3 min read

U.S. Department of Labor Takes on Questionable Independent Contracting Practices

The traditional risk of using independent contractors, a/k/a "1099's," is an audit by the IRS or state taxing authorities. In recent years, state auditors have been more aggressive than the IRS because of manpower limitations at the IRS. This may change in the future because of better IRS funding. Either way, a tax audit will generally focus on the failure to withhold payroll taxes of the contractors, on the ground that the contractors should have been classified as employees.

In addition to the tax risk when using IC's, there is overtime pay risk, because contractors are typically paid straight time for all hours worked (the exception to this risk is "computer professions," who are exempt from hourly overtime). The overtime risk usually surfaces in the form of a civil lawsuit or arbitration claim for overtime pay under the Fair Labor Standards Act or a state law variant.

In recent months the U.S. Department of Labor has gotten in on the act in a big way, most notably in a lawsuit filed on June 29, 2023, against customer service giant Arise Virtual Solutions, Inc. The lawsuit (copy attached below) was accompanied by a press release stating that the lawsuit "may be the largest misclassification case" in the Department's history and seeks relief on behalf of 22,000 individuals. But first, here are recent headlines touting two "garden variety" independent contractor actions by the DOL (click the links to read the releases):

US DEPARTMENT OF LABOR RECOVERS $106K IN BACK WAGES, DAMAGES AFTER BENEFITS ADVISORS MISCLASSIFY 68 WORKERS AS INDEPENDENT CONTRACTORS
US DEPARTMENT OF LABOR RECOVERS $352K IN BACK PAY FOR 653 WORKERS AFTER DETROIT AREA STAFFING AGENCY MISCLASSIFIES THEM AS INDEPENDENT CONTRACTORS

Back to DOL vs. Arise - the Arise website makes this pitch to future "contractors":

"Join the growing number of home-based Service Partners using the Arise® Platform. Provide customer service, sales and support from the comfort of your home. The Arise® Platform and your work from home business - the perfect combination!"
"Start your own small customer support business that gives you the flexibility to work when you want."

The latter quote serves as an admission that Arise knows the workers it seeks to retain do not have existing independent businesses. This is a significant negative factor that would lead to automatic disqualification of IC status under the trending "ABC test."

The small print at the bottom of Arise's home page reads: "This is not an offer of employment. It is an opportunity to enter into a business-to-business relationship with Arise." It is perhaps telling that Arise feels obligated to explain to its prospective workers that, regardless of appearances, they won't be treated as employees.

Arise's website prominently touts its "world class customers" such as Intuit QuickBooks, Carnival Cruise Lines, TurboTax and Dick's Sporting Goods. The DOL's complaint adds Disney and Home Depot to the list. I wonder how long it will take for the customer names to disappear from the Arise site now that the DOL has labeled Arise's employment practices illegal?

The DOL's allegations suggest Arise is in for a rough time:

Arise has bolstered its customer service work force by misclassifying at least 22,000 of these workers as independent contractors and reaping the benefits by knowingly and recklessly disregarding the FLSA by failing to pay the required minimum wage and overtime rates for all hours worked—including time spent attending and studying for mandatory training and certification courses that last for weeks—and shifting the burden of expenses for equipment, fees, and training from itself to these workers.
The workers who register as Service Partners do not typically have incorporated businesses before they register with Arise.
Arise willfully misclassified the Service Partners and Agents, who, as a matter of economic reality are economically dependent on Arise for work and are employees covered by the FLSA, including the FLSA’s minimum wage, overtime pay, and recordkeeping provisions.

One has to suspect that the IRS will not be far behind the Department of Labor with an entirely separate set of tax-related demands.

Staffing firms typically pay their call center personnel as employees, and should welcome this enforcement action, because they are at an enormous economic disadvantage to a firm like Arise.

Bottom line lesson for staffing firms: it's one thing to occasionally use an independent contractor professional in a field like accounting, law, engineering or software development - it's another thing entirely to build an entire enterprise on the shifting sands of freelancing law, especially with a clerical or industrial workforce.