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Labor Department Moves to Change Worker Classification Rule (3)

Oct. 11, 2022, 12:55 PMUpdated: Oct. 11, 2022, 4:34 PM

The Biden administration has issued a highly anticipated proposal on how it will approach independent contractor status under federal wage law, its second attempt to undo a Trump-era standard that it says leaves workers vulnerable to misclassification.

The proposal, released Tuesday by the US Labor Department, clarifies when workers should be classified as independent contractors who are in business for themselves, or employees who are afforded the full minimum wage, overtime, and other protections provided under the Fair Labor Standards Act.

Gig companies such as Uber Technologies Inc. and Lyft Inc., and construction, trucking, and other industries that use independent contractors to staff their fleets were watching closely for the rule. Shares of Uber and Lyft tumbled Tuesday after the DOL announced the proposal.

Businesses say their operating costs would skyrocket if they were broadly required to reclassify their independent contractors as employees, due to the tax liabilities and minimum wage, labor, safety, and other legal requirements that apply to employees.

The acting head of the DOL’s Wage and Hour Division said Tuesday the rulemaking wasn’t likely to result in large worker classification changes.

“What we anticipate is that this will really help provide guidance to both avoid and prevent misclassification,” Jessica Looman said during a press call. “But this is a framework that has been used and has been well recognized and understood.”

The agency’s top attorney, Seema Nanda, also noted during the press call that the proposal is “not intended to target any particular industry or business model.”

“It’s intended to provide an analysis that would apply to all industries, whether it’s newer or older, to different business models,” she said.

Major Changes

When determining a worker’s status, the Biden administration will use a multi-factor economic realities test that considers factors of the working relationship to determine whether the worker is truly in business for themselves. The proposed changes would be a return to a “totality-of-the-circumstances” analysis, according to the proposal, evaluating all of the factors involved in the working relationship equally.

The rulemaking also would rescind a Trump-era rule that outlined a similar multi-factor test, but that gave greater weight to how much control workers have over their job duties and their opportunities for profit or loss when determining whether a worker is an employee or an independent contractor.

Biden DOL officials said the simplified Trump independent contractor test is inconsistent with federal court decisions, and would result in more workers being misclassified as independent contractors when they should be employees.

The Trump test included five factors, but two were given far greater weight: the nature and degree of the worker’s control over the work, and the worker’s opportunity for profit or loss based on personal initiative or investment.

The new Biden proposal would consider those two factors and four others: investments by the worker and the employer, the degree of permanence of the working relationship, the extent to which the work performed is an integral part of the employer’s business, and the degree of skill and initiative exhibited by the worker.

The DOL may also consider “additional factors” beyond those six, if they indicate the worker may be in business for themselves, according to the proposal.

The proposed rule also provides additional analysis of the control factor, according to Looman, “including how scheduling, supervision, price setting and the ability to work for others should be considered when analyzing the degree of control over a worker.”

The Labor Department couldn’t be definitive on the proposal’s impact because it “does not have data on the number of misclassified workers and because there are inherent challenges in determining the extent to which the rule would reduce this misclassification.”

The rule change would cost affected companies, independent contractors, and local governments $188.3 million, the DOL estimated.

The proposed regulation will be officially published in the Federal Register on Oct. 13. The public will have 45 days to comment.

Legal Fight

This is the second time the DOL has tried to rescind the IC rule promulgated by the Trump administration, which made it easier for businesses to classify workers as independent contractors.

The Trump standard was reinstated after a federal court in Texas ruled in March that the DOL failed to consider meaningful policy alternatives before revoking the rule.

In response, the Biden administration began a rulemaking process again this summer, which it said was necessary to combat misclassification.

Tuesday’s proposal quickly drew criticism from business groups, and likely will spark legal challenges when it’s made final.

The National Retail Federation argued that the Biden rule would increase costs for businesses and make the complicated legal analysis for determining worker status even more confusing.

“NRF staunchly opposes a change in this important area of law, which is both unwarranted and unnecessary,” the group said in a statement. “This decision will only foster massive confusion, endless litigation, reduced innovation and fewer opportunities for employees and independent contractors alike.”

Michael Lotito, co-chair of Littler Mendelson PC’s Workplace Policy Institute, also said the proposal fails to explain why the current Trump rule has impeded the agency’s ability to police misclassification.

“Without the discussion of how the rule has failed, I don’t know how you can justify a new rule,” Lotito said.

Since the Trump rule was reinstated, the DOL’s wage enforcement arm has touted at least seven cases that collectively found more than 2,500 workers who were wrongly labeled as independent contractors when they should have been classified as employees.

(Updated with additional reporting throughout.)

To contact the reporter on this story: Rebecca Rainey in Washington at rrainey@bloombergindustry.com

To contact the editors responsible for this story: Genevieve Douglas at gdouglas@bloomberglaw.com; Laura D. Francis at lfrancis@bloomberglaw.com;
Rebekah Mintzer at rmintzer@bloombergindustry.com