The US Department of Labor released a final rule Tuesday that will make it harder for companies to classify workers as independent contractors, a policy change that’s being closely followed by major gig economy players including
The rule, which could also have sweeping impacts across construction, trucking, and health care, changes how the DOL determines whether a worker is an employee or an independent contractor under the Fair Labor Standards Act. Contractors in business for themselves don’t qualify for the same minimum wage or overtime pay protections afforded to employees, among other rights under federal labor laws.
Businesses and worker advocates have clashed over this worker classification dilemma for years, sparking litigation against a wide swath of industries under various employment laws. And Tuesday’s rule release prompted immediate threats of legal challenges and congressional review from its opponents. Legislative and ballot fights at the state and local levels have also persisted, drawing heavy opposition from gig companies seeking to avoid laws that would require them to classify their workers as employees.
Similar to the proposed version of the rule, the DOL’s final regulation states that each factor in the legal test used to determine worker status under the FLSA should be considered equally. Some of those factors, in what’s known as the “economic realities” test, include the degree of the worker’s control over the work; the worker’s opportunity for profit or loss; and investments by the worker and the employer.
“A century of labor protections for working people is premised on the employer-employee relationship,” Acting Labor Secretary Julie Su said in a press call previewing the rule release. Making it harder for businesses to misclassify employees as independent contractors will ensure workers receive those protections, she added.
The rule is scheduled to officially publish in the Federal Register on Wednesday and will go into effect on March 11. But opponents of the rule including business and industry groups could delay or kill the measure by challenging it in court, as they did an earlier Biden administration effort to change worker classification standards.
The US Chamber of Commerce announced its opposition to the final rule Tuesday and said it was considering all options, including litigation.
The rule “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,” Marc Freedman, the Chamber’s vice president of workplace policy, said via email. “It threatens the flexibility of individuals to work when and how they want and could have significant negative impacts on our economy. Making matters worse, the rule is completely unnecessary, as the Department continues to report success in cracking down on bad actors that are misclassifying workers.”
The regulation cancels a Trump-era contractor test that gave greater weight to how much control workers have over their job duties and their opportunities for profit or loss in determining whether they were contractors or employees, an analysis that was viewed as more business-friendly.
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Uber Sees No Material Change
Although it remains to be seen how the rule is implemented and enforced, gig companies and industry associations said the final rule language doesn’t appear to change the classification of ride-share and delivery-app drivers.
“This rule does not materially change the law under which we operate, and won’t impact the classification of the over one million Americans who turn to Uber to make money flexibly,” CR Wooters, Uber’s head of federal affairs, said in an emailed statement. “As this rule is implemented, we look forward to working with the Biden administration and making sure they continue to hear directly from drivers.”
While the federal rule is expected to make it harder for businesses to count workers as independent contractors, it doesn’t go as far as California’s three-factor ABC test. That stricter state standard would have classified nearly all workers—including ride-share and delivery app drivers—as employees, but for the industry-backed Prop 22 ballot measure that exempted them.
The DOL’s rule doesn’t target or provide specific guidance for any particular industry or job type, said Wage and Hour Division Administrator Jessica Looman on the Monday evening press call.
“The department is seeing misclassifications in places it hasn’t seen it before,” she said. “Health care, construction, janitorial, and even restaurant workers who are often living paycheck to paycheck are some of the most vulnerable workers.”
The final rule includes a couple of clarifications from the original proposal in the way the six “economic realities” factors are applied when determining a worker’s classification, Looman said. In particular, actions taken by an employer solely to comply with local, state, or federal law don’t count toward the company control or investment factors to indicate a worker should be deemed an employee.
And costs imposed on a worker unilaterally by the company don’t count as worker investments that would indicate they’re an independent contractor, she said.
