WASHINGTON, DC – FEBRUARY 17: U.S. President Joe Biden meet with labor union leaders, including, at … [+]
[Given the length of this piece, I’m adding a tl;dr—or too long, didn’t read, for those who don’t know the term—version here. According to many labor lawyers and tax experts, no one knows what the PRO Act, with the ABC test for an employee or independent contractor status, ultimately will mean to millions. Conflicts with other areas of law could turn into years of court cases to know. To put it politely, anyone who claims the legislation will only mean this, that, or the other for contractors, employers, and even employees is mistaken.]
You may have followed debates about the Protecting the Right to Organize (PRO) Act, union-friendly legislation that would make the largest modifications to the long-standing National Labor Relations Act since the Taft-Hartley Act restricted union power in 1947. In the process, you’ve likely heard about the ABC test and heard absolute statements about how the bill, if enacted, would affect independent contractors (ICs)—self-employed small businesspeople.
Those statements may have been “this will only affect the right of independent contractors to join a union and nothing more” by supporters or “the entirety of self-employment will melt in a blinding solar flare if the bill passes” from critics.
Neither is true. Instead, the biggest problem is uncertainty for ICs, businesses large and small, and even employees.
Experts in tax law as well as labor law attorneys representing both employers and employees have all told me that the legislation will potentially clash with existing laws in many ways. Untangling that could require years of court cases, potentially endanger the ability of many long-established independent contractors to continue their businesses, and even possibly hurt many people supporters claim it will help.
Could, would, maybe, and might are words frequently used to create fear. In this case, though, they provide the only apt and reasonable descriptions available.
As Jeremy Schatz of Virtus Law Group, a labor lawyer who represents employee plaintiffs suing employers in Alabama, put it, the ABC test in the PRO Act is a “massive conflict” with existing laws (not unusual for any new law that doesn’t try to address contradictions with existing statutes) and that anyone who says they know exactly what the implications are is “not being truthful.”
The ABC test
ABC is a three-part rule to determine someone’s status as either an employee or independent contractor. As explained by the state of California, where it was implemented first in a court case and then codified and expanded in the controversial AB5 law, the three parts require the following:
“The worker is free from the control and direction of the hiring entity in connection with the performance of the work, both under the contract for the performance of the work and in fact;”
“The worker performs work that is outside the usual course of the hiring entity’s business; and”
“The worker is customarily engaged in an independently established trade, occupation, or business of the same nature as that involved in the work performed.”
Dating to the 1930s, when the employment landscape was vastly different than today, ABC is purportedly in the PRO Act to allow a greater range of people to join unions by classifying a greater number of people, including many independent contractors, as employees for that purpose.
“It really means you can have a union full of independent contractors,” said Domenique Camacho Moran, a labor attorney with the firm Farrell Fritz who only represents management.
There are certainly many people misclassified as contractors who are actually employees. Companies do this because they pay fewer taxes and offload some costs of business onto the individuals. There are also millions of legitimate contractors that unions would like to reach to increase their own numbers and gain revenue through dues, even if it means turning them into employees by expanding the use of the ABC test into all areas of law (as Biden said he wanted to do as president).
Proponents have frequently emphasized the legislation would only affect the National Labor Relations Act. That is true and it’s exactly why the legal conflicts would exist. “The IRS has one test [for independent status], the Department of Labor has one test, state laws have other tests,” Moran continued. Title VII of the Civil Rights Act of 1964, which prohibits discrimination based on race, color, religion, sex, and national original, “has a different test, too.”
Usual course of business
One example of conflict is at the heart of the ABC test’s second prong requirement that an IC perform work outside of the usual course of business of a company. But what does that mean?
There is no definition. The only court rulings of the “really vague phrase” are at a state level, which could inform federal decisions but are not binding precedent, according to Cassady Toles, a California labor attorney. Those decisions tended to require the “strictest” description of a business and what it does.
For example, “a publisher is someone who prints and distributes something,” including vanity publishing, as Toles explained. “That company can exist without having any writers or editors or any of that stuff. As a result, editors [are] not essential to publishing. Whether it may sound insane to anyone who knows anything about publishing is irrelevant.”
But there is no guarantee that federal court decisions would follow this line. Schatz uses a contractor once or twice a month to pick up settlement checks or other paperwork. Getting the checks or delivering papers is clearly part of the lawyer’s work, according to Schatz. But does the driving now become part of the usual course of business? “I don’t know,” he said.
“Anyone who tells you they’re confident on how broad or narrow that phrase is going to be, they’re not being honest,” said Daniel Kalish, managing partner of HKM Employment Attorneys, a large national law firm that represents employees and unions.
The PRO Act technically only applies that standard regarding unions. However, the Biden administration, unions, and Democrats have all declared their desire to push the ABC test into all areas of employment, labor, and tax law. That is what worries so many ICs.
There is also an additional issue. “Although this is narrowly drafted to only amend the National Labor Relations Act, it is likely to be used as guidance in a number of other contexts,” Moran said.
“How are other courts going to apply this test?” Kalish asked. “Are courts going to interpret the statutory language in a way that will make it more likely workers are employees?”
“There’s variation among federal statutes already,” said Michael Hayes, a professor of employment and labor law at the University of Baltimore School of Law. “The IRS has a different test from the Department of Labor for the Fair Labor Standards Act. If this is not passed in the Senate, of course everything stays the same. But I do think the Department of Labor and maybe the IRS might take another look at the definition of an independent contractor. The percentage of workers being brought into that category is increasing so much.”
Taxes and other issues
One aspect of being an IC is operating under laws designed for businesses, not employees.
“It allows them to deduct certain expenses, to set themselves up more along the lines of a business,” said Chester Spatt, professor of finance at Carnegie Mellon University’s Tepper School of Business. Without that ability, a business can become untenable as the Tax Cuts and Jobs Act of 2017 eliminated employee deductions for non-reimbursed business expenses. Now not only is the IC paying the expenses but taxes on them as though the money was profits sitting in their bank accounts.
But even without intended extension of the ABC test into all other areas of law, if the claimed intent is to let ICs join unions, that could have a negative effect.
ICs who work as part of a union and under a collective bargaining agreement could potentially find the IRS—which has its own complex test—in disagreement over their tax status.
“Now you have two federal laws. If they’re conflicting, that’s not as easy [to resolve],” said Michael Raiken, a tax attorney and CPA who is an associate at E. Martin Davidoff & Associates.
This quickly gets tangled. If someone has treated themselves under taxes as a contractor for a long time, the IRS may leave things given a “quirky section that was never codified into the [Internal Revenue code],” Raiken said. That isn’t a guarantee and it also doesn’t keep employers from taking their own preventative action to what they would see as a risk.
When employers decide
A resolution could also come from a decision of an employer. “I think if people are not certain of how to categorize these workers, they will play it safe to treat them as employees to protect themselves,” said Robbin E. Caruso, a partner in the tax department of Prager Metis CPA.
If the employer changes the status, the “IRS will agree with it,” Raiken said.
A person can have an IC business and work as an employee for a company simultaneously. The question would be how many clients would make a similar shift.
An IC might also find themselves being forced into union-type work as the PRO Act would end state right-to-work laws that prevent collective bargaining agreements from insisting that all workers be union members. Could such a closed shop force W-2 status on ICs?
“I don’t know off hand,” Kalish said. “I think so. All the time they have these collective bargaining agreements with seniority system with projects going to people in the union first and if not enough union members there, it would go outside.”
No one knows the implications on tax status or many other things, such as whether client companies would quickly turn IC into W-2 employees; whether an IC union member would have access to pensions, 401(k) plans, or retirement funds that come under entirely different areas of law; unemployment implications; coverage by workers’ compensation; and who knows what else.
There are also potential negative effects for some broad areas of workers, like those in the so-called gig platform economies. As I heard from one of the major rideshare companies, if their drivers, who are currently treated as contractors, had to become employees, there would be a huge winnowing of those allowed to work.
Doubtless many supporting the ABC test in the PRO Act would claim this to be bunk, but it’s not. Rather, the threat is a cold expression of business logic. Lyft
have many drivers who can work whenever and wherever they want. But labor is a big cost to any company, let along giants that still collectively lose billons of dollars a year (a separate discussion, as is the societal wisdom of a business model that requires people to work as contractors when they may be ill-equipped to run a business).
No company could afford to have as many people come by at a time and place and claim full employee status with at least minimum wage, and maybe negotiated expenses. That could tank even a profitable business. Cutting the ranks and establishing strict schedules and shifts isn’t a threat but a recognition of economic reality. Many tens of thousands would lose what might be a part-time income they came to depend on because they must be employees.
The most likely prediction lawyers were willing to make was that the interplay between the NLSA and long-standing antitrust legislation would “probably” prevent ICs in a union to run afoul of issues like price-fixing, which technically they otherwise could. But then they are in a union—probably participating in collective bargaining (Why else would they join?)—and may be worrying about many other things.
Ultimately, the issue is balance. “The labor statute at issue has not been substantially modified since 1947 with [the Taft-Hartley Act],” said Todd Lyon, partner and co-chair of the nationwide labor relations practice group of Fisher & Phillips. “Since that time, while differing sides of this equation may differ, the law has not changed because there is a balance between labor and management in union related matters.”
But while Republicans and Democrats have both pushed to have regulations and law favor their views, the pendulum swings have increased since the 1980s. An example occurred under the Trump administration, when the DOL tried to create a more business-friendly definition of ICs. Now the Biden administration is pushing hard the other way. The danger for ICs, small businesses, large businesses, and even employees is the lack of clarity and predictability.
Rather than having a large swing of imposed self-interest with every shift of power in D.C., it would be far wiser for all sides to come together, listen to one another, and compromise on an approach that can work for everyone and not drunkenly lurch from one side to the other.