The Biden administration will soon issue a rule that may make it easier for workers to be considered “employees” instead of “independent contractors.”
The U.S. Department of Labor issued a notice of proposed rulemaking on Tuesday, signaling its intent to issue a formal regulation that would redefine how employers classify their workers.
The employee label carries worker protections like a minimum hourly wage and overtime pay. Workers misclassified as contractors may be eligible for damages covering some back pay of those benefits. Employees also qualify for unemployment benefits and worker’s compensation, for example.
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The Labor Department would unwind a Trump-era rule concerning independent contractors that took effect in January 2021, shortly before President Biden took office. The agency would largely reinstate the prior status quo with a few changes, experts said.
Misclassification of workers as independent contractors — also known as freelancers or the self-employed — instead of employees is happening across many industries, like construction, health care, restaurants, retail and transportation, Labor Department officials said Tuesday.
Employers may benefit financially by classifying their workforce as contractors instead of employees. For one, they don’t have to pay the payroll taxes that fund Social Security or unemployment insurance programs.
Overall, the proposal loosens classification guidelines and would therefore likely result in more workers being deemed employees instead of contractors, said Christopher Moran, a partner at Troutman Pepper Hamilton Sanders who specializes in labor and employment law.
“I think Trump was narrowing it a little bit, and I think this [Biden rule] is widening it a little bit,” Moran said of classification.
“I don’t see these [rules] as game-changing,” he added. “The swings aren’t dramatic.”
Guidelines as easy as ABC?
The action comes as many states have issued new guidelines — called “ABC” tests — that labor experts believe make it easier for workers to be deemed employees instead of contractors.
Ten states apply that test to wage and hour benefits, though some only for workers in certain industries such as construction and landscaping, according to the Economic Policy Institute.
In California, for example, where the ABC test was adopted in 2019, a ballot measure exempted ride-share drivers and other gig workers for app-based companies like Uber and Lyft. These companies often classify gig workers as independent contractors.
“Millions of app-based workers choose this work because of the flexibility it provides,” said Kristin Sharp, CEO of the Flex Association. The trade group’s members include DoorDash, Gopuff, Grubhub, HopSkipDrive, Instacart, Lyft, Shipt and Uber. “They overwhelmingly prefer to preserve their ability to choose when, where, and how often they work.”
New federal rules wouldn’t supersede state rules, Moran said.
It’s up to the business whether they will look at this and say these folks really are employees.Sally Dworak-Fishersenior staff attorney at the National employment Law Project,
“Today’s proposed rule takes a measured approach, essentially returning us to the Obama era, during which our industry grew exponentially,” CR Wooters, head of federal affairs at Uber explained in a written statement.
“We look forward to continued and constructive dialogue with the Administration and [Labor] Secretary [Martin] Walsh as this process progresses,” Wooters added.
Federal action would especially be a boon to “low-wage, vulnerable workers,” Labor Department officials said.
“We’ve found dishwashers were misclassified as independent contractors in order to avoid paying them the overtime they were otherwise entitled to,” said Jessica Looman, the agency’s principal deputy wage and hour administrator, on a press call.
The rule isn’t set just yet and could take months to be finalized. The agency will solicit public comments for 45 days starting Thursday.
From a legal standpoint, courts and the Labor Department have long used an “economic reality” test relative to employment classification under the Fair Labor Standards Act. Independent contractors are not economically dependent on their employer for work and are in business for themselves.
Certain factors are used to assess that question, and generally applied uniformly, experts said. But the Trump labor bureau’s rule gave precedent to two “core” factors. Among other things, the Biden rule would undo the additional weight granted those two factors.
Labor Department officials said the new rules would provide clarity to employers going forward, but experts said it’s unclear whether employers would change designations for their current workforce.
“I would hope so,” Sally Dworak-Fisher, a senior staff attorney at the National employment Law Project, said of reclassification. “But it’s up to the business whether they will look at this and say these folks really are employees.”