At the state level,
Michigan wage and hour laws largely rely on the IRS’s “20-factor test” and its broader
“economic realities” framework in determining whether a given worker may be
classified as an independent contractor or an employee. The 20-factor approach
looks at a myriad of factors broadly grouped into three categories: behavioral
control, financial control, and relationship factors. No single factor is
outright determinative and investigators weigh multiple factors (integration
into business, right to fire, opportunity for profit/loss, who supplies tools,
etc.).[2]
This distinction is
particularly important for entities in the initial stages of business
development. Independent contractors, as opposed to employees, are generally
the classification of choice for such businesses, owing to the relatively lesser
costs and administrative burdens that come with contractors. For example,
employees must have wages withheld by their employer for income taxes, Social
Security taxes, and Medicare taxes. Moreover, employees may be entitled to
certain benefits to which independent contractors are not, such as a consistent
salary, health insurance, and retirement plans.[3]
Classification standards, however, have been challenged in various
jurisdictions by employment rights advocates, who have in some cases succeeded
in adopting a more exacting measure - termed the “ABC” test.[4]
In response to similar pressure, the Michigan Legislature has been actively considering Senate Bill 6. SB 6 would amend an existing statute, The Payment of Wages and Fringe Benefits Act.[5] This Act already contains employer obligations and penalties for wage breaches. SB 6 would overlay on this statutory framework classification rules and enforcement changes, adopting a more stringent standard. At the moment, because Michigan uses a relatively complex multi-factor approach, many working relationships fall into gray areas. Enforcement often relies on fact-intensive agency or court inquiries rather than a single bright-line rule. SB 6, at least in theory, would amend this approach by adding a more consistent test. But what does this new standard actually mean, and what does it entail for workers and employers?
2. What Does SB 6 Do?
SB 6’s core change involves overlaying existing statutes with an “ABC”-style test, along with wage-transparency measures and stronger penalties.
“ABC” Test
Under a new “ABC” test, a person may be labeled an independent contractor only if their employer satisfies all three prongs. If those conditions are not met, the worker is treated as an employee for the statute’s purposes.
- The
individual is free from control and direction of the payer in connection
with the performance of the work, both under contract and in fact.
- The
individual performs work that is outside the usual course of the payer’s
business.
- The individual is customarily engaged in an independently established trade, occupation or business of the same work performed by the individual for the payer.
Wage Transparency and Stronger Enforcement/Penalties
Wage Transparency: SB 6 tacks on stronger wage transparency measures to existing statutes, allowing for employees to request wage information about “similarly situated” coworkers for up o three years prior to the date of the request, including information regarding sex and seniority.
Stronger Enforcement & Penalties: The bill would also increase the civil fine tenfold, from 1,000 to 10,000 dollars. Moreover, the penalties would grow more stringent, even resulting in possible prison sentences for misclassifying a worker.
3. The Impact of SB 6 On Employees and Employers
If passed, SB 6 would
in many respects benefit employees, allowing more workers to gain the
protections and benefits that come with employee status, such as guaranteed
wages and overtime pay. By narrowing the definition of “independent contractor”
through the ABC test, the bill would reduce opportunities for misclassification
and wage theft. On the other hand, employers would face increased compliance
pressure and rigidity, new documentation demands, potential reclassification
costs, and higher exposure to enforcement actions.[6]
SB 6, therefore, ultimately represents a distinct policy choice: whether to
prioritize worker security and pay transparency or business flexibility and
contracting freedom.
A summary of the potential impact on employees and employers, respectively, can be found below:
Pros
for Employees
●
More workers would qualify as
employees where relationships don’t meet all ABC prongs - thus gaining
protections typically only afforded to employees. This reduces the ability of
employers to avoid obligations by labeling workers “contractors.”
● Stronger remedies & enforcement could make it easier for misclassified workers to recover wages and fringe benefits.
Cons for Employees
● However, some independent contractors who value flexibility might be pushed into employee status, gaining protections but losing contractual flexibility. For independent small-business operators, the bill could create uncertainty about their classification.
Pros
for Employers
● More consistency and clarity than the 20-Factor test. SB 6 would make it easier to avoid the gray area into which many working relationships fall.
Cons for Employers
●
Because an ABC test is typically
harder for employers to satisfy than a multi-factor economic realities test,
employers that rely on independent contractor models could face higher
compliance costs and the need to restructure relationships.
●
With increased enforcement and
penalties/fines, employers may see more audits, agency actions, and private
suits alleging misclassification and wage theft.
●
SB 6 would require businesses to
document and justify independent contractor classifications under the ABC test,
maintain those records for inspection, and potentially respond to more worker
wage inquiry requests. This potentially means more time spent on HR and legal
review.
By Brendan Koebke
[1] Image:
https://openverse.org/search/?q=employee&license_type=commercial%2Cmodification
[2] Michigan Department of Labor and Economic Opportunity: https://www.michigan.gov/leo/bureaus-agencies/uia/tools/fact-sheets/independent-contractor-or-employee
[3] IRS: https://www.irs.gov/businesses/small-businesses-self-employed/independent-contractor-self-employed-or-employee
[4] Michigan Chamber of Commerce:
https://www.michamber.com/news/independent-contractor-legislation-and-problematic-abc-test-makes-its-return-with-a-wage-transparency-twist/
[5] Michigan Legislature:
https://www.legislature.mi.gov/Bills/Bill?ObjectName=2023-SB-0006
[6] Reinartz Law Firm: https://reinartzlaw.com/what-is-the-abc-test/