The United States Department of Labor has proposed a new rule to guide them in classifying independent contractors for enforcement action. If the new rule is adopted, it will likely make it more difficult for companies to use independent contractors in their workforce.
Gig economy companies like Doordash, Uber, Instacart, Grubhub, Lyft, and others are unlikely to pass the tests as they are written in the proposed rule.
What happens if the rule is implemented and if the Department of Labor rules that gig workers are misclassified? Is this the end of independent contractor work? Will Doordash, Uber / Uber Eats, Instacart, Lyft, Grubhub, Shipt, and others be forced to hire employees? Will independent contractors become employees?
We'll talk about what happens and what this means for independent contractors in the gig economy. We'll discuss the following:
What the proposed rule means
The rule proposes a six-factor test to determine whether workers are independent contractors or employees. The language in the proposal is skewed heavily toward employee classification.
However, this is a rule for the Department of Labor. It is not a law. It does not outlaw independent contractors and is not binding on any courts or government entities.
Instead, it's a guideline for the Department of Labor to interpret whether a worker is misclassified. It is for enforcement purposes.
The rule could be used by the Department of Labor, and its Wage and Hour Division, to determine that companies like Doordash, Uber, Instacart, and Lyft are violating labor law. It could require those companies to comply with minimum wage and overtime regulations, among others.
The Department of Labor has considerable power when it comes to enforcing labor laws. That power can threaten the business model of gig economy companies. However, it can only enforce existing laws. The Department cannot write its own laws, which can determine whether this can withstand court challenges.
What would the Department do if the rule holds up?
The Wage and Hour Division (WHD) of the Department of Labor is responsible for administering and enforcing several federal labor laws, including the Fair Labor Standards Act (FLSA) and the Family Medical Leave Act (FMLA).
Independent contractors are exempt from these laws. However, it is illegal for businesses to misclassify workers as contractors to avoid those regulations.
If the WHD believes that misclassification is happening, they can go after offending companies to enforce these laws. That includes investigation and enforcement.
Investigating employee misclassification
The Department of Labor can act on complaints from individuals or groups who claim to be employees. They may also choose to investigate companies.
The WHD conducts investigations for a number of reasons, all having to do with enforcement of the laws and assuring an employer’s compliance. WHD does not typically disclose the reason for an investigation. Many are initiated by complaints…
…In addition to complaints, WHD selects certain types of businesses or industries for investigation. The WHD targets low-wage industries, for example, because of high rates of violations or egregious violations, the employment of vulnerable workers, or rapid changes in an industry such as growth or decline.Wage and Hour Division Fact Sheet #44.
The U.S. government seems to target gig economy companies, as many rideshare and delivery companies rely almost entirely on an independent contractor workforce. Many examples and interpretations appear to be added specifically to address delivery and rideshare.
The Department can target an individual company, specific industries, or certain regions for investigation. Because of the attention given to delivery and rideshare companies, it's almost certain they would target the industry.
Once an investigation begins, it takes the following steps:
- Examining company records to determine which laws or exemptions apply
- Examination of payroll and time records
- Private interviews with employees (or contractors)
- Meeting with the employer or business to discuss violations and require corrective action
Enforcement and correction of violations
The FLSA gives the Department of Labor (“Department”) the authority to recover back wages and liquidated damages (to be paid to employees), and to assess civil money penalties (to be paid to the government), in instances of minimum wage, overtime, and other violations.Enforcement remedies, according to WHD Fact Sheet #44.
The Department can determine that contractors should have been employees. When they do this, they can order businesses to pay back wages and cease certain business practices.
Say that the Wage and Hour Division were to require Uber or Doordash to pay back wages and penalties for minimum wage and overtime violations. If those companies refuse to do so, the Department can seek a judgment in District Courts. The court could then hand down a ruling that a business must comply. Rulings could require one or more of the following:
- Businesses have to pay back wages based on minimum wage and overtime laws
- Immediate adherence to existing laws
- Payment of civil penalties
- Allowing employees to file lawsuits for underpayment of wages
- Forcing companies to cease offering services or selling products that involve misclassified workers.
The Department can go so far as to seek criminal prosecution in extreme cases.
What happens to gig companies if the new rule is implemented?
As I write this, the Department of Labor is seeking comments from the public. The Department of Labor has extended the comment period until December 13, 2022.
The Department is required to consider and evaluate public comments before issuing its final rule. They may make changes based on feedback. The final rule will likely be published in late 2023 or possibly early 2024.
Once that rule is published, several things can happen. We'll look at two:
Companies or individuals may sue to block the rule. In early 2021 the Department withdrew the existing independent contractor rule. However, the US District court blocked them from doing so because the Department didn't follow proper procedure.
Gig economy companies rely heavily on the independent contractor model. They previously worked together to protect that model, such as campaigning together for Proposition 22 in California. There's always the chance they can move preemptively to strike the rules down.
It's questionable whether the rules would stand up to a challenge. The Department has introduced several interpretations that are outside the norm. They've skewed a lot of the language in favor of employee classification. Remember that the Department can not make laws but only interpret and enforce them. Courts could rule that they overstepped their authority with this rule.
Enforcement and appeals
IfIf the Department's proposal survives court challenges, they may go forward with an investigation into one or more gig companies.
The process can be time-consuming. It takes time to examine all the records, interview drivers and put together their ruling.
Companies have several ways to respond if the Department rules against them. They can file an appeal with the Department, negotiate with the Department, or challenge the ruling in court. If the Department files suit against the companies mentioned above, companies obviously have the right to defend themselves.
All of these court processes can take time. Most likely, lawsuits will have to run their course. That's because there's not only the lawsuit but any appeal of the decision. I expect the court challenges to take at least a year and likely much longer.
The Department could seek an injunction where the courts require a company to stop using contractors immediately rather than waiting for the court decisions. They would have to have a compelling case for something like that to succeed.
What happens to delivery and rideshare if this new rule passes court challenges?
Expect the gig economy to change substantially if the proposed independent contractor rule holds up to challenges. The Department may prohibit delivery and rideshare companies from using independent contractors.
The independent contractor model is an essential part of the business plan for companies like Uber, Doordash, Instacart, Lyft, and others. Therefore, this ruling will shake the industry up. I would expect one of three things to happen:
- Gig companies could try to restructure the relationship so that it passes the test
- Delivery and rideshare companies may choose to close up shop rather than switch to employees
- Independent contractors will be terminated, and the companies will hire employees
Restructuring the relationship
Rideshare and Delivery services could look into changing up how their contractor relationships are structured in an effort to pass the employment tests. This would create some significant changes in the relationships with drivers. Such changes may not necessarily protect a contractor's ability to work independently.
One example comes from 2020. Before Prop 22 was approved, Uber and Lyft considered a switch a franchise model in California to get around AB5. That model would allow other businesses to build their own fleets and subcontract ride-hail services from Uber and Lyft. Gig companies could avoid hiring employees, however, drivers would most likely be employees (not contractors) of the businesses.
Closing up shop
Gig economy companies could determine that the contractor model is so important to them that it's better to cease operations. Companies like Uber, Lyft, and Just Eat Takeaway (owner of Grubhub) have a substantial international presence, and could survive if they close up in the United States.
Switching to an Employee model
Many believe that an employee model is unsustainable. Delivery and rideshare companies struggle to be profitable, and the cost of an employee workforce is substantially higher than using contractors. Such a move would likely require price increases, putting them at an economic disadvantage.
However, if new rules are applied to an entire industry, it would level the playing field. Uber and Lyft would be forced to adapt to the employee model, meaning one could not maintain an advantage by staying with a cheaper contractor force.
If this happens, contractors will not automatically become employees. Instead, gig companies would deactivate the contracts out there. They would then start from scratch to hire drivers as employees. However, higher prices to the consumer may reduce order volume. Whether gig economy companies can weather the drop in business is questionable.
What independent contractors should do to prepare
The first thing to understand is that gig economy companies could be forced to hire employees. That could happen with or without this particular rule. Delivery and rideshare companies have always skirted the line between employee and contractor.
We examined how delivery and rideshare companies stood up to the new rule. From what I see (though I am not a lawyer), gig companies fail four of the six tests at best. The chances are high that the Department will go after gig companies if this rule stands.
Therefore, delivery and rideshare drivers should be prepared for the idea that the gig economy, as we know it, may go away.
However, that brings us to the second critical thing: If anything happens, it will take time. I would be surprised if this rule leads to any major changes in the gig economy at any time before 2025. That's a year to implement it and another for court challenges to run their course.
You can take some steps if you're concerned.
1. Make your voice heard
The Department of Labor is accepting comments through December 13, 2022. If you wish to maintain independent contractor status, leave a comment. The Department is required to consider comments before making a final rule.
2. Stay informed.
Keep youre eye out for news about this and other legislation related to independent contractors and misclassification. This proposed rule is not an isolated incident. There have been several attempts to rewrite the laws about independent contractors.
The best-known example is in California. The state of California passed AB5, which implements an ABC test. That legislation states that a worker is assumed to be an employee unless three tests are met. The test is much stricter than the Department of Labor's proposed rule. Voters in California passed Proposition 22 that, among other things, exempts app-based workers from AB5.
As President, Biden will work with Congress to establish a federal standard modeled on the ABC test for all labor, employment, and tax laws. Joe Biden campaign statement supporting AB5
The Biden administration has been committed to implementing the ABC test as part of Federal law. Democrat legislatures introduced The Pro Act and The Worker Flexibility and Small Business Protection Act. Those acts would have applied the ABC test to the National Labor Relations Act and Fair Labor Standards Act. Neither of those efforts passed, and similar legislation is less likely to get through a Republican-controlled House of Representatives after the 2022 mid-term elections.
Keep your eye out for issues related to employee classification (or misclassification), the ABC test, and independent contractor laws. Also, pay attention to this rule and any challenges to they implement it. This will help you understand changes to your independent contractor status are likely.
Have an exit plan
Contracting in the gig economy is at risk right now. I don't believe an immediate change is imminent, but there's a high probability things could change.
Government rules about independent contractors are not the only threat. The business model itself may not be sustainable, as none of the major delivery and rideshare companies are profitable.
One should not rely on the idea that delivery and rideshare gigs will always be available. Enjoy the opportunities while they exist, but be prepared for the possibility of change.
The good news is, I believe, that there's a lot of time. Things will stay the same awhile, as all the processes must run their course.
How much do you rely on delivery or rideshare income? How much do you enjoy the independence of being an independent contractor? What do you enjoy the most about this kind of work?
Start thinking now about where you can go with the skills and experience. It may be time to beef up that resume. Or perhaps you love being in business for yourself and you want to find out other ways of being your own boss.
However, if you are thinking of starting a gig by yourself, definitely pay attention to how the department is worded. The narrative is that it's geared towards gig work. However, these tests will impact many independent contractors outside the gig economy. Freelancers and solopreneurs of all types are at risk, and this could have a chilling effect on your ability to be self-employed. As you examine different options, dig into whether those options are impacted by this rule.
There's no need to panic. Things may not change at all. They're actually less likely to change for delivery and rideshare workers than other types of independent contractor. That's because Uber, Doordash, Lyft and others have a lot of resources and motivation to fight this thing.
If things do change, it could take years before any of it happens. However, as long as the probability exists, it's good for you to prepare and know what you'll do if and when it happens.