A new final rule issued Tuesday, Jan. 9, from the U.S. Department of Labor could result in certain independent contractors in the promotional products market having to be reclassified as employees under the Fair Labor Standards Act (FLSA).

It’s a shift some industry executives say could trigger job loss, heavier bureaucracy for industry businesses and greater labor expenses. On the flipside, proponents think the new rule, which formally takes effect in March, could help promo salespeople who are working as independent contractors currently, but who want to be classified as employees, achieve the employee status they believe they fairly deserve.

‘Help Protect Workers’

The Labor Department adopted the new rule after receiving public comment (that included opposition from promo) and a finalization period that played out for over a year.

The department says the now finalized rule aims to clarify who should be an employee and who should be an independent contractor (IC) under FLSA, and to help workers currently classified as ICs when they should be employees, which generally enjoy greater protections under the law.

“Misclassifying employees as independent contractors is a serious issue that deprives workers of basic rights and protections,” says Acting U.S. Secretary of Labor Julie Su. “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.”

“Misclassifying employees as independent contractors is a serious issue that deprives workers of basic rights and protections.” Julie Su, Labor Department.

Most broadly, the rule says that a worker is not an independent contractor if they’re economically dependent on an employer for work. From there, the rule establishes six nonexclusive factors that must be analyzed to determine if a worker is an employee or independent contractor under FLSA.

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.

“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 says.

Criticisms From Promo

While perhaps well-intentioned, the rule may have unintended negative consequences that upend how distributors partner with independent contractor sales representatives, says attorney Chuck Machion, senior vice president and senior counsel at ASI.

Machion notes that at least several of the factors – including the extent to which work performed is an integral part of a business and degree of permanence – could compel distributorships to have to reclassify IC reps in their salesforce as employees. After all, a distributorship’s business is sales, and if the rep is an IC working exclusively for that firm, they’d appear to be both integral and permanent.

“While the Labor Department believes that the new rule will merely result in the independent contractor becoming an employee, insignificant consideration is given to the other alternative: Namely, that the employer could opt to end the position.” Chuck Machion, ASI.

Machion fears more than a few distributors won’t make the change, however, because it will be too costly and burdensome from an administrative standpoint, especially for smaller companies with independent contractors who work well less than a standard 40-hour work week.

Employees, compared to contractors, are generally entitled to greater benefits under the law, such as minimum wage, overtime pay, mileage reimbursement and more. They cost a company as much as 30% more than independent contractors, according to certain studies. Some distributors may simply not be able to handle that – and thus end the professional relationship, says Machion.

“While the Labor Department believes that the new rule will merely result in the independent contractor becoming an employee, insignificant consideration is given to the other alternative: Namely, that the employer could opt to end the position.”

Marc Simon, CEO of Top 40 distributor HALO Branded Solutions (asi/356000) and a member of Counselor’s Power 50 list of promo’s most influential people, offers another perspective.

“This Department of Labor rule should be a source of some relief and clarity for promotional product distributors accepting orders from fully commissioned salespeople,” says Simon, an attorney. “While every case 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.”

“Overall, I’d say this rule is not helpful, not good for the industry, and takes us further away from having a business climate where adults get to voluntarily enter into the business relationships of their choosing.” Joshua White, BAMKO

Joshua White, head of strategy at Top 40 distributor BAMKO (asi/131431), criticizes the new rule from the Labor Department, calling it governmental overreach that deprives independent contractors who desire that status from keeping it. The Labor Department says that an IC can’t remain one even if they want to, if the nature of their work qualifies them as an employee under FLSA.

“If you look at surveys on this, the vast majority of people who are classified as independent contractors want to be classified as such,” says White, also an attorney. “I really am not a fan of these rules that deprive individuals of the autonomy to decide the manner in which they want to work and be compensated. Overall, I’d say this rule is not helpful, not good for the industry, and takes us further away from having a business climate where adults get to voluntarily enter into the business relationships of their choosing.”

‘Readjusts Practices That Harmed the Workforce’

Others who have worked as independent contractor distributor sales reps in promo take a different view. One ASI Media spoke with, who asked to remain anonymous for fear of backlash, says he was heartened to see the Labor Department adopt the new regulations.

“The rule from the government readjusts business practices that harmed the workforce,” the rep says.

He explains that he was taken advantage of at a time in his career by a distributorship that classified him as an IC.

“The rule from the government readjusts business practices that harmed the workforce.” A former independent contractor

“I was not paid for any of the extra work that I did to help build the company,” the sales professional shares. “I spent countless hours meeting with potential clients, building relationships with those clients, etc. Some ordered big, some did not, but I was still out there prospecting in the name of my company. So, my company got countless hours of advertisement, and I got nothing in return. Not even minimum wage or health benefits.”

Things ended acrimoniously.

“When I left that company, they also stated they were not legally responsible to pay me anything once I told them that I was leaving,” the promo pro states. “They kept thousands in commissions that I worked for… They could have canceled my contract at any time and done the same thing and I would’ve had zero chance of fighting it in court, because the labor laws favored the business owner.”

The Multi-Line Rep Question

Whether or not the new rule would affect supplier relationships with multi-line reps was unclear.

Some industry pros think multi-line reps would appear to fall in the independent contractor designations if they’re truly independent, free from control of suppliers and representing a variety of supplier companies – thus not being economically dependent on any one business.

Still, final legal word on that wasn’t definitive as of this writing, and particulars are likely to vary from case to case and even based on a courtroom interpretation. It could, after all, be argued that in cases there’s significant degrees of permanence with a multi-line rep’s arrangements with suppliers and that the rep has to make considerable investment – expenses of traveling/presenting to distributors – to make sales on behalf of suppliers. The rep could, depending on circumstances, be economically dependent too.

The Labor Department’s employee-or-IC classification factors can be difficult to analyze and come to a conclusion on “because they’re inherently subjective and force you to weigh countervailing factors that inevitably force you into a muddled and opaque area of analysis,” says White.

Who Enforces the Rule? What Are the Penalties?

The Labor Department’s Wage & Hour Division (WHD) will begin enforcing the rule March 11. Possible legal challenges from opponents could seek injunctions that would at least temporarily delay implementation of enforcement, but businesses should not count on that and should start preparing to comply, if they haven’t already, executives say.

Misclassifying employees as independent contractors 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, tells 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.

The Wage & Hour Division often conducts an investigation into a potential violation following a complaint, meaning a promo IC that feels they should be an employee has the power to potentially prompt an investigation. WHD could also simply select a business for investigation. In selecting investigations, WHD tends to focus on low-wage industries because of what the agency says is high rates of violations or egregious violations.

Important to know: The Labor Department’s final rule only applies to employee/independent contractor considerations under FLSA. It’s not applicable to other laws – federal, state or local –that use different standards for employee classification.

“For example,” the Labor Department relates, “the Internal Revenue Code and the National Labor Relations Act have different statutory language and judicial precedent governing the distinction between employees and independent contractors, and those laws are interpreted and enforced by different federal agencies.”

Legal Backlash? Plus, Views Beyond Promo

The Labor Department’s new rule replaces a regulation by former President Donald Trump’s administration that had made it easier to classify workers as independent contractors. Some business groups believe the Trump-era regulation was working and are considering legal action against the Labor Department to prevent it from enforcing the new rule. Those include the U.S. Chamber of Commerce.

“The Department of Labor’s new regulation redefining when someone is an employee or an independent contractor is clearly biased toward declaring most independent contractors as employees, a move that will decrease flexibility and opportunity and result in lost earning opportunities for millions of Americans,” says Marc Freedman, the chamber’s vice president of workplace policy.

Freedman continues: “It threatens the flexibility of individuals to work when and how they want and could have significant negative impacts on our economy. Making matters worse, the rule is completely unnecessary, as the department continues to report success in cracking down on bad actors that are misclassifying workers.”

The Associated Press reported that labor advocates have supported the rule. Those proponents say employers have exploited and misclassified workers – in part to avoid paying minimum wage and benefits. In a report, the Economic Policy Institute, which leans liberal, says that construction workers, truck drivers, cleaners, landscapers, security guards and call center workers are among the most commonly misclassified workers. EPI estimated that misclassified construction workers lose between $10,177 and $16,729 per year, the AP reported.