On October 11, 2022, the United States Department of Labor proposed a new rule that would redefine when a business can use independent contractors and when they must hire employees.
This could be a big deal for rideshare and delivery workers in the gig economy. Gig workers for Doordash, Uber, Lyft, Instacart, Uber Eats, and several others contract with these companies as independent contractors.
The proposed rule will direct the Department of Labor in interpreting whether an employed worker should be classified. Some aspects of the rule could dramatically change how the relationship between gig companies and contractors works.
What is this new rule, and how does it impact delivery drivers and rideshare workers? Does this mean contractors will become employees?
We'll examine how the new rules and why this is important for contractors to stay on top of them. We'll look at the following:
About this article series
This article is part of a three-part series discussing the new independent contractor rule proposed by the Department of Labor. This post aims to examine the rule and why it's an issue.
The second article will look closer at it in light of delivery and rideshare contracting. We'll examine whether contracting with Doordash, Uber, Instacart, Grubhub, and others meets the tests for employment in the proposed DoL independent contractor rule.
Finally, we'll discuss what happens to rideshare and delivery if the new independent contractor rule is implemented. Is this the end of the gig economy? How does it impact other independent contractors?
I'm not a lawyer or legal expert. I'm an independent contractor myself, delivering for Doordash, Uber Eats, Grubhub, and several smaller gig economy companies. I write this based on my research into the issue to provide a plain English explanation.
The difference between independent contractors and employees
Simply put, if you need work done for you, you can hire an employee or have a business do it for you.
An individual can fill either role. A person can start their own business and sell goods or provide services as a sole proprietor. Otherwise, they could hire on as an employee.
A person who agrees to be an independent contractor agrees to provide services as a business, not as an employee. This is the typical arrangement for workers with Doordash, Grubhub, Instacart, Uber Eats, Uber, Lyft, and many similar gig companies.
The distinction between contractor and employee is essential because of the laws and protections for employees. Taxes are different. Under the Fair Labor Standards Act (FLSA), employees must be paid minimum wage, overtime, and have other protections. The employing companies have more significant insurance requirements. The cost of hiring and managing employees is generally much higher than it is to use contractors.
For the contractor, there's greater risk balanced with greater reward. Contractors have no guarantees and risk of costs being higher than their income. They also have more flexibility and control over their work. Contractors can set their own schedules, choose where to work, and switch back and forth between contracting companies.
Government's role in interpreting employee classification
Hiring employees is more costly, which creates a temptation to get around those costs by using contractors. However, the law states that you can't avoid employer obligations by simply changing the classification.
That's why employee classification is a vital topic.
So, how exactly do you define whether someone should be an employee and when they can be contracted? Here's where the problem lies. The law doesn't exactly say. Several parts of the government oversee different aspects of employment, and each has its own interpretations. This resource explains how various agencies classify employees, and here is a summary of some of those interpretations:
- The Internal Revenue Service examines whether employers are dodging their employment tax responsibilities. They have a test that involves several factors related to the level of control in the relationship.
- The National Labor Relations Board oversees fair labor standards, especially regarding the right to organize. The NLRB weighs nine different factors in determining employee status.
- States must determine employee status for unemployment and worker's compensation purposes. Each state has its own regulations and tests, and some states have multiple definitions.
- Finally, the U.S. Department of Labor enforces the Fair Labor and Standards Act.
Why is the Department of Labor making this change?
The Department of Labor says that they believe the existing rule, implemented at the end of the Trump administration, is inconsistent with previous interpretations and court rulings. That rule tended to lean more toward an independent contractor interpretation, with this proposal more likely to rule in favor of employee classification.
One side will tell you that the new administration is changing things to protect contractors from exploitation. There are more protections for employees than for independent contractors.
The other side will tell you it's a power grab by unions. As unions are generally limited to employees, the more people who are forced to become employees, the greater the opportunity for union growth.
The Department of Labor had no clear enforcement rule before the one implemented in March 2021. They relied on the court and department precedent, which typically centered on a six-factor “totality of the circumstances.” They weighed each factor against the others to determine if the economic reality of a contractor relationship was that of an employee.
Under the Trump administration, department leadership felt the historical approach was vague and subjective. They believed the system made it difficult for employers and contractors to know where they stood. Therefore, they implemented a new rule which went into effect in March 2022. That rule focused primarily on two factors: how much control a company has over the contractor and the contractor's opportunity for profit and loss.
Under the new administration, Department leadership felt that this approach was inconsistent with previous court rulings. Their initial attempt to withdraw the 2021 rule was overturned in court due to failure to follow Department procedure.
As a result, leadership is proposing this new rule. It will withdraw the 2021 rule and replace it with the proposed interpretations if implemented.
Current efforts to restrict the use of independent contractors.
Several recent legislative attempts were made to limit the use of independent contractors. Many aimed at the gig economy, where rideshare and delivery companies rely almost exclusively on contractors to provide their services.
In 2018, the California state supreme court ruled the state should use the ABC test to determine employee classification. That test states a worker is an employee unless they pass all three of the following tests:
- The worker is free from the control of the hiring entity
- The worker performs work outside the usual course of business
- That worker is customarily engaged in a business of the same nature as the work being performed.
In 2019, California passed AB5 to put the ABC test into law. However, California voters responded by passing Prop 22, a referendum allowing app-based workers to continue to work as independent contractors.
As President, Biden will work with Congress to establish a federal standard modeled on the ABC test for all labor, employment, and tax laws. The Biden plan for strengthening worker organizing, collective bargaining, and unions.
Joe Biden ran for President on a platform supporting the nationwide implementation of the ABC test. Lawmakers introduced two acts to do just that.
Both acts failed to pass. The administration tried other methods to implement the PRO Act, such as including it in a budget reconciliation bill but was unsuccessful.
The proposed rule states that the Department considered replacing the previous rule with the ABC test. However, they determined they could only legally do so with a new law.
What the new rule is (and is not)
The proposed independent contractor rule is a guideline for the Department to interpret whether an independent contractor relationship should be that of an employee.
The Department of Labor will use this to enforce the Fair Labor Standards Act. For example, they would use it to determine whether a contractor qualifies for overtime and minimum wage protection.
What this rule is not:
The proposed rule is not a new law. It does not change existing laws but only provides guidance for the Department to interpret them.
Because it's not a law, it does not prevent companies like Uber and Doordash from hiring independent contractors. It only guides enforcement, allowing the Department to interpret if a company misclassified employees.
This rule does not create any obligation for other departments or the courts. The courts can even go so far as to overturn all or part of the rule.
This rule is NOT the ABC test.
This rule is often characterized as an attempt to add the ABC test without a vote. However, it does not contain or implement the ABC test. The ABC test looks at things very differently. It highlights three factors as a one-strike-and-you're-out approach.
The three ABC test factors are in the new rule. However, the treatment differs. The new interpretation rules each element individually. It allows one failing test to be outweighed by the others.
The six factors that the Department of Labor proposes to weigh:
The proposed regulations would weigh the following six factors together. These factors intend to look at the economic reality of whether someone is indeed an employee. They use the term “economic reality” because it looks at what actually happens in the relationship as opposed to what the title or contract says.
The rule does not provide clear guidance on interpreting or weighing the factors. The Department insists it needs to be flexible because of the various employment circumstances.
These criteria appear to act like a vote. If four factors point to employment status and two do not, the decision will likely be that it is an employment relationship. The Department does say that some circumstances may cause them to weigh some factors more heavily than others. They also say that they may consider additional factors on a case-by-case basis.
In the end, if it's close, the Department will decide which factors outweigh the others.
It's important to note that the factors below are not new. The Department and courts have used some variety of these six criteria for decades. However, their explanation of how they will interpret these rules skews heavily towards an employment verdict.
Here's an overview of those factors and a summary of how they evaluate each one.
1: Opportunity for Profit and Loss.
Opportunity for profit and loss was one of the two primary factors under the 2021 rule. This test points to a contractor relationship if you can use managerial skills to influence your ability to profit. However, if the only way to make more money is to work more hours, it points to employment.
The proposed interpretation adds more criteria. It adds the following questions:
- Can the worker determine what they will charge or meaningfully negotiate their rate?
- Can the worker accept or decline opportunities? Are they able to negotiate the order and/or time they perform the work?
- Does the worker engage in marketing, advertising, or other efforts to expand their business?
- Does the worker make decisions to invest in hiring, purchasing equipment, or renting space?
On top of all that, the Department will look at whether the business can suffer loss. If the contractor can only profit from their work, it's more likely an employee relationship.
2: Investments by the worker and employer.
The 2021 Independent Contractor rule included investment in the opportunity for profit or loss factor. In the proposed rule, they keep the investment element in the first factor and make it a criterion of its own.
The Department's proposal insists that the investment “must be capital or entrepreneurial in nature to indicate independent contractor status.”
The proposed rule states that the equipment needed to perform work is not an investment because it's not entrepreneurial or capital. They also suggest that using one's personal vehicle is not an investment, as they already use it for personal reasons.
There's a significant difference in interpretation related to what happens if there is little or no such investment. Currently, investment is primarily evidence of an independent contractor relationship, but lacking such doesn't necessarily mean one is an employee. The proposed rule appears to apply a different logic. If investment points to contractor status, then lack of investment must indicate employment.
3: Degree of permanence of the relationship
A sporadic or time-limited contract generally points to an independent contractor relationship. An ongoing work relationship that is indefinite, or if the contract renews automatically, typically indicates employment.
The new rule goes to great lengths to point out that a short-term relationship does not mean one is an independent contractor.
The Department also proposes to add a factor to this discussion. If a company prohibits contractors from working for others, that's a sign of employment. The control test (#4) considers that type of exclusivity. However, the Department also wants to use that to evaluate the degree of permanence.
4: Nature and degree of control
Control is the one universal test applied by all the different government agencies and entities. A company can not control a contractor's work the same way they can an employee. The IRS and Social Security Administration, for example, exclusively evaluate financial and behavioral control as their employment tests.
A company can not control when or how a contractor does its work. The amount of control they exert strongly indicates whether there's an employment relationship.
The Department proposes a difference in how to involve regulatory control. For example, under the current rule, a gig company requiring facemasks during the Pandemic is not exerting control because it's a regulatory thing. Language in the proposed rule suggests that such requirements still equate to employer control.
The Department proposes examining four areas of how companies might control a contractor.
- Scheduling. Can workers schedule their own work, and does the company inhibit the ability to set their schedule?
- Supervision: Does a person, organization, or form of technology oversee the work done?
- Setting a price or rate for goods or services: Does the contractor control rates and prices, or can they be negotiated?
- Ability to work for others: Is the contractor free to provide services or sell products to others?
5: How much the work performed is integral to the employer's business
The idea behind this is that a business typically hires employees to perform the company's work but may contract work out for things that aren't directly related. Is the work performed central to the business itself?
For example, a painting company would hire employees to paint but might contract out accounting and IT services.
The proposed rule broadens the definition over past interpretations by saying, “if the employer could not function without the service performed by the workers, then the service they provide is integral.”
Interestingly, the proposal uses the example of an accountant for a farm as a legitimate independent contractor. You could argue that the business could not survive without accounting and tax filing.
6: Skill and initiative
The 2021 rule looks at the “amount of skill required to do the work.”
An independent contractor is more likely to bring specialized skills to the relationship. If the company provides the training, it more likely indicates an employment relationship.
The Department proposes to add initiative to the description. They state that the worker should use the skill in a way that is consistent with being in business for themself. Is the worker using business skills, judgment, and initiative? Is this an area where there is an open competition for a set of skills? They state that skill alone should not be a factor but instead how the skill is used.
What happens if this rule is implemented?
At first glance, the factors the Department proposes to evaluate are nothing new. However, the descriptions and guidelines for interpreting those factors tend to skew heavily toward employment. The Department would more likely declare someone is an employee under the wording of this proposal.
As of this writing in October 2022, the proposal is in a public comment period. The Department of Labor will take comments until November 28, 2022.
When the comment period ends, the Department of Labor must consider comments and make a final decision. Comments are not a vote but must be part of the public record.
At the end of the process, the agency must base its reasoning and conclusions on the rulemaking record, consisting of the comments, scientific data, expert opinions, and facts accumulated during the pre‐rule and proposed rule stages. To move forward with a final rule, the agency must conclude that its proposed solution will help accomplish the goals or solve the problems identified. It must also consider whether alternate solutions would be more effective or cost less. United States government Federal Register rulemaking process
The Department must weigh the comments and address substantial challenges before publishing its final rule. This process takes some time. I've seen estimates that the final rule will be implemented in late 2023 or early 2024.
Do not expect any changes to happen immediately because of this rule. Nothing in this new rule will automatically change anyone's status from contractor to employee. This rule only gives the Department of Labor and the Wage and Hour division a basis for enforcement decisions.
What happens after that depends on what enforcement actions the Department pursues and what becomes of the inevitable court challenges.