In an interesting Harvard Business Review blog earlier this year, “Where Are All the Self-Employed Workers,” Justin Fox looks into who exactly are self-employed workers. What he finds is that they can be any number of professions, from housekeeping maids, hairdressers, farmers and ranchers to web developers, musicians, and mental health counselors.
For any occupation, workers may choose to become independent contractors, or they may be forced into becoming independent contractors to make a living. For example, one can easily imagine someone setting out on their own to start a housecleaning business; he brings his own supplies, works his own schedule, and advertises and cleans houses for his clients. On the other hand, a large hotel may require its housekeepers to be independent contractors to avoid paying payroll taxes and dealing with I-9s. Similarly, a software developer may want to be her own boss, work from her house, and choose her projects. Likewise, a company may require its developers to be independent contractors.
For any occupation, a worker may become an independent contractor because he needs the work or she wants to be an entrepreneur. With the ranges of occupations, and the range in motives to become an independent contractor, the current legal standard is lacking. The current “right to control” model for identifying a contractor has evolved from tort law, and the question of whether an employer is liable for the actions of his agent. That model suggests that an employer is liable for the acts of his employee but not liable for the acts of an independent contractor. Surely, it is time to rethink a standard that is rooted in common law from hundreds of years ago.
One place to start to look for a new approach is the Fair Labor Standards Act (FLSA). The FLSA already has standards for exempt employees – those whose work meets particular tests are exempt from overtime pay requirements. Allowing workers to be presumed to be independent if they satisfy the requirements for a learned professional exemption or creative professional exemption might be an approach that adapts existing ideas and enables companies more confidence in hiring independent contractors.
The learned professional exemption requires the worker be paid at a minimum rate, perform work requiring advanced knowledge which is predominantly intellectual in character, and requires consistent exercise of discretion. The knowledge must be in a field of science or learning that is customarily acquired by a prolonged course of specialized instruction.
The creative professional exemption requires the worker to be paid a minimum rate, perform work requiring invention, imagination, originality, or talent in a recognized field of artistic or creative endeavor. Either of these existing standards could be used to create a presumption that worker is an independent contractor. Moreover, the FLSA had an exemption for highly compensated workers (workers who perform office or non-manual work, meet the requirements of other exemptions, and are paid more than $100,000).
The FLSA standards for exempt employees are widely used today and would be an easy transition for companies and workers. Independent contractors who satisfy requirements similar to those in place for learned professionals, creative professionals, or highly compensated employees would be presumed to be independent. This would allow businesses to hire independent contractors with less risk of the IRS or state agencies second-guessing the classification and imposing fines and penalties for misclassification. I have previously discussed the uncertainty facing businesses who want to hire independent contractors.
While adopting this approach may not address the situation in which a worker wants to start his own housecleaning business, it would make it easier for businesses to engage with independent workers who perform work that is creative, requires imagination, or mandates advanced knowledge.
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