Last month, the U.S. Department of Labor proposed changes to the Fair Labor Standards Act (FLSA) that would decimate the gig economy, drive-up costs for our nation’s small business community, and crush entrepreneurs. While the FLSA governs regulations for employees related to such topics as minimum wage, overtime, and record keeping, the rules and regulations have not previously applied to those classified as independent contractors. Under the current rules, the parameters used to classify an individual as an employee, or an independent contractor are relatively simple and clearly defined.
The proposed rule drastically alters the current tests used to determine if an individual must be classified as an employee rather than as an independent contractor under the FLSA. Unlike the current rule set, the proposed rule attempts to expand the definition of an employee through the use of arbitrary, overly broad, and highly subjective language. The proposed rule would also impose a new, six-factor test for determining whether an individual is “economically dependent” on an employer under the “totality of the circumstances”. Additionally, there is no predetermined weight for each of the tests. Fail one of the six test and the individual worker could be reclassified by the federal bureaucracy as an employee.
Confused yet? Well, you should be, because the parameters in this proposed rule are extremely confusing and will pull the rug out from our small businesses and independent contractors that are doing well under the existing rules. That’s why the Small Business Association of Michigan, of which I have been an active member for many years and have served as its Board Chair, is strongly advocating against this rule change and is encouraging small business owners and allies across the state to join us.
Our opposition must be loud because if enacted, the real pain would be felt by the countless small businesses whose operations rely on the engagement of independent contractors. Small businesses regularly engage independent contractors to provide a myriad of services. Facility maintenance, delivery, bookkeeping, graphic design, digital marketing, and web development are just a few examples.
Independent contractors provide the timely and scalable services small businesses need to service their customers or assist their organizations. This symbiotic relationship accomplishes two things. 1) The small business receives the services needed at an affordable rate that is driven by market forces, and 2) the independent contractor receives fair, market-based compensation for their efforts while setting their own work terms, pricing, and work schedule. It is a genuine “win-win”.
Consider for a moment the real-life example of Dominique, a freelance artist who is working as an independent contractor in the hopes of developing her small group of clients into a sustainable small business. My company engages Dominique as an independent contractor to meet the design needs of our clients. She likes being an independent contractor as it provides her with 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 satisfied, then Dominique might be classified by the government as an “employee” of my small business. This will serve only to inflate my operating costs as I will have to absorb the administrative, wage, benefits, and tax costs associated with bringing on an additional employee. This will be particularly costly to my business since my needs for design services are intermittent. The symbiotic relationship between my business and Dominique, the
independent contractor, would be destroyed, not by market forces, but arbitrary regulations imposed through an overly broad, highly subjective bureaucratic rule.
The proposed rule would force Dominique to abandon her dreams of being her own boss, following her own path, building something uniquely her own, and doing what she feels is in the best interest of her family. Even though she is willing to accept the economic risk associated with building her business, she will be denied the opportunity in order to satisfy the government’s subjective rules.
The bottom line is that the proposed USDOL rule is bad for small businesses and will severely impede our country’s entrepreneurial spirit. Please help us stop this rule by submitting a public comment to the USDOL by Nov. 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, owning and operating multiple businesses. David is an advocate for small business, having written and spoken on the subjects of small business tax policy, and small business labor policy at both the state and federal level.