On January 9, 2024, the U.S. Department of Labor issued a final rule that will change how companies classify workers as employees or independent contractors, starting on March 11. Specifically, the Department of Labor’s rule states that workers are to be considered employees rather than when they are “economically dependent” on a company.
This new rule usurps Trump administration decision that relaxed the federal standard for the employee/contractor test which decided that workers who own their own businesses or are free to work for competing companies can be treated as independent contractors. For example, a gig driver who works for both Uber and Lyft could be treated as a contractor.
This new rule re-adopts the standard that courts have used for years to determine the proper classification of workers. Courts look at several factors when determining whether a worker is an employee or independent contract, such as the degree of control companies exercise over workers, whether the work performed is an integral part of a company’s business. Many states, such as Washington, already factor these elements into the independent contractor test, which tend to classify workers as employees.
The Labor Department said it would consider factors such as a worker’s opportunity for profit or loss, the degree of control wielded by a company over a worker, and whether the work is an integral part of the company’s business to determine whether a worker should be classified as an employee or contractor.
Unsurprisingly, business interest groups and Republican lawmakers strongly criticized the rule, saying it will cause millions of workers to lose opportunities to earn money, would create confusion that will spur costly litigation, will increase labor costs for many businesses, and will bolster union membership. The Labor Department said it does not expect the rule to lead many companies to reclassify workers. But the new rule will enable more effective enforcement against businesses that purposely misclassify workers as independent contractors to underpay individuals that would otherwise be classified as workers.
Most labor laws apply to a company’s employees but not its independent contractors, such as states requiring a wage above the federal minimum. Shifting rules to classify more workers as employees means overall wages will rise. Misclassification of workers as independent contractors rather than employees particularly harms low-income workers who would benefit the most from legal protections such as a minimum wage, unemployment insurance, and healthcare benefits. This issue has been addressed at the state level in Washington, California, and New York where new laws allow independent contractors access to minimum wage, family and sick leave, and healthcare while still being classified as independent contractors.
The rule is expected to increase labor costs for businesses in industries that rely on contract labor or freelancers, such as trucking, manufacturing, healthcare and, most relevantly, app-based “gig” services such as Uber, which have garnered the most attention when it comes to the rule change. According to the Chamber of Progress, a trade group that represents large tech companies, the new rule is estimated to negatively impact 3.4 million gig workers, resulting in a $31 billion in lost income to the business, mostly through increased wages for workers now classified as employees. Chamber of Progress did not clarify how $31 billion in increased wages negatively impacts workers.
CR Wooters, Uber’s head of federal affairs, stated “Drivers across the country have made it overwhelmingly clear – in their comments on this rule and in survey after survey – that they do not want to lose the unique independence they enjoy.” Wooters also commented that the new rule is not expected to impact Uber’s model or its classification of workers. Uber, as well other large corporations and trade groups are expected to challenge the rule in court.
On the Hill, Republican Senator Bill Cassidy of Louisiana has plans to introduce a resolution to repeal the rule prior to it taking effect on March 11. In his statement, Cassidy took a shot at labor unions, saying the new rule would bolster labor unions’ efforts to increase their membership, as independent contractors and freelancers cannot join unions.
The U.S. Department of Labor’s rule, effective January 9, 2024, marks a significant shift in how companies classify workers as employees or independent contractors. While met with strong criticism from business interest groups and Republican lawmakers, who argue the Labor Department’s changes will lead to negative outcomes, the Labor Department contends it will enhance enforcement against intentional misclassification. The rule’s broader impact is expected to raise overall wages, benefiting low-income workers who stand to gain legal protections. Industries relying on contract labor anticipate increased labor costs, prompting challenges from corporations and trade groups. With political opposition and the likelihood of legal battles ahead, the landscape of worker classification remains a contentious and evolving issue in the United States.
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