Hidden inside President Biden’s $2.5tn infrastructure proposal is another piece of legislation that could have a significant impact on many small businesses, including mine. Or not.
It’s called the Protecting the Right to Organize Act – or Pro Act – and if it passes one thing’s for sure: the use of independent contractors and freelancers in businesses of all sizes will be challenged.
The Pro Act, which passed the House of Representatives in March, has two big components. The first is that it makes it easier for workers and independent contractors to organize unions. That’s certainly a concern for some employers. But the other, and bigger headache for small businesses, is that it potentially changes the way we define and classify employees.
Under the Pro Act, which is fashioned closely after California’s 2019 Assembly Bill 5 legislation:
“… an individual performing any service shall be considered an employee (except as provided in the previous sentence) and not an independent contractor, unless:
(A) the individual is free from control and direction in connection with the performance of the service, both under the contract for the performance of service and in fact;
(B) the service is performed outside the usual course of the business of the employer; and
(C) the individual is customarily engaged in an independently established trade, occupation, profession, or business of the same nature as that involved in the service performed.”
For most small businesses, complying with requirements (A) and (C) is generally not a problem – these are consistent with the rules we used in the past when determining whether a person is an independent contractor or an employee. But requirement (B) presents an issue. Here, the contractor’s services must be “outside the usual course of business of the employer”.
Why is that a concern? Because countless small businesses outsource certain revenue-generating services to independent contractors from time to time.
My company, for example, uses outside contractors to do special programming projects for our software installations and then we bill out their time to our clients. Other businesses lean on specialists to do construction, repairs, writing, editing, consulting, deliveries and other services that are marked up and invoiced. Under the Pro Act’s wording, these services may force business owners to classify these people as employees and incur the additional costs of payroll taxes and benefits.
“This legislation is filled with destructive labor proposals that will be damaging to the recovery and create an additional burden for small business owners,” says Kevin Kuhlman of the National Federation of Independent Businesses. “Small business owners can’t afford more labor costs and regulations at a time when they are struggling to stay open.” The organization opposes the bill and says that 95%t of their members believe that small businesses should be able to hire independent contractors to perform tasks essential to their business.
Many freelancers – the ones the Pro Act is designed to protect – are also opposed. According to a recent study of more than 11,000 businesses by the online networking site Alignable, 61% of the independent contractors surveyed said they would anticipate losing more than 76% of their business due to the act with nearly half of them (45%) saying they would be forced to shut down.
Mary Kearl, a professional freelance writer and marketing consultant, is concerned that she could lose all the benefits of freelancing as a result of the Act. “If enough of my clients can no longer work with me as a freelancer as a result of this new law, I’ll most likely have to get a full-time job, take a pay cut, work longer hours than my current 25 hours a week, lose my flexible schedule and autonomy, and miss out on being a primary caregiver to my child,” she writes on Business Insider. “For me and my husband, who is also a freelancer, the pros (of freelancing) include earning more per hour than when we worked full time, setting our own schedules, sharing in being the primary caregivers to our toddler, deciding the companies we work with and projects we take on, and the flexibility to work from and live anywhere.”
So should small business owners and freelancers be worried? Maybe. Maybe not.
The Freelancers Union, a trade group that’s in favor of the Pro Act, says that concerns about the employee/contractor classification issue are overblown. “Not only does the law itself specify that it is limited to amending the National Labor Relations Act,” the group writes on its blog. “An important amendment was also passed on the floor of the House explicitly spelling out that the ABC test applies to unionization alone and cannot change anyone’s employment status.”
Brandon Magner, a labor lawyer agrees. “The ABC test, if passed as part of the Pro Act, would only affect the analysis of employee v independent contractor status for the purposes of the NLRA,” he writes. “It would not change a worker’s employment status for the purposes of state laws, such as those involving minimum wage, overtime, unemployment compensation, or various benefit schemes. Thus, a worker could feasibly be classified as an employee with unionization rights under the NLRA while still qualifying as an independent contractor under said state laws.”
Magner states, as an example, the many freelancers in California’s entertainment industry who have have no consistent employer but can now collectively bargain for superior wages and benefits compared with non-union counterparts.
The problem really comes down to this: the legislation is still not clear. Does it apply only to the National Labor Relations Act and unionization? Do state laws supersede? Can small employers still use independent contractors for their services that are not “outside the usual course” of their business? Will freelancers like Mary Kearl be able to continue the flexibility and freedom she enjoys? Because so much is still being debated, that in itself means that more clarification is needed from Congress.
But unfortunately I’m not sure that clarification is going to happen if the legislation passes as written in the president’s infrastructure proposal. Which means that the issue of employee v contractor classification will continue to be a risk for small business owners, until it’s ultimately decided someday in the courts.