How Proposed Federal Rule On Worker Classification Could Impact Businesses And Gig Economy

The U.S. Department of Labor today proposed an important change in how workers are classified as employees or independent contractors. If implemented, the rule could have a ripple effect throughout the business world and the gig economy.

The rule would “make it more likely for millions of janitors, home-care and construction workers and gig drivers to be classified as employees rather than independent contractors,” according to the New York Times.

Statement By Labor Secretary

“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,” Secretary of Labor Marty Walsh said in a prepared statement.

“Misclassification deprives workers of their federal labor protections, including their right to be paid their full, legally earned wages. The Department of Labor remains committed to addressing the issue of misclassification,” he commented.

Effects

The Department said the new rule would have these effects:

Align DOL’s Approach

• Align the department’s approach with the courts’ Fair Labor Standards Act's interpretation and the economic reality test.

Restore Multi-Factor Analysis

• Restore the multifactor, totality-of-the-circumstances analysis to determine whether a worker is an employee or an independent contractor under the Fair Labor Standards Act.

Balanced Analysis

• Ensure that all factors are analyzed without assigning a predetermined weight to a particular factor or set of factors.

Interpretation Of Economic Reality Factors

• Revert to the longstanding interpretation of the economic reality factors. These factors include the investment, control and opportunity for profit or loss factors. The integral factor, which considers whether the work is integral to the employer’s business, is also included.

Classification

• Assist with the proper classification of employees and independent contractors under the Fair Labor Standards Act.
• Rescind the 2021 Independent Contractor Rule.

Immediate Impact

“The immediate impact of the regulations is that workers are more likely to be classified as employees than as independent contractors,” Jerry Cutler, co-chair of the American Bar Association’s Section of Litigation, Employment and Labor Relations Law Committee and lead author of Legal Guide to Human Resources, said via email.

“The immediate impact of the regulations is that workers are more likely to be classified as employees than as independent contractors,” Cutler, a lecturer at Columbia University School of Professional Studies, observed.

He said this means:

• “Potential cost increases to companies in meeting the minimum wage and overtime requirements of the federal Fair Labor Standards Act and [paying the ]payroll taxes for Social Security and Medicare.”
• “Workers are likely to become eligible for ‘employee only’ benefits such as retirement, health insurance, unemployment insurance and workers’ compensation.”

Begin Auditing Activities Of Freelancers

Companies are “well-advised to begin auditing the work activities of their independent contractors to determine whether they meet the requirements of the proposed regulations,” Cutler recommended.

He said the requirements include:

• The degree of control exercised by the company over the worker
• The worker’s opportunity for profit or loss
• The permanency of the relationship between the worker and the company
• Whether the work performed is an integral part of the company’s business
• The worker’s investment in equipment or materials required for their work
• The skill and initiative required to perform the work

“Under the proposed regulations, all of these factors are considered, and no individual factor has a greater weight in determining whether the worker is an independent contractor,” Cutler concluded.

‘Independent Contractors Will Not Benefit’

Liya Palagashvili, a labor economist at George Mason University’s Mercatus Center, was skeptical that the rule would help independent contractors become employees.

“Most independent contractors will not benefit from this rule because they are supplemental earners who have full-time employment,” she noted.

“The majority of independent contractors prefer to keep their non-traditional jobs because they provide more flexibility than traditional work. Many independent contractors will neither become employees nor keep their independent work jobs,” Palagashvili predicted.