Bloomberg Law
Nov. 14, 2022, 2:00 AM

ANALYSIS: Six Degrees of Classification Could Upend Gig Work

William Welkowitz
Legal Content Specialist

Federal agencies, as well as some state governments, have begun to more broadly define what an “employee” is for official classification purposes.

The issue of whether a worker should be considered an independent contractor or an employee is more important than ever because of new technologies that make the national workforce more mobile and flexible. As a result, important service industries rely more and more on independent contractors (many of whom are gig workers) as a significant portion of their own workforces.

These independent contractors could gain significant benefits in the coming year if a rule proposed by the Biden administration to more broadly define what an “employee” is becomes reality.

Biden Administration’s Proposed Rule

The battle to define the term “employee” for purposes of classification under federal and state labor and employment laws isn’t new. Currently, the Biden administration’s priorities on this issue are being formalized through the rulemaking process. On Oct. 13, the Department of Labor’s Wage and Hour Division published a notice of proposed rulemaking that would rescind the Trump administration’s rule on the subject.

In addition, the new rule would do the following:

  • align the department’s approach with courts’ FLSA interpretation and the economic realities test;
  • restore the multifactor, totality-of-the-circumstances analysis to determine whether a worker is an employee or an independent contractor under the economic realities test;
  • revert to the longstanding interpretation of the economic reality factors;
  • ensure that all factors are analyzed without assigning a predetermined weight to a particular factor or set of factors; and
  • assist with the proper classification of employees and independent contractors under the FLSA.

This new method to determine the meaning of “employee” would generally favor those arguing that gig workers and other independent contractors are being misclassified as such by employers and should be classified as employees instead. The outcome of this shift could mean that these individuals would become eligible for benefits such as overtime, health insurance, and paid leave. In addition, they would gain protections under EEO and other employment rights laws.

In particular, there are six prevalent issues that would affect the legal outlook in labor and employment law, should the proposed rule be implemented.

1. Payroll Issues

Independent contractors aren’t legally entitled to the FLSA’s minimum wage or overtime pay coverage like employees are, with exceptions in some states. They also don’t receive workers’ compensation. Under the new rule, more workers are likely to be classified as employees and are therefore entitled to coverage under the FLSA, as well as eligible for workers’ compensation.

2. Benefits

In recent years, several states have adopted laws that require employers to provide a certain amount of paid leave to their employees. In addition, the federal Affordable Care Act now requires employers with at least 50 employees to offer health insurance or health coverage to all of their workers. Furthermore, ERISA imposes certain requirements on private employers that provide pension and retirement plans to their employees, and there are certain states that impose requirements on private employers to provide retirement savings plans to their employees.

However, independent contractors aren’t generally covered by these laws. Under the new rule, more employers will be required to spend more money as a part of the cost of doing business in order to offer health insurance to their workers and administer retirement benefit plans.

3. EEO Protections

Many of the protections provided to employees under Title VII and other federal nondiscrimination laws don’t apply to independent contractors. For cases involving employment discrimination, courts use the “economic realities” test to determine whether someone is an employee or an independent contractor. This test has a litany of factors a court can consider in its determination, although the most important factor is usually the extent to which an employer can control the means and manner of the worker’s performance.

An expanded definition of “employee” issued by the DOL is likely to alter whether some of these factors are deemed present, as well as how these factors are weighed, in individual cases.

4. Union Organizing

Under the NLRA, independent contractors don’t fall under the NLRB’s jurisdiction. This means that unlike employees, independent contractors can’t form a union or collectively bargain with their employers. While the NLRB is generally free to come up with its own rule of what constitutes an “employee” within the NLRA’s parameters, a formal rule issued by a DOL division could prompt the NLRB, another DOL division, to adopt the rule’s definition for its own legal analyses.

A broader definition of “employee” could open up new worker groups to unionization drives than we’re seeing now, which would extend labor protections to an even greater percentage of the workforce.

5. Tax Commitments

For anyone considered an employee under the Internal Revenue Code, the employer must withhold certain taxes from the employee’s paycheck—such as Social Security, Medicare, and state and federal income taxes—that they don’t have to for an independent contractor’s payment. In addition, an employer must pay a certain amount of money to the IRS in payroll taxes for each worker classified as an employee. Independent contractors, on the other hand, aren’t subject to the payroll tax requirement.

This change in status will likely lead to higher taxes and more paperwork for employers. The new definition could also affect whether an employer would be required to pay federal and state unemployment insurance taxes.

6. Worker Safety

The DOL’s new regulation would also affect whether a worker is considered an employee or an independent contractor for the purposes of being protected by OSHA regulations. Although there’s no formal authority on this issue, it’s generally accepted that the agency excludes “self-employed workers"—a widely understood term for independent contractors—from OSHA jurisdiction. As a division of the DOL, OSHA would follow the department’s rules and guidelines in determining who is an employee and who is a “self-employed worker.”

State Action, Legal Challenges

In addition to the federal government, multiple states have also begun to reassess how they define who is an employee and who is an independent contractor. Because there’s currently no single national standard for worker classification, each state determines on its own what standard to use for this determination. The two most common standards are the ABC test and the common-law test, with some states opting to use part, but not all, of the ABC test. (Even the various federal agencies differ in which test they use for this determination. For example, the DOL uses the ABC test, while the IRS uses the common law test.)

In all likelihood, barring any serious court challenges, the proposed rule will go into effect in early 2023 with few (if any) amendments to the current proposal, and will remain in place through at least the end of the Biden administration. It’s doubtful that any court activity would alter this trajectory based on past precedent. After the Biden administration ends, the rule could be altered or rescinded through a subsequent round of rulemaking, depending on who becomes the next president—as is wont to happen for every new administration, especially if there’s a different political party in control.

Access additional analyses from our Bloomberg Law 2023 series here, covering trends in Litigation, Transactional, ESG & Employment, Technology, and the Future of the Legal Industry.

Bloomberg Law subscribers can find related content on our Labor & Employment – Practice Center page.

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