Concern and opposition are increasing regarding a proposed federal rule change that stands to affect the livelihoods of independent contractors in the promotional products market and other industries, as well as impact the costs and operations of businesses that rely on such workers.

On Oct. 13, the Labor Department published a proposed rule to revise its guidance on how to determine who is an employee or independent contractor under the Fair Labor Standards Act (FLSA). The practical effect of the rule would be that many people currently classified as independent contractors would likely have to be considered employees under FLSA, analysts say.

The Rule Would ‘Lead to Upheaval’

Leaders in the promo products market, trucking industry and financial services sector are among those to have recently expressed concern and/or opposition to the proposed rule. The U.S. Chamber of Commerce sounded an alarm, too. On Tuesday, Oct. 26, chamber Vice President of Employment Policy Marc Freedman said the organization has “strong concerns with this proposal.”

Freedman believes the proposed rule will “lead to the upheaval of many current legitimate independent contractor relationships.”

He also feels that vagaries surrounding factors for determining employee or independent contractor status that the proposed rule would allow for will create a muddle, leaving “businesses and workers unclear how to properly classify a worker, with the exception that if a business classifies a worker as an employee that decision will never be second-guessed by the (Labor Department’s) Wage and Hour Division.”

The Financial Services Institute opposes the rule. The trade group for independent financial services firms believes the envisioned legislation would create “regulatory tumult.”

The FSI sued the Labor Department and won in May. The victory stopped the agency from revoking a 2021 Trump-era rule that clarified independent financial advisers’ independent contractor status under the FLSA. The Labor Department appealed the lawsuit, but then changed course, deciding to propose the new rule as a “better legal workaround,” Financial Advisor reported.

If enacted, the Labor Department’s new rule “could result in a return to the confusing and conflicting interpretations by the courts prior to the 2021 rule, causing independent financial advisors and firms to divert time and resources to defending their independent contractor classification,” FSI spokeswoman Allison Kuehner Mutschler told Financial Advisor.

The trucking industry, where many are owner-operator independent contractors, is keeping a nervous eye on the proposed rule, too.

“We are disappointed this proposal seeks to undo the current rule, which has brought needed clarity to the issue of independent contractor status,” Nick Geale, vice president of workforce policy for the trade group American Trucking Associations, said in a statement. “Any rule must recognize the owner-operator model if it is to be successful when applied to trucking.”

A ‘Lose-Lose’ for Promo

Meanwhile, the envisioned regulation has stoked high levels of concern in the promotional products market. There’s widespread worry that the rule would upend how distributors partner with independent contractor sales representatives and how suppliers work with independent multi-line reps.

Chuck Machion, senior vice president/senior counsel at ASI, has said that current promotional products independent contractor salespeople could have to be reclassified as employees under FLSA if the rule goes on the books. That creates a potential lose-lose scenario.

“The rule envisions two options: employee or independent contractor. But there’s a third that helps no one: none of the above,” Machion has said. “Because of this rule, you could have companies in our industry and others saying, ‘Sorry, I have to let you go because I can’t afford to take you on as an employee.’ The company loses the salesperson, and the salesperson loses their income. This rule would not be a good thing for our industry.”

Employees, compared to contractors, are generally entitled to greater benefits under the law, such as minimum wage, overtime pay, protection from discrimination, mileage reimbursement and more. Those are big reasons proponents are pushing for the rule change, as they feel many employers wrongly classify workers as contractors when they should be employees.

“Because of this rule, you could have companies in our industry and others saying, ‘Sorry, I have to let you go because I can’t afford to take you on as an employee.’ The company loses the salesperson, and the salesperson loses their income.” Chuck Machion, ASI

As Machion alluded to, however, critics say the proponents are overlooking a pivotal point of practicality: An employee costs a company as much as 30% more than an independent contractor, according to some studies. Faced with such cost increases, companies may choose to cut ties with the contractor rather than bring them aboard as an employee, should they be compelled to reclassify under the proposed rule. The regulation, if enacted, could also open companies up to more potential legal issues.

Elsewhere, industry trade group Promotional Products Association International (PPAI) is encouraging promo pros to exercise their right to submit comments on the proposed rule to the Labor Department before a Dec. 13 deadline.

“If this regulation were enforced, most businesses in the promotional products industry could not hire independent contractors as employees, and instead would be forced into untenable relationships that would cause significant job losses for my industry,” reads PPAI prepared comments that promo pros may submit. “In short, this regulation would deprive thousands of independent contractors in the promotional products industry from earning an income.”

Despite the scope of the rule supposedly being limited to FLSA/existing laws like that on minimum wage, critics of the regulation say it will inevitably have a much broader ripple effect. Said The New York Times: “Many employers and regulators in other jurisdictions are likely to consider the [Labor] Department’s interpretation when making decisions about worker classification, and many judges are likely to use it as a guide.”

The proposed rule puts forth six nonexclusive factors that would be used to determine if a worker is an employee or independent contractor under FLSA. Perhaps the most important factor is the extent to which work performed is an integral part of an employer’s business. This factor weighs in favor of employee status when the work is “critical, necessary or central to the employer’s principal business,” law firm Holland & Knight notes.

The Road Ahead

The rule is not likely to be enacted soon. After the comment period closes on Dec. 13, the Labor Department will analyze the feedback and other factors before deciding how, or even if, to move forward on putting the regulation into place. If the Department decides to proceed, then a final rule would probably be issued some time in 2023 or possibly even 2024.

Still, legal challenges are expected, and that could lead to injunctions or other complications that delay implementation. Said Holland & Knight: “Such litigation could take many months or even a year or more to resolve.”