The Biden Administration released a proposed rule, indicating its intention to issue a formal regulation that would redefine how employers classify workers. Under the current Employee or Independent Contractor Classification Under the Fair Labor Standards Act rule, workers that are “economically dependent” on a company are considered employees and are entitled to more benefits and protections than contractors. This has far-reaching effects on business profits, the hiring process, household incomes, and workers’ quality of life.
The new rule would make it more likely for independent contractors to be classified as employees. The change is expected to impact ride-sharing, delivery services, and other industries that rely on gig workers.
What Does the Proposal Entail?
The proposal is essentially an update to Trump’s rule—a set of guidelines called the “ABC” tests—that labor experts say will make it easier to avoid misclassifying workers. The purpose of the test is to accurately determine whether a worker should be classified as an employee or a contractor. The test takes into account factors such as the degree of control workers have over how they do their jobs and their ability to increase their income by, for example, offering new services. Workers who have little of either are considered employees.
This new version of the test would set the bar for classifying workers lower than the current test, which was created by the Trump Administration. The Biden Labor Department initially delayed and then rescinded Trump’s worker classification rule, before a federal judge reinstated it. Once the new proposal takes effect in the coming months, it would formally revoke and replace the Trump rule.
Employees Are Misclassified as Independent Contractors
US Secretary of Labor, Martin Walsh, said that “employers misclassify their employees as independent contractors, which deprives workers of their federal labor protections, including their right to be paid their full, legally earned wages.”
A study cited by the Economic Policy Institute reinforces this statement. Between 10% and 30% of the study’s audited employers misclassified some workers. Plus, up to 95% of workers who claimed to have been misclassified as independent contractors were reclassified as employees after a review. Experts caution that these practices subvert workers and deprive the government of significant revenues.
The Potential Impact on Companies and Business Owners
Federal and state labor laws require companies to provide employees with certain benefits and legal protections—such as minimum wage, overtime pay, covering a portion of their Social Security taxes, and ensuring contributions to unemployment insurance. Independent contractors do not have these benefits. This is one of the reasons why companies choose to hire independent contractors. According to Reuters, employees can cost companies up to 30% more than independent contractors.
Thus, this new Department of Labor proposal could affect gig economy companies and other service providers that claim their workers are individual contractors. For example, Uber and Lyft have said in federal filings that they would be forced to change their business models if they had to classify their drivers as employees. Both companies added that drivers prefer the flexibility that independent contractor status gives them, allowing them to work when, where, and for how long they want to. This statement is backed up by a recent Statista study that shows that the main reason people in the US choose to do freelance work is schedule flexibility.
What Does This Proposal Mean for Independent Contractors?
Millions of Americans work as freelancers and are doing gig jobs. This type of work has become essential for the transportation, hospitality, construction, and healthcare industries. According to a recent Statista report, some main reasons people choose to work as individual contractors are: they can be their own boss, they have more control over their financial future, and they can work at their preferred location.
But freelance work also comes with some drawbacks. These include income inconsistency, unpredictability, and not having the social and legal benefits that employees do. A Statista survey shows that the leading concern of freelancers in the US is a potential recession, with 72% of respondents saying that they are either somewhat or very concerned about it. General savings are closely followed as a significant concern for gig workers. 70% of respondents said they worry about not being able to put enough money aside.
Another study showed that 62% of respondents who worked as freelancers in the US do not have enough savings for six months. By comparison, 24% of respondents said that their emergency savings wouldn’t last even one month. Emergency savings are regarded as a sign of financial well-being—particularly if they can last for an extended period of time, as the person would then be able to support themselves in the event of job loss. Such was the case in March 2020, when 52% of worldwide freelancers who participated in a Statista survey reported having lost their jobs due to the COVID-19 pandemic.
However, a more recent report shows that freelancers are generally satisfied with their jobs. Only 1% of gig workers in the US said they were very dissatisfied with freelance work. In contrast, 77% of freelancers reported being very satisfied with their jobs.
What Comes Next?
Once the proposal takes effect, it is expected to bring significant changes for freelance workers, businesses, and the gig economy as a whole.
According to protocol, businesses, labor unions, workers, and other members of the public will have 45 days to formally comment on the proposal before the Department of Labor incorporates the feedback into a final rule. After that, the Department will have substantial discretion over whether to enforce the rule on specific companies.
