The U.S. Department of Labor on Wednesday announced a final rule to define whether workers are employees or independent contractors, which has been criticized by labor advocates as making it easier for companies to deprive workers of the benefits of full-time employees.
The change, which defines independent contractors for the first time ever under the Fair Labor Standards Act (FLSA), bases worker classification on an “economic reality test” focused primarily on whether a worker is economically dependent on an employer. The administration’s push for the rule is a second attempt to nail down defining characteristics, after an earlier attempt this year was defeated in court.
Under the test, individuals are employees if they’re economically dependent on the employer, and independent contractors if they’re in business for themselves and not economically dependent on someone else’s business.
The new rule will likely decrease the overall number of workers classified as employees and lower costs for businesses, according to Cozen O’Connor labor and employment attorney Aaron Holt.
“It's going to likely decrease the number of workers classified as employees, because at its core this makes it easier to classify workers as independent contractors rather than employees,” Holt told Yahoo Finance, adding that businesses could see decreased costs because they won’t have to provide contractors with benefits or equipment.
While Labor Secretary Eugene Scalia said the rule brings “long-needed clarity” for workers and employers, labor advocates have argued that it makes it easier for gig companies like Uber (UBER), Lyft (LYFT), and Doordash (DASH) to classify full-time employees as contractors. In comments submitted after the rule was proposed, the Economic Policy Institute calculated that the rule could cost employees $3.7 billion in lost pay and benefits every year.
A delivery person for Doordash rides his bike in the rain during the coronavirus disease (COVID-19) pandemic in the Manhattan borough of New York City, New York, U.S., November 13, 2020. REUTERS/Carlo Allegri
“Many workers are misclassified and have been for years — construction workers, agricultural workers, janitors, home care workers,” Catherine Ruckelshaus, the legal director of the National Employment Law Project, an advocacy group for workers, told the Washington Post after the rule was proposed in September. “They all stand to lose from this rule.”
Still, Labor Department officials suggested Wednesday that the rule would be good for both companies and employees. “Sharpening the test to determine who is an independent contractor under the FLSA makes it easier to identify employees covered by the Act, while recognizing and respecting the entrepreneurial spirit of workers who choose to pursue the freedom associated with being an independent contractor,” Scalia said in a press release.
The department’s wage and hour division administrator Cheryl Stanton said the new test will “reduce worker misclassification, reduce litigation, increase efficiency, and increase job satisfaction and flexibility.”
A first for defining which workers qualify as independent contractors
In its history, the FLSA has never before defined the term “independent contractor,” leaving employers and employees to interpret the term based on state laws and legal decisions.
Erasing some of the gray area around the interpretations could influence a fierce debate across the country over the classification of gig economy workers such as ride hailing drivers for companies like Uber and Lyft, personal shoppers, and food delivery drivers, as well as millions of other U.S. workers currently regarded as independent contractors.
A man wears a protest mask as he watches a protest by Uber and Lyft rideshare drivers against California Proposition 22 that would classify app-based drivers as independent contractors and not employees or agents, during the coronavirus disease (COVID-19) outbreak, in Los Angeles, California, U.S., October 14, 2020. REUTERS/Lucy Nicholson
“Uber appreciates the Department’s focus on independent workers,” an Uber spokesperson told Yahoo Finance in September after the rule was proposed, noting that the company was reviewing the proposed rule.
At the time, a ballot measure known as Proposition 22 that since unraveled provisions of California’s AB5 law requiring certain gig workers to be classified as employees, was still pending, threatening the company’s business model.
Unlike AB5, Uber’s spokesperson said, “This rule recognizes that the majority of workers on platforms like Uber want to stay independent.” The company said it planned to work with government to create new benefits and protections for all gig workers.
According to the Bureau of Labor Statistics, independent contractors made up 6.9% of total U.S. employment in May 2017. However, prior government studies have estimated that the BLS data falls short of identifying all such workers and that the total may exceed 10% of the country’s workforce.
Two core factors are at the heart of the new rule’s test to evaluate whether workers are economically dependent on someone else: First, the nature and degree of the worker’s control over the work. And second, the worker’s opportunity for profit or loss based on the worker’s initiative and/or investment in the work.
Additional factors can be applied, including the amount of skill required for the work, the degree of permanence of the working relationship between the worker and the potential employer, and whether the work is part of an integrated unit of production.
For states that have adopted a more strict classification rules governing worker classification, employers will still be required to apply their more strict law. However, at the federal level, the analysis would be based on the labor department’s standard.
The new rule doesn’t take effect until March 8, and the Wall Street Journal noted on Wednesday that the incoming Biden administration may seek to delay its implementation, rewrite it, or choose not to defend the law if it’s challenged in court.
That leaves business owners with continued uncertainty.
“We don’t really know what the Biden Department of Labor is going to do,” Holt said. “It’s something that can be frustrating for employers and business, just because running a business is hard enough, especially in a pandemic, without having a constantly changing regulatory environment.”
Yahoo Finance reached out to Uber and Lyft and will update with any comments we receive.
Alexis Keenan is a legal reporter for Yahoo Finance and former litigation attorney.
