Are Distributor Companies in for a $500 million hit?

man showing empty pockets

Attention all promotional distributor companies: If you employ any independent contractors, or you work as one, then business as you know it could (fiscally) change forever.

Here’s Why:

Under the Fair Labor Standards Act (FLSA), the federal Department of Labor (DOL) issued a memo on July 15, 2015, that could disqualify many workers from being considered independent contractors.

If this new interpretation is adopted by courts, and applied by the DOL, then those being treated as independent contactors will now be considered employees.

Here’s the big kicker; this will result in promotional product distributors companies paying upward to $10,000 more per worker through significant payroll, compensation, healthcare and other legal ramifications.

As it currently stands in the promotional products industry, independent contractors are classed as such even though they may sell on behalf of only one company. Essentially, promotional products consultants can be treated as independent contractors even though they might not meet all of the common law factors.

However, the DOL’s new interpretation of who qualifies as an independent contactor calls into question most independent contract arrangements.

According to PPAI’s Distribution Business Survey, roughly 45 percent of the promotional product industry’s estimated 125,000 sales-force participants are independent contractors, and firms reporting less than $1 million in annual sales indicate that 60 to 70 percent of their sales forces are independent so this could add up to a whopping half a billion dollars per year in additional ‘employee’ costs.

One distributor rep that asked to remain anonymous said “I think this is good news for the smaller reps like me, I have always struggled to get affordable healthcare and feel that as I advance in my years I should have benefits like the office based staff.”

Attorney, Lisa Lori of Klehr Harrison Harvey Branzburg LLP, had this to say: “If the DOL’s new interpretation of the independent contractor test is accepted by courts, I would be concerned about relying on the old model just because that is what has been the industry standard for a long time. Companies can suddenly be saddled with overtime costs, liquidated damages, and attorneys’ fees for challenges brought by either the DOL or plaintiffs’ class action lawyers.”

Here are the most significant changes in considering a worker as an employee or an independent contractor:

  • Whether work is an integral part of an employer’s business
  • The nature and degree of a recognized employer’s control over the worker
  • Whether the work performed requires special skill or initiative
  • Whether a worker’s skills affects the opportunity for profit or loss
  • The businesses’ investment versus the workers investment.

Promotional distributors who utilize independent contractors should consider consulting with legal counsel to assess how these changes could impact their business profitability and structure.

Are you an independent contractor? Please comment and let us know what you think of these proposed changes in the box below.

One Response to “Are Distributor Companies in for a $500 million hit?

  • I’ve been an Independent Agent contractor/sales rep for my entire 31 years in the industry. During that time, I’ve sold for two different national distributors.

    The first did require their reps to be exclusive with them.

    However, when I switched to Kaeser & Blair, I learned they didn’t require 100% of the business from their dealers.

    I can see where many national as well as “Mom & Pop” distributor could take a major hit, for just that one policy.

    I feel secure with K & B as they spell it out clearly in their Dealership Contract.

    I won’t lose any sleep over this ruling.

    Dennis

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