How The Department of Labor’s New Definition of “Independent Contractors” Can Wrongfully Exclude Workers From Federal Labor Protections

Independent Contractors

 

Written by Taher Kameli & Chathan Vemuri

In what could be seen as a boon to employers, the U.S. Department of Labor issued a proposed regulation setting out a new definition of who was or was not an “independent contractor.”[1] This regulation, if approved and finalized, would make it easier for employers to classify much of their workforce as “independent contractors” and be excused from providing them labor protections under the Fair Labor Standards Act.[2] On the other hand, however, it may affect the security of workers as they could lose considerable protections and benefits if their employer reclassifies them as “independent workers.”[3]

 

Under the new definition, whether a person is an employee or an independent contractor is analyzed under the “economic dependence” test.[4] If a worker is economically dependent on the employer for work, then the employer can be said to “suffer or permit” that worker to work for him, making that person an employee.[5] However, if the workers are in business for themselves, they are not economically dependent on their employers and therefore are not employees.[6] There are many factors that would determine whether one is an employee under the terms of “economic dependence” but two core factors are 1.) “the nature and degree of the individual’s control over the work and 2.) the individual’s opportunity for profit or loss.”[7]

 

A separate analysis is done using the first prong. If the worker exercises substantial control over the core aspects of the job such as schedule, project selection and/or through the ability to work for others, including possible competitors, that worker is likely to be considered an independent contractor.[8] However, if the employer exercises that substantial control over the core parts of the job such as determining work schedules or workloads and/or directly requiring the worker to only work for the employer, that worker is more likely to be an employee for the purposes of the Federal Labor Standards Act of 1938.[9] Likewise, another analysis is done for the second prong of the individual’s opportunity for profit or loss. A worker is more likely to be an independent contractor if their earned profits depend on their own exercising of initiative and/or management of investment in helpers and material to finish the job at hand.[10] A worker doesn’t need to earn profits on both exercising initiative and managing investment in helpers in order to be considered an independent contractor. If the employer has more or less full control over the worker’s earnings or sets the requirements by which the worker gets paid more than usual than the worker is more likely to be an employee.[11] Other factors that are considered in determining whether a worker is an employee or an independent contractor include the amount of skill that is required for the work, how permanent is the worker-employer relationship, and whether the work is part of integrated unit production.[12]

 

Delineating the difference between employees and independent contractors in this manner of “economic dependence” puts gig economy employers like Uber, Lyft, Posmtates, and others at a clear advantage.[13] After coming up against state laws like those in California which make it difficult to treat drivers involved with these services as independent contractors rather than employees, these employers can finally point to the dependence theory to make a case that their drivers have substantial control in how they do their work and what schedules they follow.[14] As such they shouldn’t be counted as employees.[15] However, this is not quite as simple as these employers or the Department of Labor may like to believe. The differing requirements and setups of many jobs mean this type of test can’t necessarily apply to types of employment and therefore could result in employees being misclassified as independent contractors. Indeed, the issue of workers being misclassified as independent contractors has been going on for years based on technical interpretations as to the nature of their employment involving any kind of self-control or conditionality, be it for agricultural work, janitorial work, home care work, or construction.[16] Defining employment by such a straightforward standard of “economic dependence” focused on “substantial control” would see workers in these professions lose their significant protections under the Federal Labor Standards Act and other statutes as employers make use of this rule to cut costs and avoid the responsibility of guaranteeing these protections and benefits by denying these benefits and protections.[17] This new proposed regulation, if implemented, would help employers do that and key parts of the workforce that rely on some degree of self-scheduling and control (despite ultimately answering to the rules of the employer) would lose out on benefits and be more economically vulnerable based on a potentially arbitrary definition that fails to capture the nature of what they do.[18] Agricultural workers, construction workers, janitors, and home care workers (the last category extremely important in the midst of a global pandemic disproportionately affecting the elderly) all stand to potentially lose from enforcing this proposed regulation.[19]

 

There’s also the issue of workers for gig economy employers for who this proposed rule was drafted to begin with. While it is technically true that drivers for these gig economy companies may set their own schedules, hours and what jobs they do and how they do it, this doesn’t necessarily indicate levels of substantial control or that they have control over how much they earn. Many drivers for gig economy services like Uber often rely on this work as their sole source of income and have to abide by the rules of the employer as well as ratings from employees to keep their jobs, however self-directed they may be.[20] There is a further complication these workers face in that they must answer not to a particular boss but to an automated system that constantly monitors the work of the driver in question and either grant praise or criticism on that basis as well as deactivating accounts based on complaints or low ratings.[21] These “algorithmic bosses” also direct drivers to drive and work in certain areas based on notifications of surge pricing and how much more they could make if they go to these areas, thereby determining driver activity when a driver might just be about to do something else such as taking a break or ending work for the day, using the enticement of extra pay.[22] This can be particularly significant if the driver is economically vulnerable and depends on the gig work for their primary source of income. Furthermore, gig employers like Uber take fees and commissions on their work, effectively setting a determination of how much the worker actually gets for his or her services.[23] As such, claiming these gig workers are not employees, as these gig employers do, is somewhat misleading,

 

When you take this into consideration, the Department of Labor’s seemingly straightforward definition of what an “independent contractor” becomes a lot more questionable and leaves employees in services like gig companies in vulnerable economic positions. This is especially problematic when one considers the massive service such workers have provided during the global COVID-19 pandemic where drivers have provided essentials services in delivering food and groceries to those who cannot go out, therefore being “essential workers” for purposes of pandemic relief[24] and increasing their own risk of exposure to the disease as a result.[25] Furthermore, in light of the current recession, reliance on gig labor by struggling firms will only increase, making these types of jobs economic lifelines for many going through an era of mass unemployment.[26] When you consider just how increasingly integral gig work is to the economy, to the point that states are targeting gig employers for avoiding paying employee payroll taxes and giving revenue to the state[27], enforcing a definition of “independent contractor” primarily designed to avoid defining people like gig workers as employees start to look incredibly questionable and shady on the part of the Department of Labor. It almost as if the federal government is giving certain employers a pass in fulfilling their responsibilities to their workers by trying to enforce such a deceptively simple definition of what distinguishes employees from independent contractors.

 

Indeed, the proposal of this rule is seen as part of a broader effort by the Trump Administration to promote business-friendly policies that benefit employers at the expense of employees, in this instance by denying worker protections to potentially millions of people.[28] This is in response to state laws like California’s controversial AB5 law which requires gig companies to treat workers as regular employees and ensure all the federal and state worker protections and benefits that come with it.[29] Employers could also stand to suffer from this as well as failure to create a proper definition of an employee could lead to discord with workers unsure of their status and cost vulnerable firms valuable services as reliance on gig labor increases.[30]

 

This proposed rule defining an independent contractor has not been formally approved yet but its implications for workers in a rapidly changing economy where unemployment and financial insecurity can drive more and more Americans to gig work and where the requirements of social distancing increase reliance on said work are problematic and likely to only increase conflict between labor and management in the future. Indeed, the Department of Labor’s proposed definition may do more to confuse and complicate matters of employer-worker relationships rather than provide the clarity they claim to establish.

 

Please contact the Law Offices of Kameli and Associates at info@kameli.com or give us a call at +1 (312)-233-1000 if you have any questions as an employer about this proposed rule and its possible implications for your business and your relationship with your workers.

 

[1] Ben Penn, DOL Debuts Rule Easing Business Use of Independent Contractors, Bloomberg (Sept. 22, 2020, updated 8:57 AM) available at https://news.bloomberglaw.com/daily-labor-report/dol-debuts-rule-to-ease-employers-use-of-independent-contractors

[2] Id.

[3] Eli Rosenberg, New Trump Administration Rule Could Make It Harder for Gig and Contract Workers to Have Rights as Employees, Wash. Post (Sept. 22, 2020) available at https://www.washingtonpost.com/business/2020/09/22/dol-independent-contractor-classification/

[4] Allan S. Bloom, DOL Proposes New Rule on Independent Contractor Classification, Nat’l Law Rev. Vol. 10 No. 268 (Sept. 22, 2020) available at https://www.natlawreview.com/article/dol-proposes-new-rule-independent-contractor-classification

[5] Id.

[6] Id.

[7] Id.

[8] Id.

[9] Id. (The proposed regulation also notes that requirements of workers such as complying with legal obligations, health and safety standards, carrying insurance, meeting agreed upon deadlines or quality control standards, or related terms common in contracts between businesses do not constitute “substantial control” that would make an individual an employee or independent contractor.)

[10] Id.

[11] Id.

[12] Id.

[13] Daniel Wiessner, U.S. Labor Department Could Make It Easier To Treat Workres as Independent Contractors, Reuters (Sept. 22, 2020, 10:13 AM) available at https://uk.reuters.com/article/usa-labor-classification/u-s-labor-dept-could-make-it-easier-to-treat-workers-as-independent-contractors-idUSL2N2GJ0P0

[14] Id.

[15] Id.

[16] Eli Rosenberg, New Trump Administration Rule Could Make It Harder for Gig and Contract Workers to Have Rights as Employees, Wash. Post (Sept. 22, 2020) available at https://www.washingtonpost.com/business/2020/09/22/dol-independent-contractor-classification/

[17] Id.

[18] Id.

[19] Id.

[20] Alex Rosenblat, When Your Boss is an Algorithm, N.Y. Times, (Oct. 12, 2018) available at https://www.nytimes.com/2018/10/12/opinion/sunday/uber-driver-life.html

[21] Id.

[22] Id. l

[23] Id.

[24] Alex Rosenblat, Gig Workers Are Here to Stay. It’s Time to Give Them Benefits, Harvard Bus. Rev. (Jul. 03, 2020) available at https://hbr.org/2020/07/gig-workers-are-here-to-stay-its-time-to-give-them-benefits

[25] Alyssa LaFaro, Gig Workers Face More Risks Than Most During Pandemic, UNC (May 26, 2020) available at https://research.unc.edu/2020/05/26/gig-workers-face-more-risks-than-most-during-pandemic/

[26] Alex Rosenblat, Gig Workers Are Here to Stay. It’s Time to Give Them Benefits, Harvard Bus. Rev. (Jul. 03, 2020) available at https://hbr.org/2020/07/gig-workers-are-here-to-stay-its-time-to-give-them-benefits

[27] Id.

[28] Helping The Gig Economy Work Better for Gig Workers, Int’l Labour Org. (Viewed on Sept. 25, 2020) available at https://www.ilo.org/washington/WCMS_642303/lang–en/index.htm#:~:text=The%20Bureau%20of%20Labor%20Statistics,to%2043%20percent%20in%202020. (According to the Bureau of Labor Statistics, in 2017, an estimated 55 million people were gig workers, thereby constituting 34% of the workforce with an expected increase to 43% by 2020).

[29] Eli Rosenberg, New Trump Administration Rule Could Make It Harder for Gig and Contract Workers to Have Rights as Employees, Wash. Post (Sept. 22, 2020) available at https://www.washingtonpost.com/business/2020/09/22/dol-independent-contractor-classification/

[30] Alex Rosenblat, Gig Workers Are Here to Stay. It’s Time to Give Them Benefits, Harvard Bus. Rev. (Jul. 03, 2020) available at https://hbr.org/2020/07/gig-workers-are-here-to-stay-its-time-to-give-them-benefits