- If implemented, the regulation would have enabled businesses to label workers as independent contractors instead of employees.
- The Trump-era rule focused on two core factors — the worker’s opportunity for profit and control over the work.
- Status as an employee, rather than a contractor, means workers are covered by federal minimum wage and overtime laws.
In a landmark move, the Joe Biden administration quashed the independent contractor rule on June 2. The Trump-era regulation would have made it easier for companies to classify workers as gig labor rather than employees entitled to a minimum wage and other benefits.
Biden’s Labor Department blocked the rule just two days before it came into effect. If it was implemented, the regulation would have enabled businesses to label workers as independent contractors instead of employees under the federal Fair Labor Standards Act.
By blocking the rule, sought by gig economy companies in the ride-sharing and food-delivery sectors, the Biden administration signaled a potential policy shift toward greater worker protection.
The Labor Department said that it is nullifying the signature Trump-era rule that would have made it more difficult for a gig worker, such as an Uber or DoorDash driver, to be counted as an employee under federal law. Having status as an employee, rather than a contractor, means these workers are covered by federal minimum-wage and overtime laws.
What the rollback implies?
The Trump administration’s rule, welcomed by several businesses, provided a simple test to meet the legal requirements to categorize a worker as an independent contractor. This move would have reduced misclassification litigation from the workers.
Misclassification lawsuits are essentially used to recover minimum and overtime wages, among other employee protection benefits, that are not usually given to independent contractors.
What this means for you?
The move means the Labor Department will continue to use existing rules under the 1938 Fair Labor Standards Act to determine if a worker should be classified as an independent contractor.
This involves the economic realities test, a multi-factor balancing test that assesses if a worker is economically dependent on the employer or is in the business for themselves.
The test takes into consideration the following factors:
- Level of control the employer has over the work.
- How permanent is the worker’s relationship with the employer?
- The degree of skill, initiative and judgment required for the job.
- The worker’s investment in equipment or material necessary for the work.
- The worker’s opportunity for profit or loss.
- Is the service provided by the worker an integral part of the employer’s business?
- The degree of independent business organization and operation.
These factors are not fixed. During misclassification lawsuits, courts review these factors based on circumstances to determine if a worker is an employee or an independent contractor.
What do employers do now?
While app-based services like Lyft and Uber had welcomed the rule citing that the business model was popular among people who liked the flexibility of gig work, others felt the move would have deprived workers of benefits like health insurance and paid leaves.
The Trump-era rule focused on two core factors — the worker’s opportunity for profit and the worker’s control over the work. With the withdrawal of the rule, companies will simple continue using the current method. This has also spurred some companies to relook at what their workers really want –independence with benefits.
How this impacts companies?
The tussle over classification is between state governments and app-based companies. Some states have employee-friendly standards to determine if a worker is an employee or an independent contractor. California, Illinois, Massachusetts and New Jersey use the “ABC test” that, by default, considers a worker as an employee and leaves it to the company to prove that the worker is an independent contractor.
The move has dealt a significant blow on employers, gig workers and small business owners who previously enjoyed greater flexibility to configure the terms of their commercial relationship. Now, employers will have to be extra careful classifying workers as independent contractors keeping in mind the legal and economic ramifications of misclassification claims.
This puts the onus back on businesses to re-evaluate their operations. If workers do not fall under the purview of the economic realities test, companies must account for added expenses, including insurance, taxes, paid leaves, hourly wages and overtime. The move also ensures companies comply with federal, state, and local laws that protect employees.
In the past
The Trump-era contractor regulations are partially a response to California rules applied to gig companies. In November last year, voters in California exempted Uber, Lyft, DoorDash and others from a state law that would have forced them to reclassify their drivers as employees, eligible for broad employment benefits.
However, the companies conceded new benefits such as health insurance for drivers who worked 15 hours or more a week, occupational-accident insurance coverage and 30 cents for every mile driven.