The US Department of Labor (DOL) on Tuesday (Jan. 9) finalized a new rule that will make it more difficult for employers to classify their workers as independent contractors. The move means that millions of working Americans could gain the right to overtime pay, insurance benefits, and protections for unionization efforts.
The Biden administration has sought to enhance protections for gig workers since president Joe Biden took office. In 2021, Biden blocked a Trump-era rule that would have made it easier for employers to designate their workers as contractors and potentially cut them off from a number of protections and rights under the Fair Labor Standards Act. The new DOL rule first proposed in 2022 restores past federal regulations regarding independent contractors. It goes into effect March 11.
Here’s what you need to know.
Who are gig workers, and why does the new rule matter?
An estimated 36% of respondents to a 2022 McKinsey survey identified as independent workers, up from 27% in 2016. These “gig” workers are everything from lawyers and traveling nurses to lower-paid delivery drivers.
While gig workers have more flexibility, they don’t get the same benefits and protections as employees. They aren’t protected by employment and labor regulations such as wage and anti-discrimination laws, and they can’t join unions. Many industries have been cited for misclassifying workers to avoid the cost of putting them on payrolls. Such misclassification exacerbates wage theft and racial wage gaps and reduces Social Security income paid to the government, according to a 2022 report from the National Employment Law Project (NELP).
“Misclassifying employees as independent contractors is a serious issue that deprives workers of basic rights and protections,” acting secretary of labor Julie Su said in a statement. “This rule will help protect workers, especially those facing the greatest risk of exploitation, by making sure they are classified properly and that they receive the wages they’ve earned.”
What is the new rule?
The new DOL rule uses six factors to determine whether a worker is an employee or a contractor, which are outlined in a recent post from the Society of Human Resources Management (SHRM):
- The degree to which the employer controls how the work is done
- The worker’s opportunity for profit or loss
- The amount of skill and initiative required for the work
- The degree of permanence of the working relationship
- The worker’s investment in equipment or materials required for the task
- The extent to which the service rendered is an integral part of the employer’s business
The 2021 Trump rule, on the other hand, focused on only two “core” criteria — the “nature and degree of control over the work” and the “opportunity for profit or loss.”
Which workers will benefit most from the new rule?
According to the NELP analysis, more than 21 million Americans work in industries plagued by misclassification: construction, trucking, delivery, home care, personal care, agricultural, and janitorial and building service occupations. When misclassified, these workers lose as much as $18,000 per year in income and job benefits, according to a report from the Economic Policy Institute.
“This [rule] will mean higher wages and overtime pay for millions of workers in gig jobs, health care, construction, and more,” the pro-labor media outlet More Perfect Union said Tuesday on X.
But in order for the new rule to have a substantial impact on independent workers in the US, the Biden administration must go further, said Susan Houseman, a labor economist with the Upjohn Institute. “The new rules must be coupled with enforcement—yet dollars (in inflation adjusted terms) for enforcement of such employment regulations have dramatically declined over the decades,” she said.
What are the downsides for workers?
Some workers think the new rule could hinder their ability to make money from side gigs.
A nurse named Tanya—who did not share their last name—wrote in a public comment to the DOL that they work as a 1099 contractor for an infusion company on top of their 36 hours as a full-time employee at a hospital. “Being able to work on the side as an independent contractor for the infusion company allows me to work extra without burning out,” they said. “By implementing these new changes, I believe it would further damage the healthcare workers options to work as a 1099 contractor.”
How would companies be impacted?
Employees cost companies as much as 30% more than contractors, according to studies cited by Reuters.
Marc Freedman, the vice president of workplace policy at the US Chamber of Commerce, said the rule will be harmful to employers and argued that the DOL is already successfully cracking down on bad actors that misclassify employees.
“The Department of Labor’s new regulation redefining when someone is an employee or an independent contractor is clearly biased towards declaring most independent contractors as employees, a move that will decrease flexibility and opportunity and result in lost earning opportunities for millions of Americans,” Freedman said in a statement Tuesday, adding that it “could have significant negative impacts on our economy.”
The SHRM has argued the rule will create “confusion and uncertainty” for employers.
But two major companies that employ independent workers, Uber and DoorDash, have said the rule won’t affect them.
“This rule does not materially change the law under which we operate, and will not impact the classification of the over one million Americans who turn to Uber to earn money flexibly,” Uber said.
“We are confident that Dashers are properly classified as independent contractors under the FLSA, and we do not anticipate this rule causing changes to our business,” DoorDash said.
Their reactions struck a different tone than when they requested delays to the finalization of the new DOL rule. And the companies spent millions of dollars to fight the similar California law making it harder for firms to designate workers as contractors.