Department of Labor rule could shift gig workers from independent contractors
The U.S. Department of Labor last month unveiled the specifics for a new rule that, if approved, would update the factors considered for whether a worker is an independent contractor or an employee under federal law.
The changes would revert to a system in which employers would consider six factors. Currently, two of the factors are weighted, which helps employers to classify workers as independent contractors. Under the Fair Labor Standards Act, employees are entitled to minimum wage, overtime pay and other benefits, unlike independent contractors.
“While independent contractors have an important role in our economy, we have seen in many cases that employers misclassify their employees as independent contractors, particularly among our nation’s most vulnerable workers,” Secretary of Labor Marty Walsh said in a statement last month.
Here is an explanation of the factors and how they could be applied, and the objections from employers. The proposed changes have been published in the Federal Register for comments, which were due by Nov. 28 but have been extended to Dec. 13. Even if the DOL adopts the changes, legal challenges are expected in the courts.
Factors for determining employee or independent contractor
Under the 2021 rule still in effect, two factors are weighed in determining whether a worker is considered an employee or independent contractor: The nature of and their degree of control over the work, and their opportunity for profit or loss.
Here are examples, from the Department of Labor, of how those two factors and the four others would be applied under the new rule.
Nature and degree of control over the work: Employee status is indicated when an employer maintains control over when and where a worker can work and whether they can work elsewhere, as well as whether managers supervise their work. Independent contractors, however, market their specialized services to obtain work for multiple clients, are not supervised, set their own prices and can select their work schedule.
Opportunity for profit or loss depending on managerial skill: Does the worker produce their own advertising, negotiate contracts, decide which jobs to perform and when to perform them, and when and whether to hire helpers to assist with the work? If yes, that indicates they are an independent contractor. If a worker regularly agrees to work additional hours in order to earn more, that does not show managerial skill that affects their profit or loss.
Investments by the worker and the employer: Does the worker mostly rely on tools and supplies provided by the employer (employee) or have they purchased their own equipment to perform their job functions (independent contractor)?
Degree of permanence of the work relationship: The DOL gives an example of two cooks. One, an employee, has prepared meals for an entertainment venue’s scheduled events that vary in size and specifics. The other, an independent contractor, also has prepared meals for the venue over the past three years, but only for certain events, and also markets their meal preparation services to other venues.
Extent to which the work performed is an integral part of the employer's business: Does a business use workers to perform a function that’s mission critical (employee) or in a supporting role that isn’t related to the business’ main function (independent contractor).
Skill and initiative: A skilled welder, for example, who provides services for a construction firm that determines the sequence of work, orders materials, and bids for jobs would be classified as an employee. One who provides a specialty welding service for a variety of area construction companies would be an independent contractor.
Pushback from employers
If approved, the rule would likely decrease the number of independent contractors. Forbes recently reported that according to McKinsey’s 2022 American Opportunity Survey, 36% of employed respondents are working in the gig economy – up from 27% in 2016.
But both Uber and Lyft downplayed the potential effect of the rule in statements, with Uber calling the change a “measured approach, essentially returning us to the Obama era, during which our industry grew exponentially.” Lyft said the rule “does not reclassify Lyft drivers as employees. Does not force Lyft to change our business model.”
The National Retail Foundation, the world’s largest retail trade association, was more outspoken against the move.
“The current rules clearly define the difference between employees and independent contractors, providing much-needed legal certainty for employers, employees and independent contractors alike. The changes being proposed by the Labor Department will significantly increase costs for businesses across all industries, and further drive already rampant inflation.
“NRF staunchly opposes a change in this important area of law, which is both unwarranted and unnecessary. This decision will only foster massive confusion, endless litigation, reduced innovation and fewer opportunities for employees and independent contractors alike.”
If you have questions about how independent contractors are classified, Berman North’s employment lawyers can help you. Our skilled attorneys can help employers and employees understand their rights and options.