Independent Contractor Misclassification and Compliance News January 2023

By Nathan Gibson | January 31, 2023

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Key Points

The Federal Trade Commission proposed a new rule that bars companies from entering into or enforcing a non-compete agreement with employees and independent contractors.

The United States Department of Labor and the Internal Revenue Service renewed a memorandum of understanding to help stop businesses from misclassifying workers.

As the independent workforce continues to grow, so do the issues of worker compliance and misclassification. It is important for enterprises to remain informed about the latest laws, regulations, and developments surrounding these topics. Each month, we’ll bring you the latest news stories from around the web. 

1. FTC Proposes Rule Banning Non-Compete Agreements

In January, the Federal Trade Commission proposed a new rule that bars companies from entering into or enforcing a non-compete agreement with employees and independent contractors. The proposed rule says it is an unfair method of competition for an employer to have a non-compete agreement with a worker. The proposed rule defines a worker to include an employee, independent contractor, sole proprietor, volunteer, and intern.

The proposed rule defines a non-compete broadly to include any “contractual term between an employer and a worker that prevents the worker from seeking or accepting employment with a person, or operating a business, after the conclusion of the worker’s employment with the employer.” The proposed rule says that overly broad confidentiality agreements may be prohibited.

The term non-compete clause includes a contractual term that is a de facto non-compete clause because it has the effect of prohibiting the worker from seeking or accepting employment with a person or operating a business after the conclusion of the worker’s employment with the employer. For example, ….:[a] non-disclosure agreement between an employer and a worker that is written so broadly that it effectively precludes the worker from working in the same field after the conclusion of the worker’s employment with the employer.

While an overly broad non-disclosure agreement may be prohibited by the proposed rule, the FTC does allow a carefully drafted confidentiality agreement. The FTC said:

The definition of non-compete clause would generally not include other types of restrictive employment covenants—such as non-disclosure agreements (“NDAs”) and client or customer non-solicitation agreements—because these covenants generally do not prevent a worker from seeking or accepting employment with a person or operating a business after the conclusion of the worker’s employment with the employer.

The key factor is whether the non-disclosure agreement prevents a worker from obtaining employment elsewhere. Companies can protect their confidential information by carefully crafting confidentiality agreements without unduly restricting future employment opportunities of their workers.

The proposed rule requires companies to rescind existing non-compete agreements. The proposed rule allows non-compete agreements in connection with the sale of a company and does not apply to companies outside the FTC’s jurisdiction (like banks and non-profit organizations).

The proposed rule has a 60-day comment period during which businesses and employers can make comments through March 10, 2023. The FTC will review the comments and may make changes before adopting a final rule. The proposed rule sets a compliance date for all employers as 180 days after publication of any final rule.

2. DOL and IRS Renew Agreement to Cooperate to Fight Misclassification

The United States Department of Labor (DOL) and the Internal Revenue Service (IRS) renewed a memorandum of understanding (MOU) to help stop businesses from misclassifying workers.

The updated MOU will also help the DOL share information with the IRS to strengthen enforcement of federal and state laws that protect workers’ rights.

“We are determined to identify and resolve labor violations by employers who benefit by misclassifying employees as independent contractors and deprive them of the protections of the labor standards laws we enforce,” said Principal Deputy Wage and Hour Administrator Jessica Looman. “Renewing our memorandum of understanding with the IRS strengthens our existing partnership by improving referral processes and information sharing to help us better serve the nation’s workers.”

In 2011, the DOL and the IRS first entered into a memorandum of understanding to enable both agencies to use their resources to promote employer compliance with obligations to pay employees and related employment taxes. Since then, the division and IRS have shared information when an investigation discovered that an employer had misclassified employees. By sharing information, the agencies reduce the illegal use of misclassification and the tax gap while improving compliance with federal labor laws.

For more information, check out our resources page on misclassification and compliance. If you have any questions about engagement, classification, or management of your independent workforce, we’re always here to help. 

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