The U.S. Department of Labor (DOL) has proposed a new rule that would establish a new set of criteria for determining whether a worker is an employee or an independent contractor. The rule could have major ramifications for millions of independent artists, truckers, app-based drivers, couriers, freelance writers, home care workers, janitors, as well as businesses across the country. Likewise, consumers who depend on and benefit from services provided by key industries through an independent contractor network could see a significant change from the proposed rule.
The move comes at a delicate time for companies and workers given the current economic headwinds in the U.S. and globally. As businesses and workers emerge from the worst effects of the global pandemic, many are redefining the new normal when it comes to work/life balance. Individuals have been gravitating toward contract or independent contractor work for freedom and flexibility. As the workforce has evolved, so have businesses. Whether to accommodate the new worker profile or today’s consumer, entire sectors of the economy are based on independent contractor models.
What Does the New Rule Do?
The proposed rule alters how the DOL determines who constitutes an employee or an independent contractor under the Fair Labor Standards Act, the federal law that determines eligibility for protections like minimum wage, overtime, Social Security, and unemployment insurance.
The Biden administration’s proposed federal rule would rely on a six-part, “economic realities” test. The six factors are:
- the degree of control exercised by the employer over how the work is performed
- the relative investments of the employer and the worker in materials and equipment
- the degree to which the worker’s opportunity for profit and loss is determined by the employer or the worker’s own managerial skill
- the skill and initiative required in performing the job
- the permanency of the relationship
- whether the service is an integral part of the employer’s business.
DOL leaders believe the rulemaking isn’t likely to result in large worker classification changes and say that the proposal isn’t intended to target any particular industry or business model, though the business community would challenge such an assessment. The agency also emphasized that its misclassification enforcement has been targeted toward low-wage industries, citing examples in restaurants, construction, and health care.
For context, in 2021, the independent contractor economy comprised an estimated 59 million people in the United States who perform “1099 work.” They are commonly independent contractors. This independent contractor workforce contributed $1.3 trillion in annual earnings to the U.S. economy, $100 million more than in 2020.
If implemented, it’s estimated the proposed rule change would cost affected companies, independent contractors, and local governments $188.3 million, according to a DOL estimate, again, an estimate the impacted business community would challenge. One industry association, Flex, which represents app-based platforms said the new proposal could make it "challenging for workers of all kinds to work as independent contractors." According to Flex, one in every six Americans has earned income on these platforms and consistently said: "they prefer the freedom and flexibility" of being an independent contractor.
Who Is Impacted?
Workers
Workers currently classified as independent contractors could be reclassified as employees. On the one hand, it would afford them full minimum wage, overtime pay, contributions to unemployment insurance, a portion of a worker’s Social Security taxes, benefits, and other protections. It would also cover the worker under the National Labor Relations Act (NLRA) and thereby potential organizing opportunities for labor unions (independent contractors are not covered by the NLRA and therefore can not be organized by labor unions under federal law). The Biden Administration DOL and unions argue that it empowers workers to assert wage and hour, health and safety, and compensation rights more fully.
On the other hand, it would likely reduce the opportunities individuals have to make decisions about how, where and when to conduct their work that many in the ‘gig’ economy find beneficial. The control individuals have over their job duties and the flexibility it brings is a benefit for independent contractors per several studies over the years including GAO, Bureau of Labor Statistics and most recently the Global Strategy Group. In some instances, independent contractors have the opportunity to make more money and prefer not to be classified as an employee.
Businesses
Under current and former worker classification rules, if an employer treats a worker as an independent contractor and that individual should have been classified as an employee, the employer is required to pay minimum wage and overtime if the employee is non-exempt.
The new proposed rule could lead many individuals (and some would argue most) currently considered independent contractors to be classified as employees, increasing operating costs for businesses if they are broadly required to reclassify their independent contractors as employees, due to the tax liabilities and minimum wage, labor, safety, and other legal requirements that apply to employees.
Additionally, legal experts expect the new “economic realities” test could further complicate the already complicated legal analysis for determining worker status and lead to significant litigation. Especially as it could pose an inherent challenge to the business model of several industries, most notably “gig economy” companies and could potentially lead to major structural changes.
One thing is certain, the proposed new worker classification rule would provide more administrative oversight and heightened scrutiny of independent contracts and bring more governmental enforcement actions against employers who misclassify workers.
Industries Most Likely Impacted
Of the industries most likely to be impacted, here is a short list of those most likely to be considering how the new worker classification rule could impact them.
- Truck drivers (see more here).
- Ride-share drivers (Uber, Lyft, Didi, etc.,)
- App platform couriers (Doordash, Go Puff, etc.)
- Taxicab drivers
- Truck owner-operators and drivers
- Gig platform companies
- Hospitality and restaurant industries
- Journalist
- Musicians
- Software companies
- Home care services
- Labor-intensive service businesses (e.g., cleaning/janitorial companies, delivery services, etc.)
In the several short weeks following the proposed rule’s release, many “gig share” companies saw share prices drop as investors saw the proposed rule as detrimental to the company’s market valuation. If implemented, the gig-economy companies could expect labor costs to increase by 20 to 30 percent, according to gig economy officials.
What happens next?
DOL is currently seeking public comments on its proposed rule through Nov 28, 2022. The final rulemaking won’t be issued until after the public comment period is closed, but possibly before 2023.
Business groups are likely to lobby for changes to the proposed rule before it is finalized in the coming months, while pro-labor and union groups will lobby for greater scrutiny and enforcement of the independent contractor classification.
Given the level of opposition, a legal challenge is likely, which could take months to resolve. Opponents could seek a ruling from a federal judge to block the new rule temporarily or strike it down completely.
In the interim, President Biden continues to urge Congress to pass a federal version of California’s three-part “ABC” test to determine a worker’s correct classification. Overall, this proposal helps the Biden Administration stave off growing pressure from activists supporting gig workers, who had lamented that the administration had been too slow to step in to protect gig-economy workers. If implemented, activists will likely monitor how aggressively the new rule is enforced. However, unless the Senate flips to a filibuster-proof majority in the upcoming mid-terms, legislative action is highly unlikely -- which is one reason for the regulatory approach now being taken by the DOL as well as several other government agencies on this issue.
What Are People Saying?
Pro or Neutral
AFL-CIO President Liz Shuler: “[the rule] will increase protections and expand benefits to so many working people who have been subjected to corporate work-arounds. Too many companies put profits over people, intentionally misclassifying their workers as contractors to avoid providing the pay, overtime, workplace rights and benefits that employees are due under labor and employment laws.”
Uber’s Head of Federal Affairs CR Wooters: “The Department of Labor listened to drivers, who consistently and overwhelmingly state that they prefer the unique flexibility that comes with being an independent contractor. Today’s proposed rule takes a measured approach, essentially returning us to the Obama era, during which our industry grew exponentially. In a time of deep economic uncertainty, it’s crucial that the Biden administration continues to hear from the more than 50 million people who have found an earning opportunity with companies like ours.”
U.S. Secretary of Labor Marty Walsh: "While independent contractors have an important role in our economy, we have seen in many cases that employers misclassify their employees as independent contractors, particularly among our nation's most vulnerable workers. Misclassification deprives workers of their federal labor protections, including their right to be paid their full, legally earned wages."
Patricia Campos-Medina, executive director of the Worker Institute at Cornell University's School of Industrial and Labor Relations: “This is a long-awaited determination that will empower essential workers to assert their basic wage and hours, health and safety, and compensation rights. All workers are entitled to these rights, but employers easily avoid them by making arbitrary decisions on independent contractor rules.”
Lyft: “There is no immediate or direct impact on the Lyft business at this time. The release today will allow for 45 days of public comment. This is just the first step in what is likely to be a longer process before any final rule or determination is made. Any new rule that addresses independent contractor status should be informed by those it impacts most: the workers. App-based work, in particular, is fundamentally different from traditional 9-to-5 work. Nowhere else can you find the same minute-by-minute flexibility to decide when, where, and for how long you want to earn. This type of independence and flexibility is the primary reason people turn to app-based work in the first place. Lyft will continue to advocate for laws like the one in Washington state which gives workers what they want: independence plus benefits and protections.”
Doordash: “The Department of Labor announced a draft of a rule, applicable across a wide range of industries, under which we believe Dashers are properly classified. While this is just the first step in the process, we do not anticipate this rule causing changes to our business model or to Dashers’ status as independent contractors. We will continue to engage with the Department of Labor, Congress, and other stakeholders to find solutions that ensure Dashers maintain their flexibility while gaining access to new benefits and protections. […] Overwhelmingly, Dashers say they choose DoorDash because of the flexibility it offers, which is likely why more than 90% of Dashers say that they prefer to remain independent contractors.”
Sen. Elizabeth Warren (D – Mass) and 24 other Democratic members of Congress, including Sen. Bernie Sanders (D – Vt.) and Rep. Rashida Tlaib (D. – Mich.): “Companies like Uber, Lyft, GrubHub, DoorDash, and Amazon continue to misclassify workers as ‘independent contractors’ rather than employees, excluding them from accessing the rights and benefits—like access to abortion care—that they deserve.”
Con:
Small Business & Entrepreneurship Council: “The DOL is out-of-touch with the modern economy and how people want to work, as evident by its proposed independent contractor rule. More people are starting businesses because they have access to modern tools and platforms that make it simple and affordable. Overwhelmingly, they want to be to their own boss and want control over their own time. The proposed DOL rule is a massive step backwards, as it resurrects an outdated approach that works against flexibility and regulatory certainty.”
National Retail Federation: “The changes being proposed by the Labor Department will significantly increase costs for businesses across all industries, and further drive already rampant inflation. NRF staunchly opposes a change in this important area of law, which is both unwarranted and unnecessary. This decision will only foster massive confusion, endless litigation, reduced innovation and fewer opportunities for employees and independent contractors alike.”
Flex Association (represents Doordash, Gopuff, Grubhub, Instacart, Lyft, Shipt, Uber, and others) CEO Kristin Sharp: "Millions of app-based workers choose this work because of the flexibility it provides. They overwhelmingly prefer to preserve their ability to choose when, where, and how often they work. During this process, we will ensure that the Department of Labor continues hearing the voices of these earners, and will work to ensure that any final rule protects the independence they need."
Baker Donelson’s Leader of the Long-Term Care Practice, Howard Sollins: “A call for dialogue recognizing the unique situation in which healthcare providers, particularly nursing homes, find themselves in a tight labor market is merited. They shouldn’t just use a one-size-fits-all test without at least a conversation about the impact. […] Nursing homes prefer that people stay on as employees for the continuity that comes with that, learning the residents and learning the community. It’s the employees that are looking for the distance that comes from working for agencies, the flexibility to control the shift, when and where and how they work.”
Michael Schulman, a partner at the Morrison Foerster global employment and labor group: “I doubt that companies that have relied on independent contractor models are going to, in response to this rule, take steps to change their model.”
Vice President of Workforce Policy at American Trucking Associations Nick Geale: “[American Trucking Associations] is reviewing the new proposed rule and looks forward to providing feedback to the department, but we are disappointed this proposal seeks to undo the current rule which has brought needed clarity to the issue of independent contractor status.”
CEO of Moves Financial (handles payments for gig-economy companies) Matt Spoke: “Broadly speaking, I think the concern is that additional costs to companies like Uber and Lyft ultimately lead to higher prices for consumers, which will drive demand down for these services and ultimately reduce the need for as many workers.”
Chair of the House Republican Conference, Rep. Elise Stefanik (R – NY): “Joe Biden continues his assault on the American economy with his proposed rule that will upend the livelihoods of independent workers. This will force independent workers to become someone else’s employee, while creating more red tape and confusion for small businesses already struggling to survive in Biden’s economy. It is a clear reminder that Biden and Democrats are completely out of touch with the millions of Americans working as independent contractors, who overwhelmingly prefer the flexibility and increased earning opportunity from being their own boss. I am committed to continuing to protect the freedom for Americans to earn a living in the way that best suits their families’ needs.”
