IN-DEPTH: Labor Department’s Final Rule Could Redefine Independent Contractors as Employees

Truckers transport cargo in the Port of Long Beach, Calif., on Nov. 29, 2023. (John Fredricks/The Epoch Times)

The U.S. Department of Labor’s new final rule redefining who can be classified as an independent contractor takes effect next month.

The Biden administration says the new rule aims to protect workers misclassified as independent contractors and denied protections under the Fair Labor Standards Act (FLSA).

“Labor protections are a promise of a floor beneath which no one should be forced to live and work,” Acting Secretary of Labor Julie Su wrote on X last month after the final rule was announced. “Misclassification, the practice of calling someone an independent contractor when they are actually an employee, is a breach of that promise.”

Under FLSA, employees are entitled to minimum wage, overtime pay, and other protections that do not apply to independent contractors.

The new rule reverts to a multifactor analysis “used by courts for decades” to determine whether a worker is an employee or an independent contractor, rescinding the two-factor 2021 rule established by the Trump administration, according to the Department of Labor.

The 339-page rule uses a six-factor analysis for classifying workers:

1. The worker’s opportunity for profit or loss;
2. The worker’s financial stake and nature of any resources they have invested in the work;
3. The degree of performance between the business and the worker;
4. The amount of control the business has over the person’s work;
5. Whether the work performed is essential to the business;
6. And the level of the worker’s skill and initiative.

The previous rule was based on the nature and degree of control the person had over their work and their opportunity for profit or loss.

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“Under the prior [2021] rule, if both core factors weighed in favor of the same classification, there was a ’substantial likelihood' the classification was accurate,” Butler Snow LLP wrote on JD Supra. “In contrast, the new Final Rule emphasizes a ’return to totality of the circumstances analysis in which the economic realities factor are not assigned a predetermined weight and each factor is given full consideration.”

The debate over worker classification has become more complex over the past decade, Michael Green, law professor at the Texas A&M University School of Law in Fort Worth, told The Epoch Times.

“I think part of the problem is more with technology and the digital divide,” Mr. Green said. “We see some really interesting questions created about who is an independent contractor versus who’s an employee.”

As an independent contractor, the worker has little recourse “if there is discrimination going on or wage and hour problems,” Mr. Green continued. “So, that’s really the ultimate underlying reason why this is an issue.”

Industries such as trucking, journalism, construction, marketing, and others that rely on independent contractors or freelancers fear the new rule could force them to reclassify workers as employees, increasing labor costs.

“I can think of nothing more un-American than for the government to extinguish the freedom of individuals to choose work arrangements that suit their needs and fulfill their ambitions,” said Chris Spear, president and CEO of the American Trucking Associations, in a statement. “that freedom of choice has been an enormous source of empowerment for women, minorities, and immigrants pursuing the American Dream.”

The Labor Department says the rule provides greater clarity to protect the most vulnerable workers.

“Misclassification particularly hurts workers who are already subject to significant risk of exploitation in the workplace, including women, people of color, and individuals with disabilities,” Ms. Su wrote in a separate social media post.

Bill Webb, executive director of the Truckers Service Association, told The Epoch Times that about one-third of the trucks on the road are operated by independent contractors or owner-operators, which means they own their trucks.

Mr. Webb said his organization wants to make sure the choice to operate as a small business is not taken away.

 “The labor rule-making in and of itself doesn’t change a whole lot. It just opens the door to changes,” he said, making hundreds of thousands of truckers eligible for labor unions.

Owner-operators pay for their fuel, insurance, maintenance, and other related expenses. They are paid a percentage for each load they haul.

Under the new rule, the expenses of being an independent contractor could push them into the employee category, taking away the driver’s freedom to choose the work they want and how much money they earn, Mr. Webb said.

‘Bias Against Independent Contractor Status’

The U.S. Chamber of Commerce opposes the new regulation, saying it creates uncertainty and “bias against independent contractor status.”

“The thrust of the regulation is to give the Department of Labor a stronger tool to classify more workers as employees rather than independent contractors,” Marc Freedman, vice president for employment policy at the U.S. Chamber of Commerce, wrote in a blog post in January.

“While companies will still be able to use independent contractors, the new classification analysis tilts toward an employment relationship,” Mr. Freedman added. “If a company is found to have misclassified a worker, that company will be subject to back pay and penalties under the FLSA, such as minimum wage and overtime compensation violations.”

The new rule has been compared to California’s AB5, commonly known as the gig worker bill, enacted on Jan. 1, 2020.

History of AB5

The legislation was designed to regulate app-based companies, such as Uber and Lyft, that hire large numbers of gig workers, using a three-prong test to determine a workers’ classification.

Some analysts feared AB5 would upend such app-based companies and destroy the gig-based worker business model.

Later that year, Uber, Lyft, and DoorDash joined forces to back Proposition 22, a ballot initiative declaring app-based drivers independent contractors. The proposition, which voters approved in November 2020, provided certain “engaged time” protections such as health care subsidies and accident and accidental death insurance.

But the battle continued.

In August 2021, Alameda County Superior Court Judge Frank Roesch ruled that two sections of Prop. 22 were unconstitutional, making the legislation as a whole unenforceable.

Uber and Lyft appealed the decision, and last March, justices in a California appeals court struck down a portion of Prop. 22, leaving most of the legislation in effect.

In Sept. 2022, AB2257, a “cleanup bill,” provided more clarifications and exemptions to AB5.

Challenging the Regulation

Last month, a group of writers and editors filed a lawsuit challenging the new rule. The case, filed in the U.S. District Court for the Northern District of Georgia, argues that the new regulation “obscures the line between contractor and employee in an impenetrable fog.” (pdf)

The plaintiffs, Karon Warren, Deborah Kaplan, Kimberley Kavin, and Jennifer Singer, founded a coalition of more than 2,500 freelancers, from writers to truckers.

“Opposition among independent contractors to this proposed rule change has been widespread and overwhelming—just as they were with previous state and federal legislative attempts to limit the choice of self-employment since 2019,” Ms. Kavin said in a press release. “Misclassifying us as employees is not protecting us. It is attacking us and attempting to destroy our chosen careers.”