Is the Independent Contractor Dead? Examining the DOL's New Rule on Worker Classification (RIN 1235-AA43)
Staff | April 16, 2024
Rule went into effect on March 11, 2024
The recent ruling by the Department of Labor (DOL) titled "Employee or Independent Contractor Classification Under the Fair Labor Standards Act" (RIN 1235-AA43) has sparked debate about the future of independent work. While some headlines proclaim the "death of the independent contractor," the reality is more nuanced.
- In 2022 there were 31.9 million independent contractors in the United States.
- Independent contractors earned 40% more income than working at the same comparable job as an employee.
- Employers saved 30% of costs by hiring an independent contractor.
- The highest paid independent contractors can earn 6 figures or more.
What Is an Independent Contractor?
The equipment and tools required to do the task are often owned by independent contractors. In addition, they bear the expense of insurance, maintenance, and repairs. It is also common for independent contractors to have contractual authority over and accountability for an asset under a rental or lease arrangement.
The Shift and Recession
In 2021, the DOL issued a rule that established a new test for classifying workers, placing more emphasis on a worker's control over their work and opportunity for profit or loss. This rule, seen as favoring businesses, was met with criticism from worker advocates. Legal challenges ensued, and the DOL ultimately rescinded the 2021 rule in January 2024.
The New Rule: A Return to Tradition
The new rule reinstates the "economic reality test" used for decades. This test considers a broader range of factors, including:
- Control: The level of control the employer exerts over the worker's work schedule, tools, and methods.Investment: Whether the worker invests significant funds in their own equipment or business.
- Permanency: If the work is a permanent or integral part of the employer's business.
- Skill and Initiative: The level of skill required and the worker's independent initiative.
- Opportunity for Profit or Loss: Whether the worker has the potential to make a profit or suffer a loss based on their own efforts.
Impact on Independent Work
The new rule doesn't eliminate independent contracting entirely. However, it makes it more challenging for businesses to classify workers as independent contractors if they don't meet the multi-factor test. This could lead to:
- Increased Costs for Businesses: Businesses that previously classified workers as independent contractors may now need to reclassify them as employees, incurring costs associated with minimum wage, overtime pay, and benefits.
- Reduced Flexibility for Some Workers: Workers who enjoyed the flexibility of independent contracting may find fewer opportunities or stricter controls if they are classified as employees.
The Future of Independent Work
While the new rule tightens the reins on independent contractor classification, it doesn't necessarily spell its doom. Here are some possibilities:
- Focus on Genuine Independence: Businesses may need to structure work arrangements to ensure workers have a greater degree of control, investment, and opportunity for profit or loss.
- Rise of Hybrid Models: New models that combine elements of employee and independent contractor status might emerge to cater to worker preferences for flexibility while ensuring appropriate protections.
- Legislative Changes: Further legislation could be introduced to create clearer categories for different types of work arrangements.
The Roll of Labor Unions
There is strong evidence to suggest that labor unions played a role in influencing the DOL's new rule on worker classification, though the exact extent is difficult to pinpoint. Here's how:
- Alignment of Interests: Labor unions have long advocated for stricter worker classification rules. They argue that many workers are misclassified as independent contractors, denying them benefits and protections under the Fair Labor Standards Act (FLSA). The new rule, with its multi-factor test, aligns with this goal.
- Public Advocacy: Labor unions have been vocal critics of the 2021 rule and expressed support for a return to the pre-2021 "economic reality test." They likely lobbied the DOL and Congress to push for this change.
- Shifting Political Landscape: The current administration is generally considered more receptive to labor union concerns compared to the previous one. This shift in political priorities likely created a more favorable environment for the new rule.
However, it's important to consider these nuances:
Broader Worker Advocacy: While labor unions were likely a significant voice, the movement for stricter classification wasn't limited to them. Worker advocacy groups and individual workers also expressed concerns about misclassification.
Focus on Legal Precedent: The DOL frames the new rule as a return to a well-established legal standard based on judicial precedent. This justification downplays the influence of any specific group, including labor unions.
Independent Contractors This Rule Will Effect
The impact of the DOL's new rule on worker classification will likely be felt most acutely in industries that rely heavily on independent contractors, particularly those where the level of control exerted by the company and the worker's independence can be blurry. Here are some examples of independent contractor roles that could be affected:
- Gig Economy Workers: Delivery drivers, rideshare drivers, and freelance service providers on platforms like Upwork and Fiverr may face increased scrutiny. Businesses may need to reclassify them as employees if they don't have enough control over their work schedules, tools, and methods.
- Construction Trades: Independent contractors in construction, like electricians, plumbers, or carpenters, could be impacted. If a company exerts significant control over their work on specific projects, they might be classified as employees.
- Creative Industries: Freelance writers, editors, graphic designers, and photographers may be affected. The line between independent contractor and employee can be blurry in these fields. The new rule will likely encourage clearer contractual agreements that define control, investment, and opportunity for profit or loss.
- Sales Professionals: Independent salespeople who work on commission might be reviewed. If the company dictates their sales territory, quotas, and customer interactions to a high degree, they could be classified as employees.
It's important to remember that the new rule applies a multi-factor test. Not all independent contractors in these fields will automatically be reclassified. However, businesses that rely heavily on independent contractors with minimal control and investment on the worker's side should be prepared to potentially reclassify them as employees. This could lead to increased costs and administrative burdens.
President Biden's Role in Changing This Rule
Proposed changes to this rule began under the Biden Administration in 2021. President Trump had made changes to the rule during 2020 that would have lowered the standard of classifying whether a worker was an independent contractor but they never got the chance to go into effect in March of 2021 when Biden delayed the ruling and withdrew the rules.
"Judge Marcia Crone of the U.S. District Court for the Eastern District of Texas reinstated the Trump administration's rule in a March 14, 2022 order, finding that the Biden administration's actions violated the Administrative Procedure Act (APA)." Shrm.org
Here are some resources for businesses to stay informed
The Department of Labor's website on worker classification:
https://www.dol.gov/agencies/whd/flsa/misclassification/rulemaking
Contact Legal counsel specializing in employment law
Federal Register:
https://www.federalregister.gov/documents/2024/01/10/2024-00067/employee-or-independent-contractor-classification-under-the-fair-labor-standards-act
Conclusion
The DOL's new rule on worker classification is a significant development with potential consequences for both businesses and workers. While it may make independent contracting more challenging in some cases, it is unlikely to completely eradicate this form of work. The future of independent work will likely involve adaptation and innovation to comply with the new legal landscape.
Labor unions undoubtedly played a role in advocating for the new DOL rule. Their interests aligned with the goal of ensuring workers receive proper protections. However, it's likely a combination of factors, including broader worker advocacy and adherence to legal precedent, that shaped the final rule.
Sources:
The US Department of LaborDeel
Google (searches)
Zip Recruiter
Statista
SHRM.org (https://www.shrm.org/topics-tools/employment-law-compliance/federal-judge-reinstates-trump-era-independent-contractor-rule)
