By Daniel Wisner
(Reuters) – The US Department of Labor is expected to unveil a proposed rule in the coming weeks that would make it difficult for companies to treat workers as independent contractors, potentially upending the self-employment economy and other industries that rely heavily on contract labor.
The line between when a worker was considered an employee of a company, entitled to various legal protections, or an independent contractor has shifted over the past decade, as companies have faced an increasing number of lawsuits by workers alleging they were misclassified.
What is the significance of factor classification?
Most federal and state labor laws, such as those that require minimum wages and overtime pay, prohibit discrimination or protect the right to form unions, apply only to company employees. This makes employees more expensive for companies than independent contractors — up to 30% more, according to some studies.
Labor advocates have said that millions of workers have been misclassified as independent contractors and denied fair wages, benefits, and basic protections from discrimination and retaliation. Business groups assert that independent contracting helps create jobs and gives workers more flexibility and opportunity to run their own businesses.
What is the current law?
In the final days of the Trump administration last year, the Labor Department adopted a rule favored by business groups that makes it easier to classify workers as independent contractors under the federal wage law. The rule states workers who own their own business or have the ability to work for competing companies, such as a driver who works for Uber (NYSE:) and Lift (NASDAQ :), they can be treated as contractors.
The Biden administration withdrew the rule, but a federal judge in Texas ruled in March that it had not followed the appropriate procedure to do so and reinstated the previous standard.
What will be in the base of the Biden administration?
The Labor Department did not reveal any details about the offer, but it is widely expected to restrict independent contracting.
The department could serve as a model for its rule on legal guidance adopted during the Obama administration that said workers are employees when economically dependent on a company. Or it could go further and adopt a three-pronged standard known as the “ABC test” used in several states including California and Massachusetts. Under this standard, workers are employees unless they own an independent business, are not under the company’s control, and perform work outside the company’s normal business.
When is the new rule likely to come?
The Labor Department in July sent a draft of its proposal to the White House for review, one of the last steps before it is released to the public. The agency must then collect and review public comment, so the final rule likely won’t go into effect until well into next year.
What industries will be affected the most?
Any change in policy is expected to have a negative impact on a range of industries including retail and manufacturing, but the impact on the explosive growth of the “temporary labor economy”, which relies heavily on independent contractors, has received the most attention. Last year, US Labor Secretary Marty Walsh told Reuters that many temporary job workers should be classified as employees.
Reducing independent contracting will have a significant impact on trucking companies that rely on contractors who own their trucks to meet fluctuations in demand and avoid the costs of maintaining truck fleets. Trucking companies that raise prices or limit services can, in turn, put more pressure on supply chains already crippled by the COVID-19 pandemic.
Some industries can be exempted from the new standard if the Department of Labor includes exceptions to the rule. California and other states exempt many professional professions, including doctors, lawyers, real estate agents and financial service providers, from strict classification standards.
Will there be legal challenges to the base?
Almost certainly, given the significant impact it would have. Claims targeting the rule could allege that the new definition of “employee” is broader than the federal wage law allows or that the Department of Labor did not follow appropriate administrative procedures in adopting the rule.
Business groups, individual companies, and workers can also sue under the US Constitution or argue that the rule conflicts with existing regulations for specific industries. Groups representing trucking companies, self-employment businesses, and freelancers have not been successful in challenging a 2019 California law adopting the “ABC Test” unsuccessfully.