The Department of Labor just shouted loudly and clearly that most workers are employees.
A newly released memo has rocked the employer-employee relationship world. Its far-reaching effects will be felt from FedEx to small business owners in Phoenix Arizona. Unfortunately, it has not made mainstream news, and you might have missed the memo. This bombshell is being talked about in legal and insurance circles. But you need to know about it too.

In short:
"If it looks like a duck, swims like a duck, and quacks like a duck, then it probably is a duck." Substitute "employee" for "duck" and you'll get what I mean. (Except the quacking part.)

The Department of Labor assumes that anyone who works for you is an employee- even if you call them an independent contractor. This is a renewed initiative of a years long path that began when the Fair Labor Standards Act (FLSA) was passed by Congress way back in 1938.  

The Department of Labor (DOL) sums up their 15 page memo, released on July 15, 2105 with this sentence:  "...most workers are employees under the FLSA’s broad definitions."

What this means is that there is a fresh statement from the federal government about how they will look at any independent contractor arrangements you might have in place. They will assume that every worker you have is an employee.  You can call them "independent contractors" all day long- but as far as the government is concerned, that doesn't make them an independent contractor.

There are several reasons why the Department of Labor suddenly cares so much about how you classify the people who work for you. Here's a couple:

First, flexible scheduling, telecommuting and advanced technology has made it even easier for an employee to work more flexibly. This increased flexibility has made it tempting for more and more employers to view their employees as "independent" workers (think "1099") and hence not withhold social security and other taxes. That's a big revenue drain on the government... and the government notices when they don't get the money they feel entitled to.

Second, with the rise of new  technologies comes the rise of new industries never thought of before, like Uber and the other rideshare companies. I recently wrote an article about the insurance problems associated with driving for Uber (read it here). Rideshare is an example of a new wave of jobs being created where workers won't have the protection Congress wishes them to have. You know, things like unemployment compensation, workers comp and safe working environments. California has recently ruled that Uber drivers are employees, and other states may follow. The new memo by the DOL essentially sends a fresh message to all employers... "don't hide your workers behind a veil of self-employment."

The revised and expanded guidelines use six questions which must be taken as a whole. There is no simple answer to the age old question... "is this an employee or an independent contractor?" Instead, the Department of Labor is using these questions as guidelines which all must be considered together. Here they are:

(A) the extent to which the work performed is an integral part of the employer’s business;
(B) the worker’s opportunity for profit or loss depending on his or her managerial skill; 
(C) the extent of the relative investments of the employer and the worker; 
(D) whether the work performed requires special skills and initiative; 
(E) the permanency of the relationship; and 
(F) the degree of control exercised or retained by the employer.

There are examples they provide for each of the six tests. But it can still be confusing.

I'm an employer too, and I provide insurance for employers. It's important that we get this right. If we accept: "it looks like a duck, so it's a duck," it could save us all a lot of grief down the road. Check with your attorney and CPA before hiring someone as an independent contractor. The Department of Labor is aggressively challenging these arrangements. Don't get caught in a fight with them. It's not worth it.

If you have business insurance or work comp questions, call me at (480) 940-0909.

I've read the 15 page memo, and I caught a few things "between the lines" that may convince you to take the safe route and change that "independent contractor" to an "employee."

(Please consult your attorney and CPA. I am neither. Just an insurance guy. So take these talking points to them for professional advice.)

• A recurring theme in the memo was that an independent contractor has multiple clients. If the person working for you has only one client, and that's you... beware. They could be an employee.
  
• An independent contractor invests a significant percentage of the money they receive from you back into their business, for things like equipment and supplies. If most of what you pay your worker stays in their pocket... beware. They could be an employee.
  
• The independent contractor manages their business as a business that is independent of you, and makes independent decisions about how to provide you with a desired result. If you tell someone how to bake a cake, even if they can do it from home, they are a baker who is an employee of yours. They are not a bakery.
• Finally, and this is the umbrella over them all: "Economic Realities" are the biggest theme repeated over and over in the memo. If the reality of the situation is that you can fire that worker, and their livelihood will be dramatically affected by your termination of them, then you are their employer, and not a customer. All the tests and questions exist under this big canopy. Do they depend upon primarily you for their livelihood? If they do... they are most likely an employee.

Remember, the presumption by the government is that your worker is an employee. That's the starting line. The enforcement seems to be ramping up. As they used to say on the old TV show, Hill Street Blues... "let's be careful out there."

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Let's talk about some practical things we can do as employers to lower our work comp rates. First though, let's take a quick look at how work comp rates are doing overall in Arizona.

Workers compensation rates are holding their own in Arizona, and in some cases are actually going down. Some of that has to do with the economy in general, which is getting better slowly. In fact, in 2015, the overall rate filing was down 6%. (See slides 23 and 24 in this report.)

But there's another statistic in this NCCI State Advisory Forum; something we all need to pay attention to. While claim frequency may be down overall in the last few years, and injured employees are returning to work a little faster, there is still room for improvement in the overall medical costs area. We are much higher than our regional average.

So what does this mean to me as an employer in Arizona who is trying to lower his work comp rates? It means that we all need to work smarter at keeping our workers comp rates down. I'm an employer just like you (and a huge shout out to my excellent staff at Joe's Insurance).

Here are three things we employers all need to do:

I know, you've heard this one before. But most small business owners I personally know in Chandler, Maricopa, Phoenix and all over Arizona, still don't have a written safety program in place. Or if they do, it hasn't been updated in years. Having an up-to-date written safety program is a start in focusing everyone in the company on safety. Even if you have just two or three people that is "everyone." Here's a good start; download this Small Business Handbook by OSHA. Workplace safety lowers claims. Lower claims means lower a lower MOD. A lower MOD means more money left in your business checking account for future growth.

This is a big one. The longer an employee is unable to return to his or her job, the more likely it is that they will remain out of the workplace for what seems like forever. And you will pay for that in higher work comp premiums.

Employees get discouraged when they feel there's no "path back." A discouraged employee is an employee who takes longer to recover. Work is medicine. You know that for yourself; if you have something to get up for in the morning, something positive, it gives you energy. It's the same for your employee. No one does well sitting on the bench.

There are many resources for setting up a Return To Work plan. You can start here, by looking at the U.S. Department of Labor Toolkit. You can also partner with your insurance company; most of them have programs that you can utilize. Farmers Insurance has an excellent one (shameless plug- I'm a Farmers Agent).

Studies have shown that there is an error rate as high as 35% when it comes to the classification of employees. That means that if you manage a restaurant, your bookkeeper may be costing you what your chef is costing you. The chef who plays with knives for a living. A bookkeeper is usually a classification 8810 (clerical- the lowest NCCI rate). The chef standing over a hot grill is a different NCCI code, and it's considerably more. When is the last time you sat down with your insurance agent and carefully reviewed the hours and classifications of every employee? If you are like most of us... it's been too long.

I can help. I specialize in small business insurance in Arizona. I've been recognized as one of the top Farmers Insurance agents in Arizona, and I can help you do what I do... save money on workers compensation rates. Give me a call at (480) 940-0909.

~Joe Baselice

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