Trump-era rules reversed on treating gig workers as contractors
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The US Department of Labor (DOL) on Tuesday issued a rule for determining at what point workers should be classified as employees or independent contractors under the federal Fair Labor Standards Act.
It's a move that may upset the business model of gig economy companies.
The distinction between the two classifications is a matter of significant economic impact, both for workers – who can be entitled to financial benefits and workplace protections as employees – and for businesses – which foot the bill for benefits. It also affects worker autonomy and tax obligations, among other things.
The DOL says the rule, which goes into effect on March 11, aims to combat employee misclassification – eg, businesses treating workers as contractors when they shouldn't – that can deny gig workers benefits and protections, limit pay, enable wage theft, skew industry competition, and generally harms the economy. Gig workers typically being the people who deliver stuff, give others rides around town, and perform other work on demand for money via apps.
"Misclassifying employees as independent contractors is a serious issue that deprives workers of basic rights and protections," said Julie Su, Acting Secretary of Labor, in a statement. "This rule will help protect workers, especially those facing the greatest risk of exploitation, by making sure they are classified properly and that they receive the wages they’ve earned."
The final rule rescinds a Trump administration rule [PDF], blocked by the Biden administration in 2021, that made it easier for companies to classify employees as independent contractors, or gig workers to use a popular euphemism. It essentially restores the analysis used by US courts for decades, which weighs six different factors to determine how a worker should be classified.
These include: the worker's opportunity to profit or lose money; the worker's financial stake in the work; whether the work relationship is permanent or transitory; the degree of control the employer has over the staff load; whether employees are essential to the business; and the extent to which a worker's skill and initiative are relevant.
Wendy Musell, counsel to employment law firm Levy Vinick Burrell Hyams LLP and a partner of the Law Offices of Wendy Musell, told The Register, "This is great news for employees to ensure that employers do not use the tool of misclassification to steal employee's wages and to avoid paying into necessary and required governmental programs, such as workers compensation and unemployment insurance."
Musell said it also signals that the Labor Department, now under Acting Labor Secretary Julie Su, is returning to the six factor test that has been the standard since 1940.
"The new rule replaces the 2021 rule change, which had been a departure from established law," said Musell. "The prior 2021 rule was far more in favor of employers who sought to avoid paying minimum wage and overtime, as well as other legal protections for employees. It is a good day for workers and frankly, for continued funding of government programs like unemployment insurance."
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These government programs may end up paying costs ducked by employers through worker misclassification. According to a 2022 study from the University of Texas School of Public Health in Houston, gig work is associated with income insecurity, which harms worker health and leads to higher healthcare costs. Gig work effectively socializes corporate liability without sharing profits.
Musell told The Register that the cost shifting of staffing by gig companies was apparent during the COVID pandemic, when workers who were arguably misclassified as independent contractors lacked unemployment insurance and health benefits. And she said that concern remains today.
Advocacy groups voiced opinions about the new rule in accordance with their constituencies, with labor groups endorsing the change and business groups unsurprisingly expressing opposition.
Rebecca Dixon, president and CEO of the National Employment Law Project, said in a statement, "This new rule helps to address corporate schemes to avoid accountability and depress wages by mislabeling workers as ‘independent contractors’ – often in take-it-or-leave-it contracts workers must accept as a condition of work."
Meanwhile, Marc Freedman, VP of workplace policy for business lobbying group The Chamber of Commerce, said:
"The Department of Labor’s new regulation redefining when someone is an employee or an independent contractor is clearly biased towards declaring most independent contractors as employees, a move that will decrease flexibility and opportunity and result in lost earning opportunities for millions of Americans."
The Department of Labor’s new regulation ... is clearly biased towards declaring most independent contractors as employees
Adam Kovacevich, CEO of the Chamber of Progress, a trade group focused on the interests of technology companies, said in a statement that the Biden Administration previously indicated that it isn't specifically targeting gig work at companies like DoorDash, Lyft, and Uber, and that he hopes the DOL recognizes that some gig workers might not want to be employees.
"Every survey shows that gig workers value the flexibility that comes with being their own boss," he said. "A reclassification that forces them into the position of full-time employees would do economic harm and erase what many workers see as the primary benefit of their occupation."
DoorDash, Lyft, and Uber all issued statements about the new DOL rule in which the respective companies say nothing much will change because they contend they properly classified their workers as independent contractors under the six factor test.
That said, these gig worker employers fought tooth and nail to secure the 2020 passage of California Proposition 22, which let rideshare and delivery companies classify their drivers as independent contractors. Prop 22 defanged California Assembly Bill 5, which made such classification more difficult.
Musell expressed skepticism that it will be business-as-usual for these ridesharing and delivery firms. "To say nothing will change is a bit of hiding the ball," she said. "I can appreciate they want to save face with these statements, but I don't think they're so sanguine."
Pointing to the lobbying, legislation, and litigation of the past few years, she said she anticipates further fights over these issues. ®