partner with sales pros they classify as ICs. Attorney Chuck Machion, senior vice president and senior counsel at ASI, said some such partnerships could be upended by the contractor rule.
Machion noted that at least several of the classification factors – including the extent to which work performed is an integral part of a business and degree of permanence – could compel some distributorships to have to reclassify IC reps in their salesforce as employees. After all, a distributorship’s business is sales, and if reps are ICs working exclusively for that firm under its direction, they’d appear to be both integral and permanent.
“Business is hard enough, and for bureaucrats to make these changes that make it even harder – it’s silly.” Memo Kahan, PromoShop (asi/300446)
Employees, compared to contractors, are generally entitled to greater benefits under the law, such as minimum wage, overtime pay, mileage reimbursement and more. They come with more administrative burdens for a business and cost a company as much as 30% more than ICs, according to certain studies. Distributor firms may simply not be able to – or want to – handle that and could then end the professional relationship.
Some California-based distributorships told ASI Media they were compelled to cut off work with IC contractors following the enactment of state-level legislation, AB5, that prompted the reclassification of sales rep ICs to employees. They think similar scenarios could play out nationally under the Labor Department rule.
“We had six independent contractors, and we let four of them go – that is, ended the relationship with them,” said Craig Nadel, president/CEO of California-headquartered Top 40 distributor Nadel (asi/279600) and a member of Counselor’s Power 50 list of promo’s most influential people. “The other two we made employees. It’s probably what one should expect.”
Power 50 member Memo Kahan, president of California-based Top 40 distributor PromoShop (asi/300446), said that AB5 impacted recruiting and “our ability to hire individuals who want to be independent. We have lost opportunities. Business is hard enough, and for bureaucrats to make these changes that make it even harder – it’s silly.”
10.5%
Reported decrease in self-employment among affected occupations in California following the enactment of a state-level law that compelled the reclassification of many independent contractors to employees.(Mercatus Center)
The freelance writers suing the Labor Department over the rule have pointed to a recent study from the Mercatus Center, which found that California’s AB5 legislation failed to create unionizable jobs and decreased overall employment for affected occupations by 4.4% and self-employment for affected occupations by 10.5%. Mercatus asserted that this happened even though California exempted more than 100 professions. The Labor Department rule currently has no exemptions.
All that said, some promo distributor executives said the new rule doesn’t mean an IC sales rep has to be automatically reclassified as an employee – far from it.
Mitch Kaeser, co-CEO of Top 40 distributor Kaeser & Blair (asi/238600), told ASI Media that the firm has reviewed its relationships with its sales dealers, which are classified as ICs. The company believes no change to that classification is warranted.
“They all have the freedom to run their business the way they see fit,” Kaeser said. “K&B never requires a contract. We don't require dealers to be in an office. We don't keep track of their hours. We will never ask for a client list. They are truly free to be their own business leaders. Kaeser & Blair business owners simply engage with us to perform back-office support services for them.”
Marc Simon, CEO of Top 40 distributor HALO Branded Solutions (asi/356000), a Power 50 member and an attorney, believes the Labor Department rule “should be a source of some relief and clarity for promotional product distributors accepting orders from fully commissioned salespeople.”
“While every case,” Simon continued, “would be determined in its own right on a facts-and-circumstances basis, distributors who do not attempt to impose control over the salespeople and the manner in which they work should be free to characterize these salespeople as independent contractors under federal tax law. However, the degree of control is only one of six relevant factors to be considered, so some ambiguity remains.”
Some promo pros who have worked as IC reps have told ASI Media that they are in favor of the new law. “The rule from the government readjusts business practices that harmed the workforce,” said a rep who was exploited as a contractor by a distributorship they formerly worked for but is now an employee with a different firm. The pro wished to remain anonymous.
Regardless of the law, some distributor leaders think sunsetting the IC stature would benefit promo, helping to attract up-and-comers to the industry.
“Several years ago, we moved away from a contractor model, in part because it was impossible to bring in bright young talent because they couldn’t afford to build their book of business,” said Kathy Finnerty Thomas, president of Arizona-based distributorship Stowebridge (asi/337500), a Counselor 2024 Best Place to Work. “To attract the best talent, we saw value in building compensation plans with incentives to motivate, while also providing a liveable salary and benefits package. This enables our salespeople to focus on doing the right thing for the customer.”
Could multi-line reps be affected?
A: The prevailing sentiment among promo leaders ASI Media spoke with is that multi-line reps meet the criteria for being ICs. Still, some say it’s not a closed-book case.
For sure, certain executives believe the IC designation applies if the multi-line rep is free from control of suppliers and is representing a variety of supplier companies – thus not being economically dependent on any one business.
Lee Gallagher-Coscia, a sales pro with multi-line firm Themco LLC (asi/828251), falls into this camp.
“Multi-line reps do not fit neatly into the criteria to qualify as employees because our income streams are fractional throughout the number of suppliers we represent,” Gallagher-Coscia told ASI Media. “Furthermore, it would be challenging to determine if any of those suppliers should extend the standard benefits associated with full-time employment.”
“The multi-line-rep model has proven itself to be very effective in the promo industry, with unique benefits to both the manufacturer and the rep, and I have no doubt it will evolve as necessary.” Chris Anderson, HPG (asi/61966)
Themco represents a number of suppliers in New England. None of those companies have reached out with concerns about the rule. “To date, we have not had any conversations that Labor Department rule changes will affect our relationships or contracts with any of our suppliers," Gallagher-Coscia said.
Maple Ridge Farms (asi/68680), a Wisconsin-based supplier that specializes in gourmet food gifts, partners with multi-line reps. President Tom Riordan told ASI Media that a close reading of the Labor Department rule appears to place multi-line pros in the IC category.
“It is our opinion that multi-line representatives are indeed independent contractors, not employees,” Riordan said.
Still, definitive legal word was hard to come by in these early days of the rule, and particulars could vary from case to case and even based on a courtroom interpretation, executives said.
When the rule was first finalized, some promo pros worried that it could be argued that in select cases there are significant degrees of permanence within a multi-line rep’s arrangements with suppliers, and that the rep has to make considerable investment – expenses of traveling and presenting to distributors – to make sales on behalf of suppliers. The rep could, depending on circumstances, be economically dependent too, especially if they’re generating a significant majority of their income through representation of one supplier.
Chris Anderson, a Power 50 member and CEO of Top 40 supplier HPG (asi/61966), said the firm is studying the multi-line rep/IC question. One thing is for sure, though: HPG doesn’t want to break off ties with the multi-line pros with whom it currently partners.
“The multi-line-rep model,” said Anderson, “has proven itself to be very effective in the promo industry, with unique benefits to both the manufacturer and the rep, and I have no doubt it will evolve as necessary.”