The final rule on independent contractor classification by the U.S. Department of Labor is set to significantly impact the gig economy and other industries that rely heavily on contract labor. This rule aims to make it harder for companies to classify workers as independent contractors, potentially upending business models that depend on such classifications.
Key Aspects of the Final Rule:
- Economic Realities Test: The rule incorporates a multi-factor “economic realities” test to determine whether workers are employees or independent contractors under the Fair Labor Standards Act (FLSA). This test evaluates the extent of a worker’s economic dependence on the employer.
- Factors Considered: The rule considers several factors, such as the nature and degree of the worker’s control over work, the worker’s opportunity for profit or loss, the amount of skill required for the work, the degree of permanence of the working relationship, and whether the work is part of an integrated unit of production.
- Impact on Worker Classification: The rule is designed to reveal whether workers are economically dependent upon their employer or are in business for themselves. It emphasizes the entrepreneurial nature of an independent contractor.
Effects on the Gig Economy:
- Legal Protections for Employees: The rule could lead to more workers being classified as employees, entitling them to various legal protections like minimum wage, overtime pay, and protection against discrimination. This classification change could make employees up to 30% more expensive for companies to use than independent contractors.
- Impact on Businesses: The change could negatively impact various industries, especially the gig economy. Companies may have to raise prices or limit services, potentially straining supply chains already impacted by the COVID-19 pandemic.
- Benefits for Workers: For many workers, especially in gig and delivery services, this change could guarantee minimum wage, overtime pay, and reimbursements for work-related expenses. However, it could also lead to companies hiring fewer workers or eliminating some jobs altogether, as they would have greater control over employees compared to contractors.
- Legal Challenges: The final rule is likely to face lawsuits, with potential claims that the new definition of “employee” is broader than federal wage law allows or that proper administrative procedures were not followed in adopting the rule.
- Comparison with Current Rule: The current rule, established in 2021, uses a five-factor test with two core factors: the nature and degree of control over work, and the worker’s opportunity for profit or loss. The new rule, being more nuanced, is expected to result in less definitive answers to the classification of independent contractors, increasing the likelihood of more court or DOL findings in favor of an employment relationship.
Overall, the rule represents a significant shift in how worker classifications are determined, with substantial implications for both businesses and workers in the gig economy and beyond.