DOL: NEW RULES FOR EMPLOYEES vs. CONTRACTORS | Scolaro Fetter Grizanti & McGough, PC | Watertown, NY

February 5, 2024

By:  Elizabeth M. Maugeri, Esq.


The Department of Labor issued a new final rule regarding the distinction between employees and independent contractors on January 10, 2024. This rule, while in some ways is similar to the 2021 Independent Contractor Rule (IRC), mostly departs from the previous iteration.


The Department believed the 2021 IRC was not fully in agreement with the framework outlined in the Fair Labor Standards Act (FLSA) or the courts' interpretation of the FLSA by departing from accepted case law in applying the economic reality test. Thus, on October 13, 2022, the Department published a Notice of Proposed Rulemaking (NPRM) regarding the classification of employees versus independent contractors under the 2021 IRC.


The final rule returns to the notion of framing of investment by a worker as its own separate factor, and the most significant factor being whether the work performed by the worker is an integral part of the potential employer’s business. However, the final rule maintains that no one factor is determinative in assessing if a worker is an employee or independent contractor. Additionally, it offers a broader discussion of how scheduling, remote supervision, price setting, and the ability to work for others concurrently should be considered as factors and allows for more consideration of reserved rights, which was minimized in the 2021 IRC. The main purpose of the changes made was to avoid any potential misclassification of workers whether intentional or accidental. The rule maintains that part 795 continues to contain the Department’s general interpretations.


After taking comments, the Department published the final rule, which consists of an outline of six, non-determinative, factors for consideration. The factors are: (1) opportunity for profit or loss depending on managerial skill, (2) investments by the worker and the potential employer, (3) degree of permanence of the work relationship, (4) nature and degree of control, (5) extent to which the work performed is an integral part of the potential employer’s business; and (6) skill and initiative. Other relevant factors may be considered on a case-by-case basis. These six factors are meant to be offered as a guide for assessment as to the economic realities of the working relationship.


When assessing opportunity for profit or loss depending on managerial skill, the Department implores potential employers to consider if their workers have opportunity for profit or loss that affect the worker’s economic success or failure when performing the work. Factors that may be relevant to this assessment could be whether the worker can meaningfully negotiate the charge or pay for their work, whether the worker accepts or declines jobs on their own, whether the worker makes hiring decisions, or if the worker chooses when or how the work is performed. If the worker does not have these types of opportunities available, then this factor suggests that they may be an employee.


When considering the second factor, whether any investments by the worker are capital or entrepreneurial in nature, the assessment asks what the costs are to the worker for performing the job. Notably, some costs that are unilaterally placed on the worker by the potential employer, such as the tools or equipment needed to perform the job, or the cost of the labor do not necessarily suggest the worker performs independently. If the worker has opportunity to do differing types of work, reduce costs, or extend their market reach, this may indicate they are an independent contractor. However, the costs to the potential employer and to the worker should be considered relative to each other. The comparison should be done on investments, such as if the worker is making similar investments as the potential employer, even if on a much smaller scale.


The third factor weighs in favor of a worker being an employee when the working relationship between the worker and the potential employer is indefinite, continuous, or exclusive. However, this does not imply that temporary or seasonal workers should be considered independent contractors as the lack of permanence due to operational characteristics to a particular business should be considered in these circumstances. A worker may an independent contractor if the work performed is non-exclusive, project-based, or generally sporadic.


Fourth considers the control over the worker and the working relationship that the potential employer has. It may be relevant to consider whether the potential employer sets the worker’s schedule, supervises the work, limits the worker’s ability to work for others, or the sets pricing or rates of the services. Additionally, when a potential employer’s actions in regard to the worker go beyond that is required for compliance with federal, state, or local laws and regulations, this may be suggestive of an employer-employee relationship.


The fifth factor is one of the more significant factors, and asks whether the work performed by the worker is integral to the potential employer’s business. This factor does not ask whether the worker themselves are integral, but rather if the work they perform is. This factor will likely consider a worker an employee if the work performed is critical, necessary, or central to the potential employer’s business.


The final factor considers whether the worker utilizes specialized skill sets to perform their work and if those skill sets contribute to a business-like initiative. If the worker does not utilize specialized skills or if the worker is dependent on training to learn or utilize specialized skills, then the factor weighs towards the worker being an employee. However, if the worker brings a specialized skill set to the jobs they perform, this does not automatically indicative of the worker being an independent contractor. The worker’s use of the skills in connection with the job itself is what matters in most cases.


While the final rule does not act as anything other than a reinforcement of already established legal guidance, it leans more pro-employee than its predecessor. The impact of it is likely to be felt by companies in the gig economy, such as food delivery (i.e., DoorDash, Postmates, UberEats) or transportation mobility services (i.e., Uber, Lyft); freelancers; construction workers; and truckers. Litigation has already been brought forth by associations and individuals in these spaces, who argue that the final rule creates a much vaguer landscape for assessment which will ultimately force independent contractors into unnecessary employment relationships. Decisions by the courts regarding the filed complaints have not yet been issued.


The final rule does not impact any other federal, state, or local laws that use other determinative factors for employee classification.


This article is intended to be for informational and discussion purposes only and is not to be construed as legal advice or as a legal opinion on which certain actions should or should not be taken.

Important Notice for New York State LLCs

August 8, 2024
By: Nicholas J. Graham, Esq. Limited Liability Companies ("LLC") have been authorized in New York since 1994. When the law was first enacted, an LLC could not have perpetual existence like corporations. This limitation was removed in 1997. If your LLC was established under the old New York State law that imposed a 30-year lifespan, it's crucial to be aware of the approaching expiration of your company's duration. Originally, LLCs in New York were required to specify a limited duration, commonly set at 30 years. Many of these companies are now reaching the end of this period and must take action to continue operating. Special attention should be given to LLC's formed between 1994 and 1997, as they were likely established with a 30-year lifespan. What Has Changed? The law in New York has evolved, and LLCs are no longer bound by the 30-year limit. Pursuant to NY LLC law §701(1), businesses now have the option to exist perpetually, providing greater flexibility and stability for long-term planning. However, this change is not automatic for existing LLCs that were originally set up with a 30-year term. What You Need to Do To ensure your LLC can continue its operations beyond the original 30-year term, you need to file an amended Articles of Organization with the New York Department of State. This amendment should update the duration of your LLC to perpetual, or to another term if desired. Steps to Amend Your Articles of Organization: Prepare the Amendment: Draft an amendment to your LLC's Articles of Organization. This document should clearly state the new duration of the LLC, typically set to "perpetual." File the Amendment: Submit the amended Articles of Organization to the New York Department of State. This can usually be done online or by mail. Ensure that you include the necessary filing fee. Update Internal Documents: Reflect the change in your LLC's operating agreement and any other internal documents to ensure consistency and compliance. Notify Members and Stakeholders: Inform all members and relevant stakeholders of the change to ensure everyone is aware of the updated status of the LLC. Why It Matters Failing to update your LLC’s duration could result in the automatic dissolution of the company once the original 30-year term expires. This could lead to significant disruptions in business operations and potential legal complications. By taking proactive steps to amend your Articles of Organization, you can ensure the continuity of your LLC and take advantage of the flexibility offered by the current laws. Need Assistance? The Scolaro Law Firm specializes in helping businesses navigate changes in regulatory requirements. If you need assistance with amending your Articles of Organization or have any questions regarding your LLC's status, please contact us. Our experienced team is here to provide the guidance and support you need to keep your business running smoothly. This article is intended to be for informational and discussion purposes only and is not to be construed as legal advice or as a legal opinion on which certain actions should or should not be taken.

SMB M&A SERIES: Financing Business Acquisitions

July 23, 2024
By: Nicholas J. Graham, Esq. The SMB M&A series provides insights into buying and selling a small business. For business buyers looking to acquire a small business, securing the right financing is often a critical step. The U.S. Small Business Administration (SBA) offers two popular loan programs that can be invaluable in this process: the 7(a) loan and the 504 loan. These loans are available through local lenders and are partially guaranteed by the SBA, reducing the risk for lenders and making it easier for small businesses and entrepreneurs to obtain financing. Both programs provide favorable terms that can make acquiring a business more achievable. Here’s a closer look at how each can be used, with a particular focus on the flexibility of the 7(a) loan, as it is more commonly used for business acquisitions. The SBA 7(a) Loan Program The 7(a) loan program is the SBA’s most popular and flexible loan option. It is designed to help small businesses and entrepreneurs obtain financing when they might not be eligible for traditional financing options. Here are the key advantages and uses of the 7(a) loan for business acquisitions: 1. Broad Eligibility and Use of Funds: The 7(a) loan can be used for a variety of purposes, including purchasing a business which can include goodwill, buying out partners, acquiring real estate, and refinancing existing debt. This flexibility makes it an ideal choice for business acquisitions where the buyer may need to cover multiple types of expenses. 2. Favorable Terms and Conditions: 7(a) loans offer competitive interest rates, long repayment terms (up to 10 years for business acquisitions), and lower down payment requirements compared to conventional loans. These favorable terms can ease the financial burden on buyers and improve cash flow during the critical early stages of ownership. 3. Working Capital Inclusion: One significant advantage of the 7(a) loan is the ability to include working capital in the loan amount. This can provide new business owners with the necessary liquidity to manage day-to-day operations, especially important during the transition period post-acquisition. 4. Collateral Flexibility: While the SBA prefers loans to be fully collateralized, a 7(a) loan can still be approved even if sufficient collateral is not available. This can be a major benefit for buyers who have limited assets to pledge. The SBA 504 Loan Program The 504 loan program is another powerful financing tool, primarily focused on fixed assets such as real estate and equipment. It involves a partnership between the SBA, a Certified Development Company (“CDC”), and a private lender. Here’s how it works for business acquisitions: 1. Structured Financing: A 504 loan typically consists of three parts: a loan from a private sector lender covering 50% of the project cost, a loan from a CDC covering up to 40%, and a 10% down payment from the borrower. This structure can reduce the amount of equity the buyer needs to provide upfront. 2. Long-Term Fixed Rates: The 504 loan offers long-term fixed interest rates, which can provide stability and predictability for business owners. This is particularly beneficial when acquiring property as part of the business purchase. 3. Real Estate and Equipment Focus: While the 504 loan is less flexible than the 7(a) loan in terms of eligible uses, it is ideal for acquisitions that involve significant real estate or heavy equipment investments. The ability to finance these assets over a long term with a fixed rate can be a strategic advantage. Conclusion Navigating the complexities of financing a business acquisition can be challenging, but SBA loans offer valuable tools to help buyers achieve their goals. The 7(a) loan’s flexibility and broad eligibility make it a particularly attractive option, while the 504 loan’s fixed-rate, long-term structure provides stability for significant asset purchases. However, to truly capitalize on these advantages, it's essential to structure the transaction properly and adhere to all eligibility criteria and regulatory requirements. With careful planning and compliance, SBA loans can provide the financial support needed to successfully acquire and grow a business. If you’re considering buying a business and exploring SBA loan options, our experienced M&A team at Scolaro Fetter Grizanti & McGough, P.C. is here to help. Our team handles small business M&A transactions throughout New York State, Vermont, Pennsylvania and Florida. This article is intended to be for informational and discussion purposes only and is not to be construed as legal advice or as a legal opinion on which certain actions should or should not be taken.