The Department of Labor (DoL) has extended its deadline for comments related to the 2021 IC Rule, a regulatory rule that provided clarity and distinction for determining independent contractor classification, for another 15 days. While the DoL claims that the rule failed to provide the clarity it set out to offer and that its proposal will reduce the confusion that came from it, it seems to be doing just the opposite already. Commenters interested in the IC Rule are already concerned with the proposal’s complex stipulations.
After almost two years of the IC Rule being in place, the DoL is hoping for its rescission by proposing an alternative method for independent contractor vs employee classification. Its aim is to stay in line with the decades of judicial precedent, case law and multifactor economic reality test — a test that considers a wide or ‘total[ity]’ of factors that are important when determining if a worker is economically dependent on the employer for work or in business for themselves — that existed prior to the IC Rule. However, this proposal would have detrimental consequences for our increasingly technologically advanced and modern economy because of the impact it would have on employers and workers.
The main gripe the Department has with the IC Rule is the higher probative value placed on two factors of the five-factored economic reality test. These two factors are referred to as “core factors” and consist of the nature/degree of control over the work and the opportunity for profit or loss for the worker. The Department believes that this method predetermines, narrows and undermines the economic reality test. It prefers to not elevate certain factors but rather to consider the “whole,” or totality, of the circumstances.
This approach will lead to an ever-expanding and changing characterization of what constitutes an employee under the protections of the Fair Labor Standards Act (FLSA). In its aim to be specific and considerate of workers’ “totality” of circumstances and “economic realities,” this ad hoc consideration of factors will subject many willing independent contractors to reclassification as employees.
Whatever the merits or demerits of the differing means of testing economic dependence, it’s important to take account of the costs associated with departing from the 2021 IC Rule.
In its proposal, the DoL pointed out some of the costs its proposal would impose. It said that independent contractors would be legally responsible for an additional 7.65% of their earnings in FICA taxes. It also acknowledged that there would be transfers from employers to workers for minimum wage and overtime compensation. Lastly, it noted that there would be rule familiarization costs that would include transfers. Between businesses, independent contractors and local governments, this proposal would cost a total of $118 million in year one.
The proposal will be bad for employers. Their costs of production will increase, as they’ll have to provide an expanded set of workers with minimum wage, overtime pay, insurance, workers compensation and benefits such as sick days, pension and vacation that the FLSA requires. This would mean less profit for the employer to allocate to more growth-oriented uses. Small businesses will be hit the hardest. As the American Consumer Institute (ACI) points out, the cost of a traditional employee is typically 1.25 to 1.4 times their salary. Hiring independent contractors can save businesses up to 30 percent on these labor costs.
Employers that partner with independent contractors would be subject to costs incurred from reclassification litigation. They would also have to ensure that FLSA protections are applied to their previously classified independent contractors. For example, independent contractor rideshare drivers becoming employees would essentially subject their employers to increased liability if their drivers are injured during a trip, which would result in increased litigation. Business groups are also worried about these liabilities and the litigation that will ensue from the proposal.
The proposal will also harm the independent contractors themselves. 36 percent of the population freelances, and freelancers contributed $1.3 trillion to the U.S. economy in 2021. Not only that, but according to studies by Pew Research Center in 2021, 31 percent of gig platform workers who have earned money this way in the past year say it’s been their main job during this time, and 58 percent of current or recent gig workers say money earned via gig jobs has been essential or important for meeting their basic needs over past 12 months. The effects of this proposal on such a productive and prominent sector will be immensely damaging.
While in its proposal the DoL claims it’s fundamental that: “workers who should be covered under the Act are able to receive its protections, as the misclassification of employees as independent contractors remains one of the most serious problems facing workers, businesses, and the broader economy,” 70 percent of independent contractors said they are working as contractors by choice. One study by the Bureau of Labor Statistics found that “79 percent of independent contractors preferred their arrangement over a traditional job.” Only 53.7% of traditional employees could say the same about their arrangement.
The DoL also claims that misclassification could have a disproportionate impact on women and minorities due to their overrepresentation in low-wage positions where classification as independent contractors is more likely. It claims that misclassification deprives them of benefits that could alleviate inequality. However, according to a survey by Pew, Black and Hispanic Americans comprise the highest percentage of those who say that gig platform jobs are generally a good way for other people to make money. A majority of them that do gig work report it being their primary source of income as well. They also are more likely to report that they’ve earned money doing online gig platform work. These conditions don’t have to represent a disadvantage — independent contractors tend to earn more than traditional employees. For many, independent contracting is a highly valuable source of income to which many traditional employees may not be able to devote time.
Although the Department seeks to benefit these workers by reclassifying them to secure a specific set of protections and rights for them, the independent contractors themselves want otherwise and are satisfied with their work status. According to the American Action Forum, “wage protections that could result in higher wages are not a priority, with 51 percent reporting that they ‘wouldn’t return to the traditional workforce for any amount of money.’” A letter written by ACI cites reasons why such a high percentage of independent contractors prefer being a contractor, such as “flexibility, the ability to work anywhere, and the ability to spend more time with family — all of the things traditional employment does not offer.” The letter also cites a study by Upwork revealing that high satisfaction rates among independent contractors have led 30 percent of full-time employees to leave traditional jobs for full-time independent contracting.
Clearly, many workers gladly accept the tradeoffs of being an independent contractor over those that come with employee status. Employers also see benefits and reduced costs from being able to classify workers as independent contractors. To continue to see the economic gains that come as a result of independent contracting, the DoL should refrain from advancing its proposal. Its proposed changes would prove costly for employers, constraining for a workforce that values flexibility and, in the end, pricey for consumers.