Washington—The U.S. Department of Labor has issued updated guidance on what constitutes an independent contractor vs. an employee, with a new directive that emphasizes a worker who is “economically dependent” on the employer should be treated as an employee. By contrast, to be regarded as an independent contractor, workers must be in business for themselves.
The guidance could make it harder for flooring dealers to use subcontractors for installation, which is a common practice today.
Labor unions and activists have for years argued that companies in many industries, including construction, have attempted to hold down labor costs by calling workers independent contractors. Contractors aren’t eligible for overtime pay, unemployment insurance or workers’ compensation, and they pay all Social Security taxes, compared with employees, who split that cost with employers.
The new guidance comes as the Labor Department steps up its enforcement of classification rules. Last year, it forced companies to pay $79 million in back wages to 109,000 workers in the janitorial, temporary help, food services, day care and hotel industries.
Jeff King, an attorney representing the World Floor Covering Association (WFCA), and a labor expert, said flooring dealers must adhere to this new guidance, which he said is essentially a new interpretation of an existing law.
“It should upset everybody. Retailers will have to adjust. Some will have to bring installers in-house and they will have to distant themselves from others. It would be extremely dangerous to have in-house and outside installers under this new interpretation.”
King said installers “truly have to look like they are independent. They must have some investment in what they do—just having tools is not sufficient. They need to have a tax ID number. They need to show they can make money independently, that they can reject work and not suffer the consequences, as well as work for other retailers.”
Lowe’s Home Centers agreed to pay $6.5 million—plus legal fees—to settle a lawsuit filed by independent contractors who claimed they legally qualified as employees. The plaintiffs in the case acted as independent contractors for Lowe’s, installing kitchens, appliances, bath and plumbing fixtures, windows and doors; they alleged Lowe’s misclassified them as contractors, saying they were actually employees because the chain not only controlled all aspects of the installation work, but also required them to identify themselves as “installers for Lowe’s” or telling customers “I work for Lowe’s.” The plaintiffs also had to wear Lowe’s hats and Lowe’s shirts at work sites, attended training by Lowe’s, and complied with Lowe’s production requirements
In addition, the ICs claimed they were improperly denied all the benefits— health insurance, paid leave and 401(k), among others—that regular Lowe’s employees were entitled to. After a prolonged legal battle, Lowe’s agreed to the $6.5 million settlement in lieu of taking the case through the courts.
King said every flooring dealer should look at the Lowe’s case as a cautionary tale for what not to do. “Every retailer has to evaluate their installation/independent contractor programs and what is required of it. Don’t have them wear your T-shirt; you can mandate that they be neat and clean on the jobsite but you cannot mandate that they wear your T-shirt.”
The WFCA plans to file a comment opposing this new guidance, which King said, “crushes the entrepreneurial spirit of installers.”
He added that dealers need to pay attention to how the IRS views the worker-business owner relationship. For example, if the individual worker receives benefits (insurance, a pension or paid leave), that is usually a giveaway that the person is an employee.
Two other key factors, according to the IRS: behavioral control and financial control. Regarding behavior, if the business has the right to control or direct not only what work needs to be done, but also how it gets done, then the worker is most likely an employee. If the person has a significant investment in the work being performed, he or she may likely be an independent contractor. Also, if the worker can earn a profit or incur a loss, that’s an indication the person is in business for him or herself and is an independent contractor.
Flooring dealers react
Because many installers work as subcontractors, this new guidance could certainly impact flooring dealers.
Nick Freadreacea, president of The Flooring Gallery, with six locations in the Louisville, Ky., market, said all flooring businesses are affected by the “ever-changing standards” regarding the independent contractor status. “We do everything possible to ensure that our crews’ status as independent contractors is protected but it seems to be a moving target. All of our crews work for other companies, have their own insurance, are paid as independent contractors, and sign a contract to work for us that states they are independent contactors. Still it is always a concern when the status changes.”
Carlton Billingsley, owner of Floors and Moore, a Benton, Ark.-based flooring dealer that does extensive residential and commercial work, acknowledged there could be a disruption to some businesses that rely on subcontract labor only for installation. “In our business we have an independent contractor subcontract that is signed by both parties, does not provide work wear (shirts, hats, etc.), and treats them as a subcontractor instead of an employee. Meetings should be called for safety, scheduling and invoices submitted as required with the subcontractors. Documentation is the key to making sure all paperwork is handled and able to be produced for verification if needed.”