The U.S. Department of Labor’s Wage and Hour Division released its much-anticipated regulations on worker classification, which are important for determining businesses’ obligations under the Fair Labor Standards Act. The distinction between independent contractors and employees has been hotly debated in recent years, coinciding with the rise of a gig economy that relies heavily on independent contractors. Unfortunately, this new Department of Labor (DOL) classification rule muddies the waters further, exposing businesses that hire independent contractors to risks of lawsuits and federal intervention. In response to these risks, businesses will be less likely to hire independent contractors, which would reduce the benefits of the gig economy to workers, firms, and consumers.
The new Labor Department rule, published on Jan. 10, rescinds a 2021 independent contractor rule from the final days of the Trump administration, the first time DOL had defined “independent contractor” in a regulation rather than non-binding agency guidance. The Trump administration’s DOL rule aimed “to promote certainty for stakeholders, reduce litigation, and encourage innovation in the economy.” It emphasized the importance of “the nature and degree of the individual’s control over the work” and an “individual’s opportunity for profit or loss” in determining worker classification, in addition to three minor factors. This definition was well-received by the independent contractor community for providing regulatory certainty that had been lacking.
Following the change in presidential administrations, the Biden DOL attempted to delay and withdraw the independent contractor rule. These moves were challenged in federal district court and were found to have violated the Administrative Procedure Act, with the court holding that the Trump DOL independent contractor rule remained in effect.
That approach has now been supplanted by the new Labor Department rule’s “totality of the circumstances” analysis that relies on six different factors including the degree of permanence, the opportunity for profit or loss, and the nature and degree of control. The new rule emphasizes that “no one factor or subset of factors is necessarily dispositive, and the weight to give each factor may depend on the facts and circumstances of the particular relationship.” The rule even allows for the consideration of “additional factors” beyond the named six “if the factors in some way indicate whether the worker is in business for themself, as opposed to being economically dependent on the potential employer for work.”
Taken together, the Department of Labor’s regulatory change makes it much more difficult for businesses to determine whether they have properly classified their workers. This ambiguity lends itself to competing interpretations, which will likely result in inconsistent application and federal enforcement. Class-action lawsuits alleging worker misclassification could result in substantial damage awards or settlements. To mitigate this risk, businesses will be less likely to hire independent contractors in the first place, which will limit opportunities for workers seeking flexible work arrangements with innovative gig economy firms. This is likely the point.
Many gig workers are attracted to the flexibility offered by these new jobs, which has increased competition and innovation in the markets in which they operate. Likewise, businesses enjoy greater flexibility by avoiding requirements related to the minimum wage, overtime premiums, and recordkeeping placed on them by the Fair Labor Standards Act.
However, labor unions have opposed these developments. The AFL-CIO claims, “We should not allow or encourage businesses to treat their employees as independent contractors in the On Demand economy or anywhere else because this weakens working people’s ability to negotiate, lowers labor standards for all working people, and puts good employers at an unfair disadvantage.”
Critics of unions would suggest they oppose gig work because they cannot organize independent contractors into bargaining units and want to limit the classification of workers as independent contractors.
This regulatory change would be bad for independent contractors who want to remain self-employed, and surveys show that most do not want to be forced into conventional employment. A 2017 survey by the Bureau of Labor Statistics found that 79% of independent contractors preferred their current gig work to conventional employment. A 2021 survey by Pew Research Center confirmed the consistency of that figure with 78% of gig workers saying they are very positive or somewhat positive about their arrangement. Years of research on gig workers shows they would very much like to have better benefits, such as health care and retirement benefits, but are mostly unwilling to give up the flexibility enabled by their independent contractor status.
The new worker classification rule is scheduled to take effect on March 11 but has already been met with lawsuits. The business groups that challenged the Labor Department’s unlawful delay and withdrawal of the original independent contractor rule filed a motion seeking to revive that litigation, arguing that the new rule is deficient in many of the same ways the court has already identified. In addition, a new lawsuit filed on Jan. 16 by four freelance writers alleges the Department of Labor rule violates the Administrative Procedure Act and is unconstitutionally vague.
Independent contractors, companies that use them, and consumers of gig economy services should all hope the Biden administration is forced to pull back on these new rules. If gig workers lose the independence and flexibility that makes such work attractive to them, this vibrant and growing sector of the economy may shrink or even die out.