The administration of U.S. President Joe Biden is set to release a final rule this week that will impact how companies categorize workers, favoring employee status over independent contractor classification. An administration official stated that the rule, proposed in 2022 and likely to face legal challenges, emphasizes the consideration of workers as employees entitled to enhanced benefits and legal protections when “economically dependent” on a company.
The forthcoming rule, slated to take effect later this year, is anticipated to affect various industries, with particular attention on its potential implications for app-based services relying heavily on contract workers. “Notably, shares of Uber Technologies Inc, Lyft Inc, and DoorDash experienced significant declines, each dropping at least 10% when the draft rule was initially proposed in October 2022.”
Marc Freedman, Vice President at the U.S. Chamber of Commerce, acknowledged the rule as one of the most impactful regulations issued by the Labor Department office enforcing U.S. wage laws. However, he expressed concerns that the draft version lacked clear guidance for companies in distinguishing between employees and contractors, citing the elusive nature of “economic dependence.”Freedman added, “Economic dependence is an elusive concept that in some cases may end up being defined by the eyes of the beholder.”
In detailing the criteria for classification, the Labor Department noted factors such as a worker’s “opportunity for profit or loss, investment, permanency, the degree of control by the employer over the worker, (and) whether the work is an integral part of the employer’s business.” This rule replaces a Trump administration regulation that allowed workers who own their businesses or can work for competing companies to be treated as contractors.
Legal experts anticipate that the sharp departure from the Trump-era regulation will be a focal point of legal challenges to the new rule, as federal law requires agencies to adequately explain their decision to withdraw and replace existing rules.* The Biden administration contends that the previous rule violated U.S. wage laws and deviated from decades of federal court decisions, asserting the need for a more stringent standard to address widespread misclassification of workers in certain industries.
According to a report by the Economic Policy Institute, workers treated as contractors, such as truck drivers, construction workers, and home health aides, experience significant earnings disparities compared to their employee counterparts.* The potential policy shift has drawn criticism from business groups, who anticipate increased labor costs across sectors such as trucking, retail, and manufacturing.
The proposed rule comes in the context of federal and state labor laws, including those concerning minimum wage and overtime pay, which predominantly apply to company employees. Studies suggest that employing workers as employees can cost companies up to 30% more than engaging independent contractors. A December survey by freelancing marketplace Upwork revealed that nearly 40% of U.S. workers, over 64 million people, engaged in freelance work in the past 12 months.
(Reuters)
