Employee or Independent Contractor? Department of Labor Institutes New Rule

On Tuesday, January 9th, the United States Department of Labor (DOL) released a final rule to explain when a worker qualifies as an employee and when an employee may be considered an independent contractor under the Fair Labor Standards Act (FLSA). The classification of employee versus independent contractor is an important distinction, as employees receive the protections of the FLSA, while independent contractors are not covered under the FLSA. Furthermore, existing labor law under the National Labor Relations Act provides the right to unionize and related protections only to workers classified as employees; independent contractors are excluded. According to the DOL, the rule’s guidance aims to address the issue of employee misclassification, a “serious problem that impacts workers’ rights to minimum wage and overtime pay, facilitates wage theft, allows some employers to undercut their law-abiding competition and hurts the economy at large.”

 

 

The labor market and the economy in the United State have been experiencing a shift with the rise in the “gig economy.” The “gig economy” is characterized by a shift away from permanent jobs and a shift towards short-term contracts, freelance work, and jobs performing single tasks. Common examples include Uber drivers, Instacart workers, and people offering services on platforms such as TaskRabbit.

 

The United States Government Accountability Office (GAO) analyzes the results of the Annual Business Survey (ABS) and annual tax reports submitted to the Securities and Exchange Commission. GAO reports that, in 2020, 33% of ABS respondents reported using “contractors, subcontractors, independent contractors, or outside consultants,” and 50% of respondents reported using part-time workers. Additionally, in 2021, GAO estimated that 89% of studied companies mentioned the use of contracted work arrangements. 

 

According to a Pew Research Center study, 16% of Americans reported earning money via an online gig platform in 2021. Workers participating in the gig economy vary according to numerous factors, such as age, race, and ethnicity. In 2021, among 18- to 29-year-olds, for example, 30% reported having earned money through an online platform, a much larger percentage than the 7% of Americans over 65 who earned money through an online platform.

 

 

The DOL’s new rule rescinds a Trump-era rule from 2021 that made it easier for employers to classify workers as independent contractors instead of employees. The rule identified two “core factors” in the determination: the nature/degree of the worker’s control over the work, and the worker’s opportunity for profit or loss based on initiative, investment, or both. Three other factors were included for consideration, but they were to be considered as “less probative” than the two core factors. These three factors included the amount of skill required for the work, the degree of permanence of the working relationship between the worker and the employer, and whether the work is part of an integrated unit of production.

 

 

The DOL’s new rule returns to a multi-factor analysis courts have used for decades. Under the new rule, six relevant factors, which are non-exhaustive, must be analyzed and considered to determine whether a worker is an employee or an independent contractor. All factors are to be considered, with no factor having predetermined weight. These factors include: 1) a worker’s opportunity for profit or loss; 2) financial stake and nature of any resources a worker or potential employer has invested; 3) the work relationship’s degree of permanence; 4) the extent of control the employer has over the person’s work; 5) whether the work is essential to the employer’s business; and 6) the extent of the worker’s skill and initiative required. 

 

 

The DOL’s new rule will likely invoke conflicting reactions among union-supporters and those opposed to unions. Union-supporters are likely to view the new rule as a victory for workers, as the rule makes it easier for workers to be classified as employees and thus receive the protections afforded by the National Labor Relations Act. On the contrary, those opposed to unions will likely view the new rule as the government prioritizing union workers over those who choose to work independently. Furthermore, large corporations, which often oppose union activity, may likely show pushback.

 

Response to the new rule will also likely divide among partisan lines. Republicans, and others in favor of less government intervention, may argue that the new rules take away individual workers’ freedom to contract. Democrats, on the other hand, are likely to applaud the new rule and the intention and attempt to provide additional protections and rights to workers.

 

Small companies with fewer employees who take on large responsibilities are most likely to be affected by the DOL’s new rule. Large companies employing gig workers, such as Uber and Instacart, are unlikely to be greatly impacted. The nature of Uber drivers and Instacart drivers’ work will likely still classify them as independent contractors under the FLSA. 

 

While intended to go into effect on March 11, 2024, the new rule will undoubtedly face challenges and litigation. The rule’s implementation will be subject to such litigation. Both employees and independent contractors will have to wait and see.