This story was updated at 2:15 p.m. Eastern to reflect the Department of Labor’s announcement about the effective date of the rule.
A controversial new rule from the U.S. Department of Labor (DOL) that would make it more difficult for companies to treat workers as independent contractors will take effect on March 11, according to the agency.
The rule, which deals with worker classification under the Fair Labor Standards Act, was approved by the White House office of management and budget on January 2 and will be published in the Federal Register on January 10.
The DOL believes many companies using “gig” workers or contractors should be classifying those workers as employees so that they have rights and protections under federal labor standards and are paid their “full, legally earned wages,” as the former head of the DOL stated.
But many business groups and industries have lined up against the rule change, first proposed in October 2022 after the Biden administration blocked a Trump-era rule that would have tilted worker classification rules toward greater allowance of independent contracting.
Checks on independent contracting could seriously disrupt industries that rely heavily on it, like construction, emergency medicine, financial advice, insurance, app platforms, timber harvesting, and transportation, said Marc Freedman, vice president of workplace policy at the U.S. Chamber of Commerce, in his comments on the rule last year.
The revised rule could also be costly for small businesses, as they would have to pay FICA, Medicare, state, local, unemployment, and worker’s compensation expenses for workers reclassified as employees.
The new rule requires employers to use a “totality-of-the-circumstances analysis” that looks at six factors of “economic reality” to determine if a worker is economically dependent on the employer or is in business for themselves.
The six factors are the worker’s opportunity for profit or loss; the degree of permanence of the working relationship; the worker’s investment in equipment or materials, not including tools or equipment to perform a job; whether the service rendered requires special skill; the degree of control the employer has over the worker’s schedule, supervision, and prices or rates; and whether the service is an integral part of the employer’s business.
Writing in the National Law Review in November, Mark Wallin, a partner at Barnes & Thornburg, said the Department of Labor’s rule “is significantly more nuanced and will result in less definitive answers to the question of whether independent contractors are properly classified.” With less clarity, Wallin added, “comes the likelihood of more opportunity for courts (or the DOL) to find that the ‘totality’ weighs in favor of an employment relationship.”
“With less clarity, comes the likelihood of more opportunity for courts (or the DOL) to find that the ‘totality’ weighs in favor of an employment relationship.”
partner, Barnes & Thornburg
Writing in The Hill on December 23, Liya Palagashvili, a senior research fellow with the Mercatus Center at George Mason University, said the rule could cost many gig workers their jobs, a consequence that the DOL is ignoring. Not all contracting jobs would turn into employment, Palagashvili wrote, as shown by a February 2022 analysis of the impact of reclassifying ridesharing and delivery drivers as employees in Massachusetts. She also pointed out the loss of independent contracting opportunities in California when the state enacted its AB5 law.
Some businesses that commented on the proposed rule last year said it downplays the differences between independent work and employment.
Elizabeth Jarvis-Shean, vice president of communications & policy at DoorDash, said the DOL “portrays employment as work that offers flexibility and autonomy,” ignoring the degree of control DoorDash delivery workers, for example, have over their schedules and the ability to accept or reject work.
While the DOL’s rule could face court challenges, a disapproval procedure from Congress, or even a “regulatory freeze” directive from the White House, those circumstances are unlikely to occur, wrote Allan Bloom, the leader of Proskauer’s wage and practice group, on January 4.
The advice for employers? In a Thomson Reuters blog, Wallin said the starting point for worker classification is “always going to be the contract.” He recommended that provisions spell out that the worker is an independent contractor and also indicate that the company is not controlling their schedule.
However, he also indicated that the employer should investigate how existing workers are being treated by the internal business point of contact. If that point of contact treats them as an employee, “then all the work that was done on the contract goes out the window.”