Employee or contractor? Labor moves to clarify rules around increasingly contentious issue

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When are workers employees? When are they contractors?

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The Labor Department issued new guidance Wednesday intended to help companies answer that increasingly fraught question. The issue has taken on greater urgency with the growth of sharing-economy firms such as Uber and TaskRabbit, which increasingly rely on independent workers, often for short-term projects.

The guidance could make it harder for companies to use contractors, labor law experts say. It comes amid a wave of lawsuits against companies such as FedEx, ride-hailing service Lyft and online cleaning service provider Handy, brought by workers who say they should have been treated as employees rather than contractors.

"The pendulum is swinging away from classifying workers as contractors and toward employees," said Michael Droke, an employment law partner at Dorsey and Whitney. "Employers should be more cautious in identifying workers as contractors."

Labor unions and activists have for years argued that companies in many industries — construction, hotels and janitorial services, among others — have sought to hold down labor costs by calling workers independent contractors. Contractors aren't eligible for overtime pay, unemployment insurance or workers' compensation. They typically pay all their Social Security taxes, compared with employees, who split that cost with employers.

The issue has also emerged in the early stages of the presidential campaign, after Hillary Clinton promised earlier this week to "crack down" on companies that wrongly classify workers as contractors. She praised the "gig economy" for "creating exciting opportunities" but also said it is "raising hard questions about workplace protections and what a good job will look like in the future."

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The guidelines don't represent new regulations, but clarify how Labor officials think companies and courts should interpret the rules.

The move comes as the 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.

The Economic Policy Institute, a liberal think-tank, estimates that 10 percent to 20 percent of employers misclassify at least one worker.

The department's directive emphasizes that a worker who is "economically dependent" on the employer should be treated as an employee. By contrast, a worker must be in business for themselves to be an independent contractor.

That is a broader standard than guidelines followed by many states and the IRS, Droke said. They generally focus on how much control a company has over how a worker does the job.

David Weil, the head of the department's wage and hour division, said in a blog post Wednesday on the department's website that the directive also overrides any agreement between the employer and worker.

Prior to taking the post at Labor in May 2014, Weil was a professor at Boston University and wrote a book titled "The Fissured Workplace," which examined ways that companies have sought to outsource or subcontract many functions. That has increased the misclassification of workers, Weil wrote.

Uber lost a high-profile case in California last month when the state's labor commission ruled that a driver for the company was an employee, not an independent contractor. The case was limited in scope, applying to one driver who sought unpaid wages and expenses and was awarded $4,152.

The company has said that its drivers like its business model, which enables them to choose when and how much to work.

"The number one reason drivers choose to use Uber is because they have complete flexibility and control," the company said last month. "The majority of them can and do choose to earn their living from multiple sources."

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