Government Affairs Roundup for 1.24.2024

Chamber members:

A number of concerning topics are in today’s roundup for your review. Read on for information about independent contractor rules, main street lending, and a ban on service charges.

What Businesses Need to Know About the Independent Contractor Rule
With much fanfare, but little surprise, on January 9, the Department of Labor unveiled its new regulation for classifying workers as either independent contractors or employees under the Fair Labor Standards Act. The final regulation, as expected, hews very closely to the proposed regulation. Under the new rule, it is expected that many independent contractors would be deemed as employees by the Labor Department. It was published in the January 10th Federal Register and will take effect March 11.

Being classified as an employee, instead of an independent contractor, will result in millions of Americans losing the opportunity to get work and will threaten the flexibility these individuals have to work when and how they want.
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Independent contractors feel they are more productive and earn more income than if they were employees. The Labor Department reached a similar conclusion finding that “freelancers and contract workers are paid more per hour than traditional employees.”

The rule includes vague and undefined terms, like “reserved control” that will make it difficult for employers to determine whether the Labor Department will decide that an independent contractor should have been classified as an employee.

The thrust of the regulation is to give the Department of Labor a stronger tool to classify more workers as employees rather than independent contractors. The DOL argues that this new regulation is necessary to go after employers who are misclassifying workers as independent contractors, but they are having no trouble doing that now under the current regulation that was implemented in 2021 and which this regulation explicitly rescinds. In reality, this new regulation changes the terms for determining whether someone is an independent contractor or employee, making more current independent contractors look like employees.

Changing the rules isn’t necessary to improve enforcement; it simply raises the bar so that more companies will now be out of compliance. While companies will still be able to use independent contractors, the new classification analysis tilts towards finding an employment relationship.

Companies will need to carefully review their current independent contractor relationships to ensure they conform to the new rule. If a company is found to have misclassified a worker, that company will be subject to back pay and penalties under the FLSA, such as minimum wage and overtime compensation violations.

The following are highlights of the final regulation and problems the new regulation will cause:

• Totality of Circumstances Structure: The new regulation rescinds the 2021 regulation’s emphasis on control and opportunity for profit and loss, leaving employers unsure of which factors the DOL will use in determining whether a worker has been properly classified. This regulation, far from DOL’s assertions, leaves employers completely in the dark and guessing about their classification decisions. The exception to this will be if an employer classifies their worker as an employee.  One can assume DOL will never challenge that classification.
• Open-Ended, Undefined Terms: Despite DOL disingenuously claiming that the rule includes six factors, it still includes the seventh catch-all factor referred to as “additional factors.” In other words, if DOL can’t prove an employment relationship using the six specific factors in the rule, there is a completely undefined factor that can be used to claim misclassification.
• Reserved Control: Under the analysis about who controls the work product of the worker, the final rule includes “reserved control” as did the proposed regulation. This term is not defined and could be used to conclude that the control factor supports finding an employment relationship.
• Compliance with Local, State, and Federal Laws and Regulations: The final rule pretends to pull back from using compliance with local, state, or federal laws and regulations as indicia of control, but in the next sentence says that if the potential employer has their own standards that could be indicative of control leading to employee status. This could create significant problems as most employers with a strong emphasis on workplace safety have their own safety programs that exceed OSHA standards, so if a company hires an IC to do some kind of work on their premise and says “here’s our safety program, follow it” they will be asserting control that could be cited by DOL as evidence of misclassification.
• California’s ABC Test: While DOL claims the rule does not implement the CA ABC test, it mirrors it very closely and DOL’s claim that the regulation does not reflect the ABC test leaves something to be desired. The ABC test requires that to be an independent contractor the worker must meet all of the following three factors: the company does not exert sufficient control on the worker; the work is outside the company’s typical business; and the worker normally provides this type of work as an independent business. In the final regulation, control is an expected major factor, and whether the work done by the potential IC is outside the company’s typical business will be judged under the following language: “Extent to which the work performed is an integral part of the potential employer’s business.” This is arguably the core of the ABC test and one that will likely be used to support a finding of employee status.
• Severability Clause: The Department has begun regularly including severability clauses in their regulations so that if one portion of it is struck down by a legal challenge, the remainder of the regulation can survive. In this regulation, which is understood to mean that if the new regulatory provisions are invalidated, the portion of this regulation rescinding the 2021 regulation would still take effect.  This would effectively mean that there is no rule in place, and DOL would enforce the FLSA using their standards from before the 2021 regulation was implemented. In some ways, that approach would be very similar to the new rule, although not explicitly setting up the totality of circumstances analytical framework and including open-ended terms that were not present previously. It’s worth noting that in any court challenge to the rule, a judge is under no obligation to respect the severability language.

If a company is found to have misclassified a worker, that company will be subject to back pay and penalties. This regulation is unnecessary and could have significant negative impacts on our economy.

Main Street Lending Protection
Businesses throughout the United States heavily depend on bank loans to expand, innovate, and contribute to their local communities. However, the ‘Basel III Endgame,’ a set of proposed rules from the Federal Reserve, the Federal Deposit Insurance Corporation (FDIC), and the Office of the Comptroller of the Currency (OCC), threatens to create obstacles for businesses seeking the necessary financing for growth, innovation, and employment.

The Basel III Endgame rules aim to raise the capital requirements for banks, forcing them to hold more funds in reserve. The Federal Reserve estimates an overall 16% increase in capital requirements across the banking sector, with potentially higher impacts on individual banks. While the rationale behind Basel III is to enhance bank stability, a comprehensive 21-year study suggests that the mandated capital buffers are overly cautious and do not align with real-world scenarios.

The repercussions for Main Street businesses are significant. The implementation of Basel III Endgame is anticipated to disrupt the lending ecosystem, leading to reduced loan availability and impeding economic growth across various sectors. Despite the initiative’s goal of strengthening the banking system, it may paradoxically harm economic opportunities in the U.S.

Consider the scenario of an aspiring entrepreneur seeking a loan. Under the proposed Basel III Endgame rules, a privately owned small business is likely to face higher loan costs compared to a well-known public company. This is because banks must hold more capital against loans to private businesses. Given that approximately 99% of U.S. businesses are private, this could result in small businesses paying more interest over the life of the loan compared to their larger counterparts.

The impact extends to small business tenants in the commercial real estate market, already strained by the aftermath of the COVID-19 pandemic. The rules increase capital requirements on commercial real estate lending, potentially leading to higher costs for tenants. This, in turn, may prompt businesses to reduce leased space or exit leases altogether, affecting retail options for consumers.

Farmers, reliant on financial agreements like derivatives to safeguard against unforeseen changes in crop and livestock prices, also face challenges under the Basel III Endgame rules. The increased capital requirements could make these hedging contracts more expensive or less available, leaving farmers more vulnerable to risks such as droughts.

In essence, the proposed Basel III Endgame rules threaten to tie up funds that could otherwise support businesses of all sizes. This has a detrimental impact on the U.S. economy, affecting everyone from aspiring entrepreneurs to consumers supporting local businesses. It is imperative for the Federal Reserve, FDIC, and OCC to reconsider these rules, taking into account their costs to businesses and the overall economy, and to propose regulations that foster rather than hinder economic growth.

Federal Trade Commission Ban on Service Charges – Public Comment Extended
In October 2023, the FTC proposed a rule that would prohibit junk fees – “hidden charges and bogus fees that cost consumers tens of billions of dollars each year and undercut honest businesses.” The FTC wants your feedback on its proposed Trade Regulation Rule on Unfair or Deceptive Fees and has extended the deadline to February 7th.

While subject to state law and rules established by the card companies, charging transaction fees by businesses is legal. In recent times, many businesses have commenced charging service fees instead of or in addition to any transaction fees. The term “service fees” refers to any generic fee charged by a business owner in addition to the total transaction amount. Examples of such service fees include restaurants adding an extra fee to offset inflation, fees charged by a host to clean a vacation rental accommodation, fees charged by a ticketing vendor when tickets to any live event are purchased online, fees charged by a third-party travel ticket vendor as a commission, etc.

The Federal Trade Commission’s (FTC) proposed rule could force restaurant operators of all sizes to rewrite compensation models, increase menu prices, and overhaul established business practices. The FTC admits it would cost restaurants at least $3.5 billion to comply with their plan.

The FTC would force restaurant operators to:

1. Remove any separate fees or surcharges—including service fees and large group surcharges.
2. Overhaul menus so that the listed price is the total price a customer must pay.
3. Eliminate the use of surcharges for dynamic costs such as credit card processing or delivery fees.

It would also create a new wave of litigation and federal fines for noncompliance. What does this entail?

INCREASED MENU PRICES
The FTC is instructing restaurant operators to modify their established business practices by raising menu prices instead of implementing fees or surcharges. The proposed rule also requires operators to create separate menus for large parties, incorporating service fees into food prices. This may lead to consumer inquiries about why the same dish costs less for smaller parties. If adopted as is, this rule would compel restaurant operators to be less transparent with customers, necessitating a rewrite of compensation models, an increase in menu prices, and an overhaul of established business practices.

ANTICIPATED COMPLIANCE COSTS FOR RESTAURANT OPERATORS SURPASS $3.5 BILLION
The FTC appears to overlook the realities of the restaurant industry. The estimated compliance cost of $3.5 billion would equate to $4,818.27 per operator for menus alone. Small independent operators, operating on a 3-5% margin with an average income of $45,000/year, would bear approximately 10% of their total income in making this change.

WAGE REDUCTIONS FOR EMPLOYEES
The FTC’s proposal would prohibit restaurant operators from using service charges, compelling them to raise menu prices to offset the cost. This removes the operator’s ability to choose the best compensation model for their business. Elevated menu prices often lead to decreased traffic, resulting in reduced hours and fewer job opportunities for servers. Operators who have shifted from tipping to a service fee would be directed by the FTC to revert to a tipping model to eliminate the fee.

DIMINISHED TRANSPARENCY FOR CUSTOMERS
Diners prefer clarity in understanding their costs, but the FTC’s elimination of fees and surcharges prevents diners from seeing the impacts on restaurant operations, such as credit card processing fees beyond the operator’s control.

While some operators can easily incorporate credit card swipe fees into menu prices, independent and small business restaurant operators, operating on tight margins and significantly affected by rising credit card swipe fees, would find it challenging to include this cost in menu pricing due to its transaction-based nature. Who bears the brunt of this FTC intervention? Independent restaurant operators, constituting 65% of U.S. restaurants, will struggle to afford compliance. Restaurant workers will face fewer customers and reduced income. Unbanked consumers will experience higher prices that encompass swipe fees, even when paying in cash.

The questions posed by the FTC in its proposed rule underscore that the impacts on restaurants were not fully comprehended or quantified. Despite identifying restaurants as one of the three “example” industries, the FTC seems unaware that the industry comprises more than 70 segments, each affected differently by their mandates. The rule, as currently formulated, appears unfeasible.

In the meantime, businesses should carefully review their fees structures and related disclosures to ensure they do not create unnecessary regulatory risk.

State Supreme Court Upholds Consolidation for Police & Fire Pensions
The Illinois Supreme Court delivered a unanimous decision on Friday, upholding a 2019 law that consolidated nearly 650 municipal police and firefighter pension funds. This ruling dismisses arguments from pension fund members who claimed that their voting power was unconstitutionally diluted.

Governor JB Pritzker signed the law, which garnered overwhelming bipartisan support in the General Assembly, merging 649 individual pension funds into two entities. One manages investments and payouts for retired police officers, while the other serves retired firefighters. The consolidation aimed to provide access to larger investments that were previously unavailable to numerous small individual funds, with the goal of achieving greater returns. Additionally, the merger eliminated administrative costs previously drawn from individual pension funds.

Despite the potential benefits, around three dozen pensioners and 17 individual pension funds filed a lawsuit challenging the law. Their contention was that the voting dynamics for oversight boards shifted from selecting five local peers to a statewide basis, resulting in an alleged injustice.

Chief Justice Mary Jane Theis, writing on behalf of her colleagues, rejected the argument that this case paralleled a 2014 ruling preventing the state from reducing health care benefits to retirees under the pension protection clause. Theis emphasized that the ability to vote for local pension board members does not enjoy constitutional protection, nor does the ability to have local board members control and invest pension funds.

Theis, the only remaining justice from the court that handled high-profile pension benefit cases, including the 2014 challenge, expressed skepticism during oral arguments in November. In Friday’s opinion, she clarified that the law has no impact on plaintiffs receiving their promised monetary benefits.

Governor Pritzker welcomed the decision, crediting his efforts in pushing for pension consolidation after decades of discussions in Springfield. He described the Supreme Court ruling as a victory for Illinois taxpayers, local governments, and first responders. House Speaker Emanuel “Chris” Welch praised the ruling, labeling the 2019 law as “commonsense reform.” Brad Cole, CEO of the Illinois Municipal League, who advocated for consolidation for years, expressed gratitude in an email to IML members, emphasizing the consistent rulings favoring the Act and the determination to focus on strengthening and growing the funds after a decade-long effort.

Child Tax Credit for Illinois
Approaching a January deadline to expand the national child tax credit, Congress continues negotiations, but Illinois lawmakers are forging ahead with plans for a state-level credit, aiming to provide financial relief to working and low-income families irrespective of federal developments.

State Senator Mike Simmons asserts the importance of returning dollars to struggling parents and expresses confidence in incorporating the credit into the budget promptly. Fifteen other states, under both Republican and Democratic leadership, have implemented child tax credits, either permanent or temporary, in recent years to alleviate the income tax burden for qualifying households with dependents.

Simmons, drawing from personal experience growing up in a single-parent household, emphasizes the challenges faced by parents in meeting various financial obligations. He introduced a bill in the state Senate last year, still under consideration, proposing a credit of up to $700 per child. A parallel bill in the state House of Representatives is gaining sponsors.

An analysis by the Illinois Economic Policy Institute suggests that the proposed credit could reduce childhood poverty in the state by 7.6%, with 15.7% of Illinois children currently living in poverty. Economist Frank Manzo from the Institute highlights the objective of supporting working and middle-class families, emphasizing that these families contribute a higher share of their income in taxes compared to wealthier households.

While negotiations are ongoing, the final size of the tax credit may be subject to reduction. The Institute’s study examined the implications of a potential $300-per-child tax credit, estimating a 3.3% reduction in child poverty at a cost of $470 million.

Manzo points out that resistance to past proposals stemmed from concerns about the price tag, with the $700 credit estimated to cost the state $1 billion annually. However, he argues that this cost would be counteracted by reductions in state assistance spending for low-income families, emphasizing the front-end benefit of lifting children out of poverty.

Additionally, a state child tax credit is seen as enhancing Illinois’ appeal as a place to live, especially in competition with other states offering similar credits. Manzo points out that states like Arizona, California, Colorado, and Utah use child tax credits to provide tax relief to families, potentially attracting families away from Illinois.

Will County Alternative Fuels Readiness Plan – New Interactive Map Survey
The Will County Executive Office would like to invite you to take part in the next phase of their initiative – the Interactive Map Survey. This feedback will play a crucial role in identifying suitable locations for new fueling stations for Alternative Fuel Vehicles, including Electric Vehicles.

Please help their team by promoting this mapping survey within our community. This additional input will help them plan for the future of alternative fuel infrastructure in Will County, pinpoint desired fueling locations, and contribute to a more sustainable environment for residents, visitors, and businesses.

For additional information on the project, please feel free to visit willcountyaltfuels.com.

Stay well,

Mike Paone
Executive Vice President
Joliet Region Chamber of Commerce & Industry
mpaone@jolietchamber.com
815.727.5371 main
815.727.5373 direct