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THE FUTURE OF WORKERS’ CLASSIFICATION: A POST-PANDEMIC DILEMMA

 

The COVID-19 pandemic affected businesses across the states in several ways. Among the entities who were impacted the most by prolonged quarantine periods were small businesses. Small businesses account for more than 99% of businesses in the United States, and it has been estimated that they employ around 60 million people in the country.[1]

Small businesses strongly felt the impact of the pandemic on various aspects of their operations, such as “cash flow, inflation, and taxes.”[2] One aspect, however, played a significant role in contributing to an already deteriorating condition: Workers’ shortages. Some even went as far as calling the phenomenon “the Great Resignation.”[3] The shortage is persistent, even amidst rising vaccination rates and a vaccine mandate in many places.[4] Statistics from the Department of Labor (DOL) show that as of January 2022,  6 million persons reported an inability to work due to pandemic-related reasons.[5] Some of those reasons could be traced back to employers closing or losing their businesses. What is even more surprising is that those figures were up from “3.1 million” in December.[6]

Since the beginning of the pandemic, multiple factors contributed to the change in the labor market. When the first COVID wave hit the country, national and small businesses alike were clueless about the future of their businesses and what this new—almost extraterrestrial—phenomenon would entail. When stores and commercial retailers across the country went on lockdown, employers’ first response was laying off their employees and cutting costs in an attempt to mitigate the impact of what had been an unknown future.[7] At the time, workers who were accustomed to maintain a regular working schedule suddenly found themselves without a job. Even for those who managed to get through the lockdown without getting laid off, as schools went remote, parents across the country struggled with childcare, online schooling, and caregiving responsibilities, forcing them out of the labor market. Everyone was forced to adjust to a new normal: employers and employees alike. Likewise, some workers struggled to recover from the effects of COVID-19 which proved to be persistent for many of those infected.[8]

Amidst the change in the labor force and the workers’ shortage, it is only normal to expect the hiring dynamics to shift for small businesses. One important aspect that may be affected by these turbulences is workers’ classification. Workers’ classification involves evaluating whether a worker is considered an employee versus an independent contractor. For instance, the Internal Revenue Service (IRS) draws a clear distinction between employees and independent contractors, requiring businesses to “withhold income taxes and pay Social Security, Medicare taxes and unemployment tax on wages paid to an employee.”[9] On the other hand, for independent contractors, it is up to them to pay for all their social security and Medicare taxes.[10] Apart from tax implications, independent contractors generally do not have the same benefits that businesses are required to provide for their employees under the Fair Labor Standards Act (FLSA). That includes minimum hourly wages, extra pay, and breaks and meal periods.[11]  In most cases, independent contractors are also not eligible for unemployment insurance.[12]

One primary factor government agencies, courts, and others consider to determine whether a worker falls within one category or the other is one of control.[13] The IRS uses a 3-part test that accounts for both behavioral and financial control as well as the type of relationship between the worker and the employer.[14] That said, there are consequences to employers from the IRS and the DOL for misclassifying workers as independent contractors while having them perform employee-duties.[15]

            Thanks to the pandemic—workers have increasingly started looking for more flexibility in performing their job duties. Some workers have struggled with childcare well into 2022 while schools were still being held remotely.[16] As the pandemic changed the dynamics of what we consider a traditional job—the typical day and night shifts arrangements accompanied with a consistent need for physical presence in the workplace—workers have now more than ever settled into a new routine. That made it difficult for workers to readjust to pre-pandemic working models and to what has been once the norm. The demand for flexibility has become a work culture by itself. In a 2021 survey by EY Americas, more than half of the employees surveyed indicated that they would quit their jobs if they were not provided with “post-pandemic flexibility.”[17]

            As independent contractors tend to have more flexible arrangements in their working hours and in how they perform their job duties,[18] businesses may be tempted to shift some of the job positions that would traditionally be reserved for employees to independent contractor designations.[19] When this is accompanied by the relevant legal standards, small businesses may in fact benefit from such a change. Following two years of living in a global pandemic, some small businesses are still struggling to maintain their operations and to stand on their own feet,[20] and recent developments in supply chain issues have only made this problem worse.[21]

Cutting costs while still preserving a workforce could constitute a natural solution that small businesses’ owners might resort to at some point in the future. As hiring employees generally costs more than hiring independent contractors,[22] implementing changes in workers’ dynamics might be the change that small businesses would be looking at to survive these tiring times. If that is to happen, small businesses should be aware that they must abide by the legal requirements necessary to implement such changes.[23]  Small businesses are likewise advised to consider their workers when making such decisions, as many employees may not afford a drastic shift in working models.        

 By: Sara El Souki


[1] https://www.mckinsey.com/featured-insights/mckinsey-live/webinars/protecting-us-small-businesses-from-the-impact-of-covid-19

[2] https://www.linkedin.com/pulse/small-business-owners-exhausted-optimistic-heading-/?trackingId=enHumNEKZYtrL3%2FSXDimyg%3D%3D

[3] https://www.cbsnews.com/news/americans-quit-jobs-states-leading/

[4] https://www.fiercehealthcare.com/hospitals/aha-concerned-federal-vaccine-mandate-could-make-workforce-shortages-worse

[5] https://www.bls.gov/news.release/empsit.nr0.htm

[6] https://www.bls.gov/news.release/empsit.nr0.htm

[7] https://www.shrm.org/hr-today/news/all-things-work/pages/cutting-staff-due-to-coronavirus-fallout.aspx

[8] https://www.cbsnews.com/news/americans-quit-jobs-states-leading/

[9] https://www.irs.gov/newsroom/understanding-employee-vs-contractor-designation

[10] https://www.ptla.org/worker-classification-employee-vs-independent-contractor

[11] https://www.dol.gov/agencies/whd/flsa/faq

[12] https://bench.co/blog/accounting/independent-contractor-vs-employee/?blog=e6

[13] https://www.irs.gov/newsroom/understanding-employee-vs-contractor-designation

[14] https://www.michigan.gov/documents/uia/155_-_Independent_Contractor_20-Factor_IRS_Test_Revised_01-08-13_408013_7.pdf

[15] https://justworks.com/blog/consequences-misclassifying-workers-independent-contractors

[16] https://www.clickondetroit.com/all-about-ann-arbor/2021/12/31/ann-arbor-public-schools-will-have-remote-start-in-2022-due-to-covid-surge/

[17]https://www.ey.com/en_us/news/2021/05/more-than-half-of-employees-globally-would-quit-their-jobs-if-not-provided-post-pandemic-flexibility-ey-survey-finds

[18] https://www.acf.hhs.gov/css/training-technical-assistance/whats-difference-between-independent-contractor-and-employee

[19] https://www.jucm.com/the-hazards-of-independent-contractor-employee-misclassification/

[20] https://upnorthnewswi.com/2022/01/27/nearly-two-years-into-pandemic-some-small-businesses-still-struggling/

[21] https://www.nytimes.com/2021/10/22/business/shortages-supply-chain.html

[22] https://smallbusiness.chron.com/costs-employee-vs-independent-contractor-1077.html

[23] https://www.nolo.com/legal-encyclopedia/employees-vs-independent-contractors.html


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