Department of Labor Issues New Independent Contractor Rule
The U.S. Department of Labor (DOL) on Tuesday issued a final rule that draws distinctions between employees and contract workers, and some trade groups are worried about what this means for businesses.
The rule offers new guidance on worker classification under the Fair Labor Standards Act. It states that a worker should be considered an employee if they are economically dependent on a company. DOL looks at six factors in determining the relationship, including a worker’s opportunity for profit or loss, investments made by both the worker and employer, the degree of permanence of the relationship, the nature and degree of control over performance of the work, the extent to which the work is essential to the employer’s business, and the use of the worker’s skill and initiative.
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According to DOL, the rule aims to ensure that workers aren’t misclassified, which could impact their rights to minimum wage or overtime pay and facilitate wage theft. “Misclassifying employees as independent contractors is a serious issue that deprives workers of basic rights and protections,” Acting Secretary of Labor Julie Su said. “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.”
The rule overturns the 2021 Independent Contractor Rule, in which two factors—opportunity for profit or loss, and control over work—carried the greatest weight in determining whether a worker should be classified as an independent contractor. Under this week’s ruling, which DOL said “aligns with longstanding judicial precedent,” all six factors must be equally considered. The department took into account feedback generated during stakeholder forums and a comment period in 2022, when the proposal was announced. The final rule will take effect on March 11.
The National Retail Federation (NRF) submitted comments on the proposed rule in December 2022, voicing opposition when it was released in October 2023. NRF senior vice president of government relations, David French, said the rule affects employers engaged in “a wide range of business relationships with independent contractors, including billing, facility maintenance, data analysis, delivery, marketing and other critical services.” Flexible relationships have become “even more important and common in a post-Covid-19 environment,” he added. Repealing the previous Independent Contractor Rule is “both unwarranted and unnecessary”—and likely to “foster confusion, endless litigation and reduced innovation,” French said.
“As bad as this rule is for retailers specifically and employers generally, it is far worse for the millions of workers nationwide who cherish the opportunity to engage in independent work,” he added.
The Coalition for Workforce Innovation (CWI), which represents technology, retail, logistics, and service industry enterprises like Uber, Lyft, Shipt, Mary Kay, Amway and Kelly Services as well as trade groups like the Retail Industry Leader Association (RILA) and the National Home Delivery Association aren’t happy with the change.
“CWI is very disappointed that the Department of Labor issued a final rule interpreting the economic realities test under the FLSA that both undermines flexible, independent work for millions of Americans and is inconsistent with longstanding judicial interpretations,” chair Evan Armstrong said, adding that the department “chose to issue a vague interpretation of the test that will create more uncertainty for both independent workers and businesses throughout the economy and will be harmful to independent worker relationships.”
Armstrong said CWI will “consider all options” to prevent the rule from “negatively affecting independent workers, consumers, and the economy.”
Labor rights groups and unions including Gig Workers Rising, the National Employment Law Project, PowerSwitch Action, the Service Employees International Union (SEIU) and Temp Worker Justice have been sounding the alarm about CWI’s mission, calling the coalition “a corporate lobby group that aims to pass federal laws and regulations that lock workers across occupations, industries, and work arrangements into ‘independent contractor’ or nonemployee status—stripping them of fundamental labor rights and protections.”
“Businesses have willfully misclassified employees as independent contractors in order to avoid complying with labor standards and tax laws that apply only to workers labeled as employees,” like the rights to minimum wage, overtime pay, paid sick leave, employer-funded unemployment benefits and collective bargaining, the group wrote in a July 2022 report titled “How the ‘Coalition for Workforce Innovation’ is Putting Workers’ Rights at Risk.”
Companies that misclassify independent contractor save up to 30 percent on payroll by eliminating payments into Social Security, Medicare, unemployment insurance, and workers’ compensation, the report said. “While legal claims by workers and regulators and pro-active enforcement efforts by government entities and worker advocates have begun to combat independent contractor misclassification, the practice remains pervasive in sectors such as trucking, ride-hail, delivery, building services, logistics, home care, agriculture, and construction,” it said.
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