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Labor Department makes it tougher to classify gig workers as contractors
Companies that have created business models that rely on the use of independent contractors to perform as personal shoppers, handle deliveries and other jobs may find it legally more difficult to avoid paying these workers a baseline minimum wage or overtime pay going forward.
The U.S. Labor Department has withdrawn a rule put in place during the Trump administration right before President Joe Biden took office that gave companies such as DoorDash, GrubHub, Instacart, Lyft, Postmates, Shipt, Uber and others the ability to employ so-called gig workers on a part- or full-time basis without having to classify them as employees.
The debate over when an independent contractor is, in fact, a company employee deserving of the same protections and benefits as those receiving W-2s has been ongoing in state capitals and Washington, D.C. for years.
In making the move to withdraw the rule, the federal government said that it was incompatible with the Fair Labor Standards Act that established minimum wage, timekeeping, overtime pay, record keeping and child labor regulations governing all public and private workers.
The timekeeping provision could prove a point of legal contention going forward as companies such as Amazon.com in the past have avoided having to pay warehouse workers for time spent waiting to go through security checks at the end of shifts.
The Trump administration’s rule put the onus on contractors to legally prove they should be classified as employees with the determination based on a “worker’s opportunity for profit or loss,” according to a Washington Post report.
Secretary of Labor Marty Walsh called the decision to withdraw the rule a necessary step.
“Business owners play an important role in our economy but, too often, workers lose important wage and related protections when employers misclassify them as independent contractors,” he said in a statement. “We remain committed to ensuring that employees are recognized clearly and correctly when they are, in fact, employees so that they receive the protections the Fair Labor Standards Act provides.”
The current Labor Department’s decision has been criticized by companies with an interest in the move and the U.S. Chamber of Commerce.
A letter written by the Chamber vice president, workplace policy, Marc Freedman, said it supported the previous rule, which provided “a consistent analytical framework and updated criteria” used in “determining when legitimate independent contractor relationships exist.”
- U.S. Department of Labor to withdraw Independent Contractor Rule – U.S. Department of Labor
- Wages and the Fair Labor Standards Act – U.S. Department of Labor
- RE: Independent Contractor Status Under the Fair Labor Standards Act: Withdrawal; RIN 1235–AA34; 86 Fed. Reg. 14027 (March 12, 2021) – Chamber of Commerce of the United States of America
- Trump era rule that made it harder for gig and contract workers to get minimum wage is withdrawn – The Washington Post
- Classifying workers as independent contractors is now tougher after a Trump-era rule is dropped – USA Today
- Biden’s Labor Department rescinds Trump-era rule affecting gig workers – NBC News
Discussion Questions
DISCUSSION QUESTIONS: Will the decision by the Labor Department to withdraw the Trump administration rule that favored companies classifying workers as third-party contractors affect retailers, restaurants and their vendors? Do rules governing employment classifications need to be reconsidered?
Poll
BrainTrust
Matthew Brogie
CEO, Repsly
James Tenser
Retail Tech Marketing Strategist | B2B Expert Storytelling™ Guru | President, VSN Media LLC
The economic model of the gig economy is unpinned by the ability to classify workers as third-party contractors. Without this classification, labor costs will increase, which will impact retailers, restaurants and vendors who use these services, and the bottom line profit of the companies who offer these services. In an environment of a strengthening labor market, a push for higher minimum wages and general sentiment in favor of employees, I believe a re-classification is inevitable.
Simple question, if a driver works both Uber and Lyft and chooses the best rides that come, is the driver an employee of Uber or Lyft or both or neither?
Great question Gene! Sparked a thought – and what is the brand loyalty impact when a customer sees the driver works for both?
In this case, I think the brand loyalty has everything to do with which ride comes quicker and/or cheaper.
How would the customer even know unless she or he were using both services themselves? In which case, it would seem, there really isn’t any “loyalty” to begin with.
In current form, in letter and spirit, the gig workers are independent contractors. They bring their own equipment and set their own hours. That is not to say that there are enough protections for the workers, or the workers are getting fair deal.
The answer is not certainly treating them as regular employees because that opens up a whole set of unintended consequences and lands a blow to innovation.
Perhaps a new class of workers need to be defined. Assuring minimum wage for the time they clocked in, and group participation in benefits at the worker’s cost comes to mind as a starting point .
I’ll agree with your “letter” argument but not the “spirit” part (or at least I’ll not give it an automatic pass). How can one plausibly argue that someone who drives for a company — or even several companies — and is at their mercy for bookings is really “independent”?
Now of course there are, and always have been, people who are truly independent contractors — many of RW’s commenters are an example — those with experience or special skills who can offer their services to the world on their own terms and find buyers; but that hardly seems to describe the typical gig worker (or at least what we think of as typical).
It is true that a gig worker is at the mercy of the app to provide him the bookings. But that is true for every single business. Isn’t it? We are all at the mercy of our prospective and existing customers to give us business.
The moment any of these companies seek exclusivity in working relationships, bar the gig workers working for a rival, or mandate hours, it becomes untenable to call them independent contractors. But none of this is happening.
Historically, the regulations have put great store in an “economic reality test.” I hope we can both agree this will present a challenge as that reality changes.
Certainly, Craig. Thanks for the link and additional perspective. Appreciate it.
I think we still have a lot to learn about the “gig economy.” At the risk of over complicating rules and classifications, we need to acknowledge that there are many different types of gig work, and many different desires/needs of gig workers.
If a process works really well for a low skilled person to pick up occasional work when it is convenient for them to do so, and to get paid a “market rate” for doing that work, it needs a far different level of regulation than a process that relies on trained workers to commit significant scheduled time to performing those tasks. I believe that there is a certain value that comes from having “ultimate flexibility” as a true gig worker, and that value is lost when the person is captured as an employee; traded for a committed level of work, pay and benefits.
Companies should have the ability to determine what works best for their business model, and put the appropriate program in place. If the workers are required to build certain skills, and to commit to a certain number of hours, they should be compensated for the freedom they are giving up. If it is truly work at the pleasure of the worker, the market should dictate compensation, not the government.
This is not a new issue, but has become a higher profile issue with the expansion of the “gig worker.”
In the past, the lines were very clear — how many hours are you working, how many companies do you work for, are you on call by the company, do you make your own hours? In the past, the preferences for both the worker and the company was to make them contract, but following the law, many times, there was no choice but to classify them as employees.
I don’t know why that changes now? I can’t speak for anywhere else, but here in NYC, the delivery guys and the Uber/Lyft drivers carry multiple cell phones and react to whoever they choose. I have no idea if they are permitted to do that by the companies, but they obviously do. If so, they are not employees in any way. If they are not permitted, by contract, to work for the “competition” then it seems they are employees.
It’s worth considering that the reason gig drivers affiliate with more than one brand is because they can’t cobble together a decent living by working with only one.
The definition of “employee” is due for reexamination in this context. Seems like gig workers get the worst of all worlds — uncompensated waiting hours, few or no benefits, complex income tax calculations, work expenses like auto repairs and fuel, no bathroom breaks, and zero negotiating leverage with their employers/clients.
As someone who has delivered his fair share of freelance work over many years, I am concerned that efforts to create a new legal framework around driving and delivery gigs may result in disaster for writers and artists who are paid by the assignment.
Updated definitions under the law must distinguish more than just employee-versus-contractor, as the nature of those contract relationships is not at all uniform.
A “contractor bill of rights” is needed that defines basic protections.
Unlike a taxi driver who has much down time, the Uber/Lyft combo give them some efficiency. They take the ride that is they best deal. They can wait for the next Uber ride, if a Lyft one comes along, take it.
I don’t know for sure, anecdotal, not real research, when I talk to Uber drivers, they are doing it many times for the freedom that it gives them in time, and in many cases to do other things … college students, actors, teachers….
Regulatory shifts based on binary parties are never a good thing. Traditional retailers are saddled with huge payrolls and associated costs vs. categorizing labor as gig workers. The differential is based on a lot of factors, however Uber/Lyft drivers do not report to a place every day for work.
…but how do you classify the retail worker who is required to be at the store at a certain time without the ability to decline?
This rule is only one piece of the sweeping overhaul needed to balance worker needs with employer realities. The problem isn’t the “gig” or “freelance” status, the real issue is the worker’s lack of access to health care and wage stability. I love the idea behind this legislation, but most companies cannot afford the financial impact. A long term plan is needed to take healthcare out of the purview of employers, to set a manageable transition to higher hourly wages, and incentivize companies to improve employee retention. If this is done then it won’t matter if employees are full time, part time or gig workers, they will still get the livable wage, healthcare and income stability so desperately needed in this country. By doing this we ultimately create a stable and viable resource pool that, ironically, is what will really reduce costs to the employer and improve productivity and long term success.
If you took healthcare out of the equation, would the decisions be easier? What company would not like to get out of the healthcare business?
Yes! And it would likely trigger a new wave of entrepreneurship to boot. Health care, child care, senior care, and retirement security are all constraints working against vigorous participation in the marketplace.
Of course it will impact any and all businesses using gig economy workers. How couldn’t it? As to whether or not the rules should be reconsidered, the first question ought to be, “Whom or what are you trying to protect and/or regulate through the rules?” If the answer to that question is that you are trying to encourage free markets’ bottom lines over the welfare of individual workers, then odds are you’ll see gig workers as independent contractors. If, on the other hand, you are concerned about the rights of workers and/or the physical protection of the public, you are going to insist on regulating these workers and that requires giving them a different status. So how you answer these questions determines what you will see as the best course. Over time, markets correct themselves. So it is easy to envision a scenario where, as a growing percentage of workers are dependent on the gig economy, operating as independent contractors, unions and organized labor have a Renaissance, compounding the business problems the pro-contractor community were trying to solve.
I’d imagine these firms will start pitching drivers/shoppers on becoming LLCs and support this effort as value-added services. These new LLCs would then contract to Uber, Lyft, DoorDash, et al as businesses with tax benefits. This prior to the aspirational hope of what autonomous vehicles and other automation will bring.
The whole point of the gig economy is being able to leverage the free time of contract workers when they please and on their terms; giving them the flexibility and the power to choose their work. A gig worker doesn’t need to be told when to go to work – when they feel like earning money, they turn on the app and jump in their car. I think the gig workers should be given an option to be treated as full-time employees but as a trade-off they lose much of the freedom they enjoyed; or they could continue as gig workers and be able to switch easily from one company to another, one gig job to another as they please. However, in the case of the former, we lose the flexibility of the model and the innovation is lost.
It’s hard to answer the (first) question without knowing a few more details, other than to assume the effect can’t be positive … but to what degree I can’t say.
As for whether the classifications should be reconsidered, I’m going to go with those who ask “what has changed”? Many offer up technological change or “innovation,” but at their core the arguments are really the same as they’ve always been, and in fact the laws/classifications were designed to anticipate them. What really seems to have changed is the determination to exploit loopholes.
Reclassifying these jobs away from independent contractors is a really bad idea. While the words sound good about protecting workers, if this classification is so bad why are there millions of workers working this way? It is because the rules fit their needs. Making these jobs non-contractor will result in millions of lay-offs. The free market had lead to the current environment which is working well. Reclassifying these jobs will disrupt the current environment. The rules should not be reconsidered.