We pause coverage of macroeconomic issues and the midterms for a moment to look at a growing problem for workers: the lack of protections for those in the gig economy and the misclassification of workers. Last week, the Biden Administration released its proposal for a new rule that would provide guidance on the classification of workers in this half-trillion dollar industry.
Drivers for app-based services like Uber, Doordash and Lyft have been at the forefront of the debate over employee misclassification, although the problem extends well beyond the gig economy. In today’s update, we cover the Department of Labor’s proposal on classifying employees, the harm misclassification poses to workers, and what lies ahead.
Best,
Dana
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With 57 million Americans now doing at least some freelance or “gig” work every week, increasing attention is being paid to the great disparity in terms of employment, compensation, and benefits between these workers and their traditional counterparts. Of these, many are misclassified. Indeed, misclassification of employees as independent contractors is a growing problem throughout the US labor market. Per a Department of Labor study, between 10 and 30 percent of audited employers misclassified employees as independent contractors. A California study found 9 out of 10 audited businesses out of compliance with state law regarding the classification of workers.
Independent contractors do not receive the same benefits and protections as employees and are not guaranteed a minimum wage or overtime. They do not have a federally protected right to organize, and are not covered by the civil rights laws. Employees who are misclassified as independent contractors are also often ineligible for unemployment insurance and worker’s compensation, essential components of the social safety net.
Administration’s Proposed Changes
The Department of Labor’s proposed rule would rescind the 2021 Independent Contractor Rule and restore the six-part “economic realities” test that has been long used by the Supreme Court and federal courts to determine whether someone is an employee under the Fair Labor Standards Act (FLSA). Under the 2021 IC Rule, two of five economic reality factors – nature and degree of control over work and the worker’s opportunity for profit or loss – were given the greatest weight in determining the classification of a worker. Currently, if these two core factors support the same classification, the other factors are highly unlikely to outweigh the core factors. The 2021 rule also narrowed the facts to be considered under the non-core factors.
By contrast, the proposed rule would return to a totality of circumstances analysis, in which six economic reality factors are each considered rather than weighted. The six factors (defined more fully in the notice of proposed rulemaking) are:
- Opportunity for profit or loss depending on managerial skill
- Investments by the worker and employer
- Degree of permanence of the work relationship
- Nature and degree of control
- Extent to which the work performed is an integral part of the employer’s business
- Skill and initiative
The proposed rule would return to an earlier interpretation of the integral factor, which would consider whether an employee’s work is integral to the business, rather than whether the worker is exclusively part of an integrated unit of production, as under the 2021 IC rule. The new rule would also provide additional analysis of the control factor revolving around scheduling, supervision, and price setting, among other factors.
Disadvantages for Workers
Misclassification of employees as independent contractors can have serious repercussions for workers. Depending upon the state in which they live, a misclassified worker who loses his or her job or gets injured on the job may not be entitled to unemployment benefits or workers’ compensation, despite performing the work of an employee. Independent contractors are also not entitled to the up to 12 weeks of unpaid, job-protected leave for family and medical reasons that is protected under the Family and Medical Leave Act (FMLA).
The COVID-19 pandemic highlighted the urgency of ensuring that workers classified as independent contractors had access to unemployment insurance. While the CARES Act did expand unemployment insurance during the pandemic to otherwise ineligible workers, including gig workers and other independent contractors, this was only a temporary fix. Ensuring that employees have access to these benefits will require both fixes to the unemployment insurance system and thorough enforcement of worker classification under the FLSA.
Misclassified workers are also not entitled to a minimum wage or overtime pay under the FLSA. So, an Uber driver, despite being integral to the functioning of Uber, may make less than the city or state’s minimum wage per hour, depending on the fares and tips that they receive. A 2020 survey found that 14 percent of gig workers earned less than the federal minimum wage per hour, and 29 percent earned less than the state minimum wage.
Many companies rely on misclassified workers as an essential part of their business model. App-based services like Uber, Lyft, Doordash, and Instacart rely heavily on cheap labor to keep prices low. The appeal of these services is that they offer what are essentially luxury services – personal shoppers and private drivers – on demand and at relatively low prices. These companies’ business models seem to be largely incompatible with fair wages and benefits, evidenced by a 13 percent drop in Lyft’s share price the day that the proposed rule was announced. Shares in Uber and Doordash fell by 11 and 7 percent respectively, further evidence that the markets do not buy that the companies would remain unaffected.
Legal Fights and Legislative Opportunities
The finalized rule will incur legal challenges. When the Biden administration attempted to withdraw the Trump-era rule in early 2021, a federal judge in Texas struck down the move citing violations of the Administrative Procedure Act. The judge specifically referred to the shortened notice-and-comment period, failure to consider changes as opposed to recension, and the need for regulatory certainty.
To avoid lengthy legal fights and regulatory backsliding, Congress could codify the proposed rule into law. This would significantly limit the opportunity for legal challenges and prevent future Republican administrations from rescinding the rule. Ending the possibility for regulatory volatility would give peace of mind to millions of improperly classified workers.
Congress and the administration have taken some steps to look into employee misclassification already. Senators Brown and Warner have called for examinations of the overuse and improper use of independent contractors and its impacts. Senator Warren has called out the reliance on independent contractors directly. And there have been multiple bills filed by members on both sides of the aisle to study the impacts of the gig economy. A few of these bills nominally intended to protect workers’ right to “flexibility” would in fact further erode worker power in the interests of corporations by presenting a false dichotomy between scheduling flexibility and workers’ rights.
- HR 8442 — Worker Flexibility and Choice Act – This bill has provisions that would do more to restrict than extend protections and offers no wage, hour, or overtime protections. The bill is not likely to see action in what remains of the 118th Congress and President Biden would almost certainly veto it should the next Congress enact it.
- FTC Policy Statement on Enforcement Related to Gig Work – This agency policy is limited in scope. It would restrict noncompete agreements and investigate price fixing and non-poaching agreements among gig companies not to recruit workers. But these are enforcement measures, not the extension of new protections.
The Department of Labor’s proposed rule is a great milestone for furthering labor rights and ending the grotesque problem of employee misclassification, but Congress can go further by amending labor law itself to enshrine the proposal. The House-passed PRO Act for example would have addressed employee misclassification by codifying the ABC test while still maintaining and strengthening workers’ rights. While proponents must be ready to defend the finalized rule from legal challenges, we also must fight for long-term and permanent changes via legislation.
Beyond Misclassification
There is also a fight that extends beyond misclassification. What of the millions of workers ultimately classified, by choice or law, as gig workers? What protections are afforded them currently under federal law? Gig workers, whether classified correctly or not, do not have many protections or benefits. While employees are entitled to a minimum wage, overtime pay, and other benefits, gig workers are not. Policies and proposals have recently been introduced to address the paucity of protections and enforce such protections as they exist.
The practice of employee misclassification cannot be allowed to continue, otherwise too many hard-working families will lose out on vital compensation, benefits, and protections that properly classified employees have access to.
The public has until November 28 to submit comments to the Department of Labor on the proposed rule, which can be done here.