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Explanation – How a US rule on independent contracting will affect workers and businesses

Explanation – How a US rule on independent contracting will affect workers and businesses
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By Daniel Wisner

(Reuters) – The US Department of Labor on Tuesday unveiled a proposal that would make it more difficult for companies to treat workers as independent contractors, potentially upending the economy of temporary work and other industries that rely heavily on employment contracts.

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.

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What will the Biden administration’s proposal do?

The proposal unveiled Tuesday would require the company to treat workers as employees when they are “economically dependent” on the company at work. The Labor Department said it would look at whether workers have a chance of winning or losing, the continuity of their jobs, and the degree of control the company exercises over the worker, among other factors. The proposal is similar to legal directives issued during the Obama administration that were withdrawn by the Department of Labor under former President Donald Trump, a Republican.

The agency must now collect and review public comment, so the rule likely won’t be finalized until long 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.

How will the rule affect workers?

The proposed changes would be a boon to many workers by guaranteeing minimum wages, overtime pay, mileage compensation and some other work-related expenses. Many service and delivery workers currently work long hours for low pay and lack safety nets, such as paid — or even unpaid — time off, according to worker advocates.

At the same time, limiting independent contracting could prompt some companies to cut back on the number of workers they hire, and eliminate some jobs entirely. Companies will have more control over which workers are considered employees and have a greater say in when and where work is done.

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Will there be legal challenges to the base?

Almost certainly, given the significant impact it would have. Lawsuits targeting the final rule could claim 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.

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