New Proposed Rule Will Harm Workers, Business, and Labor Relations
By Joseph A. Pickels
The U.S. Department of Labor Rule publicly proposed on Tuesday would have disastrous effects on independent contractors, harming companies and workers. Indeed, while proponents ostensibly assert that the proposal is for the worker’s benefit, it would make the attraction of gig economy work obsolete.
Labor Relations and Independent Employment
The majority of state and federal labor laws, including those for workers’ compensation, wage & hour disputes, minimum wage, occupational safety, and unionization, do not apply to independent contractors. It is readily apparent that labor unions are behind the latest initiative under the auspice of worker protection.
In 1938 Congress enacted the Fair Labor Standards Act to deal with “labor conditions detrimental to the maintenance of the minimum standard of living necessary for health, efficiency, and general well-being of workers.” This includes minimum wage and overtime payments, but also includes a myriad of other labor standards and rules as determined by the Department of Labor. Exempted from these rules, however, are “independent contractors” – those who, as a matter of economic reality, are not dependent on an employer for work and are in business for themselves. To that end, only true “employees” are covered by the labor laws.
The FLSA defines “employee” in a highly circular and incomplete way, noting that an employee is “any individual employed by an employer.” But what is an employer? And what constitutes “employment”? By the 1940’s the Supreme Court judicially created a multi-faceted “economic reality” test which purports to guide courts, businesses, and state agencies when determining whether workers are employees or contractors. The test has 6 or 7 prongs, depending on factual circumstances. They include: (1) The extent to which the services rendered are an integral part of the principal’s business; (2) The permanency of the relationship; (3) he amount of the alleged contractor’s investment in facilities and equipment; (4) The nature and degree of control by the principal; (5) The alleged contractor’s opportunities for profit and loss (6) The amount of initiative, judgment, or foresight in open market competition with others required for the success of the claimed independent contractor; and (7) The degree of independent business organization and operation.
In general practice, prong 4 is the most pertinent factor – or at least should be. For example, in Washington, the emphasis is on control – that is, whether the purported employer exercises any control over the contractor, or if the contractor is in complete control over their ”employment.” By contrast, federal courts have focused on other factors when reaching a determination. The result? A myriad of unworkable and untenable conclusions, scattered based on jurisdiction nationwide.
On January 7, 2021, the Trump Administration published a Rule which sought to clarify the confusion. Instead of a 6-7 prong economic reality test, the Trump-Labor Department rule condensed the analysis to weighing two key factors: (1) the nature and degree of the individual’s control over the work; and (2) the individual’s opportunity for profit or loss. Under the Trump rule, only when these two factors are insufficient to answer whether the individual is an employee or independent contractor should the remaining four factors be considered. In other words, if the individual controls what they do and has the opportunity to directly profit, they are independent of the company.
The Biden Labor Department initially sought to withdraw the rule from being enacted in March of 2021. However, a federal court in Texas blocked that action noting that the Labor Department did not follow proper administrative procedure. In any event, the writing has been on the wall since the 2020 election as to how the Biden Labor Department would treat gig economy workers.
Indeed, the new Biden-Labor Rule makes sweeping alterations. It replaces the Trump Rule with a “totality-of-the-circumstances” analysis that focuses on whether workers are “economically dependent upon an employer for work.” That is, the inquiry tests whether a worker relies on an employer for work opportunities. In a rideshare case, does the driver rely on the consumer to select a ride, which the individual can decline, or does the driver need the company to facilitate the transaction?
The Biden Labor Department asserts that their Rule “restores” the economic reality test used by the courts, regardless of the lack of cohesion or consistency in its national application. There may be legitimate policy arguments in the proposal, but in a not-so-economic reality, there are vast concerns with these changes.
Impact of Rule Change
As a matter of political reality, the tension between labor unions and business are at the forefront of the proposal. But additional effects beyond unionization and collective bargaining are significant.
OSHA and Tort Liability
Currently, state and federal laws relating to occupational safety apply only to employers and employees, not independent contractors. If enacted, this new proposal would create additional liability for companies who have no control over the actions of individuals. For example, rideshare and delivery companies provide an application software that individuals and consumers use for transactions. The individual making the delivery currently operates independent of the company. Under the new rule, the individual and the company are intertwined – the individual is acting as an agent of the company. This exposes the company to liability to any infraction, including a traffic accident, a workplace accident, or occupational exposures.
Like OSHA, independent contractors and companies would be susceptible to workers’ compensation provisions. This ignores, however, that many gig-economy companies have insurance coverage agreements already in place for contractors. So, the private insurance industry will instead be replaced by government interference and enhanced government benefit costs by way of taxes, fees, and assessments against both companies and contractors.
The Labor Department and pro-proposal stakeholders also note the minimum wage and overtime implications. They conclude that the lack of access to basic minimum wage prevents individuals from supporting their families and places them in a lower rung in the economic market. But again, this ignores that independent contractors want the flexibility to be able to pick and choose when and for how long they want to work. Further, as a matter of economics, raising or providing for a uniform minimum wage may increase a person’s hourly pay, but will likely decrease their hours worked as businesses grapple with the rising costs of wages vis-à-vis the number employees and the revenue generated.
Changing independent contractors to employees will result in a sharp increase in in business and labor costs for companies. Some market analysts estimate this increase upwards of 30%. The reason? Employees are expensive to maintain and there are additional costs which are associated with employee status, such as OSHA and workers’ compensation, business insurance, health benefits and overtime pay. It will also reduce job opportunities for individuals. Nearly 1/3 of Americans performed some form of “independent contractor” or “freelance” work in 2021. Altering their status, raising costs on companies, and forcing compliance and benefits that are antithetical to true “independence” will limit further opportunities for individuals, both new and seasoned to gig-economy work. The result? Lower wages, less market stability, fewer jobs and unmet supply and demand.
The proposal, so soon on the heels of the 2021 Trump proposal, further politicizes labor relations. The Obama, Trump, and Biden Labor Departments have now all issued conflicting measures relating to gig-economy workers. To the extent a new executive succeeds President Biden in 2025, there is, at this rate, increased potential for yet another revision. Ultimately, labor policy should be outside the realm of the executive branch and its ever changing political ideology.
The Biden Labor Department must comply with administrative procedure. So, public notice and comment will proceed for approximately 1-year. The Labor Department and labor stakeholders should exercise caution at the unintended effects of forcing change to match their political prerogative.