Last month, the US Department of Labor proposed changes to the Fair Labor Standards Act (FLSA) that would decimate the informal economy, increase costs for our nation’s small business community, and crush employers. While the FLSA governs regulations for employees related to issues such as minimum wage, overtime, and record-keeping, the rules and regulations have not previously applied to those classified as independent contractors. Under current rules, the parameters used to classify a person as an employee or independent contractor are relatively simple and clearly defined.
The proposed rule drastically alters the current tests used to determine whether an individual should be classified as an employee rather than an independent contractor under the FLSA. Unlike the current rule set, the proposed rule attempts to broaden the definition of employee through the use of arbitrary, overly broad, and highly subjective language. The proposed rule would also impose a new six-factor test to determine whether an individual is “financially dependent” on an employer under the “totality of the circumstances.” In addition, there is no predetermined weight for each of the tests. If one of the six tests fails, the federal bureaucracy could reclassify the individual worker as an employee.
Confused yet? Well, it should be, because the parameters in this proposed rule are extremely confusing and will pull the rug out of our small businesses and independent contractors who are doing well under the existing rules. That is why the Michigan Small Business Association, of which I have been an active member for many years and have served as Chairman of its Board of Directors, strongly advocates against this rule change and encourages small business owners and allies across the state to join us.
Our opposition must be strong because if enacted, the real pain would be felt by the countless small businesses whose operations depend on hiring independent contractors. Small businesses regularly hire independent contractors to provide a wide variety of services. Facilities maintenance, delivery, accounting, graphic design, digital marketing and web development are just a few examples.
Independent contractors provide the timely and scalable services that small businesses need to serve their customers or help their organizations. This symbiotic relationship accomplishes two things. 1) The small business receives necessary services at an affordable rate driven by market forces, and 2) the independent contractor receives fair market-based compensation for their efforts while setting their own terms of work, prices, and work hours. . It is a real “win-win”.
Consider for a moment the real-life example of Dominique, a freelance artist who works as an independent contractor hoping to turn her small group of clients into a sustainable small business. My company hires Dominique as an independent contractor to meet the design needs of our clients. She enjoys being an independent contractor, as it gives her the freedom to work from home and the flexibility she needs to meet the demands of her family’s schedule.
Under the proposed rule, if any one of the six factor tests is not fully met, the government could classify Dominique as an “employee” of my small business. This will only serve to inflate my operating costs, as I will have to absorb the administrative, salary, benefits, and tax costs associated with hiring an additional employee. This will be particularly expensive for my business as my needs for design services are intermittent. The symbiotic relationship between my company and Dominique, the
independent contractor, would be destroyed, not by market forces, but by arbitrary regulations imposed through an overly broad and highly subjective bureaucratic rule.
The proposed rule would force Dominique to abandon her dreams of being her own boss, go her own way, build something uniquely her own, and do what she believes is best for her family. Even if she is willing to accept the financial risk associated with building her business, she will be denied the opportunity to satisfy the subjective rules of the government.
The bottom line is that the proposed USDOL rule is bad for small businesses and will severely hinder the entrepreneurial spirit of our country. Please help us stop this rule by submitting a public comment to USDOL by November 28 by visiting sbam.org. Before it hurts Michigan’s small businesses, the proposed rule should be rejected without exception.
— David Rhoa is a serial entrepreneur who owns and operates multiple businesses. David is a small business advocate, having written and spoken on issues of small business tax policy and small business employment policy at both the state and federal levels.