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Who’s an Employee and Who’s a Contractor: DOL Proposal Explained

Oct. 18, 2022, 2:37 PM

There are only 41 days left for anyone to try to change the Biden Labor Department’s mind on a proposal outlining the legal test that would make it easier for workers to be classified as employees rather than independent contractors under federal wage and hour law.

With the growth of contractor relationships in the economy over the past several decades, the question of who’s an employee with protections and benefits under labor law and who is a contractor not covered by those laws has become paramount for big companies to answer, such as Uber Technologies Inc., Lyft Inc., Instacart, and others.

Unions, Democrats, and some workers say businesses are wrongfully classifying their workers as independent contractors to avoid the tax and legal liabilities that come along with employment. Businesses, Republicans, and some contractors, though, say these relationships are squarely within the law and provide more flexibility for the modern economy.

The DOL moved forward with its proposal to stymie what it perceives to be misclassification abuses.

“While independent contractors have an important role in our economy, we have seen in many cases that employers misclassify their employees as independent contractors, particularly among our nation’s most vulnerable workers,” Secretary of Labor Marty Walsh said when the proposed rule was released earlier this month. “Misclassification deprives workers of their federal labor protections, including their right to be paid their full, legally earned wages.”

1. What happens next?

Already, business organizations have pressed the Department of Labor to double the 45-day comment period, given the potential impact of the rulemaking and the 184-page length of the proposal.

Once the comment period ends, the agency will review every comment and prepare to finalize the rule, a process that could take several months.

When the rule is finalized—which is expected to happen in the first quarter of next year—opponents of the regulation will be able to challenge it in court, which some groups have suggested they plan to do.

2. How does the proposed regulation work?

The new worker classification proposal from the Department of Labor outlines a test that reviews several factors of the working relationship between a worker and an employer, to determine whether the worker is truly in business for themselves or is economically dependent on the employer.

The six factors considered by the DOL include: the nature and degree of the worker’s control over the work; the worker’s opportunity for profit or loss; 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 agency says that each of these factors has no greater weight than the other when deciding worker status, and that other factors may be considered in the analysis if they indicate the worker may be in business for themselves.

3. How is it different from the current standard?

The Biden DOL’s proposal would replace a simpler worker classification test finalized during the Trump administration that’s still in effect. The Trump standard also evaluates factors within the working relationship, but places greater emphasis on how much control workers have over their duties and their opportunities for earnings. The shortened Trump test makes it easier for businesses to classify their workers as contractors.

The Biden plan would use a longer multi-factor economic realities test to determine worker status. It lists more circumstances where the agency could find that a worker should be classified as an employee, including whether the work is integral to the company’s business, among other factors. The Biden test would also consider all of the factors of the working relationship equally in the analysis, as opposed to the Trump test’s focus on control and earnings.

4. Who does this impact and will it cause big changes?

Using a rough estimate because there isn’t a lot of good data available on the number of independent contractors in the US, the DOL forecasts that the rulemaking could impact more than 22 million contractors.

Independent contracting relationships exist in every industry within the economy, including trucking, construction, journalism, and many others. Drivers for gig-companies like Uber and Lyft, while making up a small portion of the independent contractors in the economy, have also dominated the conversation around worker classification, given tech’s role in our modern economy.

Ultimately, the Biden DOL will decide how much of a splash it wants to make when it comes to cracking down on worker classification if the rule is finalized.

Management-side attorneys and the DOL have said they don’t expect businesses to broadly change how they classify their workers, because the test is based on historic case law and generally returns to the approach used during the Obama administration.

While the agency will have more legal discretion to argue that a worker is an employee versus a contractor, attorneys say that companies using independent contractors have had years to develop their legal arguments to defend those relationships and their business model.

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

To contact the editors responsible for this story: Martha Mueller Neff at mmuellerneff@bloomberglaw.com; Genevieve Douglas at gdouglas@bloomberglaw.com