Last month, the Department of Labor (DOL) abruptly proposed withdrawing a new rule that would clarify which workers are “independent contractors.” A brief review shows that its justification for the backslide is underwhelming at best, revealing a lack of thorough economic impact analysis and a left versus right power struggle.
Unfortunately, millions of workers and employers who need that clarity are caught in the middle.
The rule, finalized in January, updated the “economic realities” test which determines whether workers are independent contractors or employees. The difference matters. Many labor regulations (like minimum wage and overtime pay) and government programs (like unemployment insurance and workers’ compensation) that raise the cost of employment typically apply only to employees.
Unfortunately, worker classification has been murky since the passage of the Fair Labor Standards Act (FLSA) in 1938. The legislative text is intentionally vague in an effort to ensure that most workers are considered employees by default. Its amorphous nature was supposed to inhibit employers from finding cost-saving loopholes that could enable them to classify workers as contractors.
But the ambiguity has unintentionally facilitated improper worker classification by unscrupulous corporations. Employers generally control the classification of the jobs they create, and most workers have limited ability to challenge it because of the legal, monetary and bureaucratic costs. Unless a misclassification has caused egregious harm, the easier solution for most workers is just to find a different job, leaving the same problem to ensnare another worker.
Moreover, the ambiguity can be a concern for employers who use independent contractors. At any time, their business model could be challenged. The only thing standing between them and prohibitively large fines (and back-payments of wages and regulatory fees) is a judge’s interpretation of intentionally unspecific DOL regulations.
The clarity provided by the revised independent contractor rule was a welcome reprieve. Rather than making revolutionary changes, it reexamined the employment factors used by previous regulations and case law. Two core factors – the worker’s “control over their work” and “opportunity for profit or loss” – were deemed to be primary determinants of whether someone is in business for themselves, and thus a contractor.
The other factors – “the permanency of the working relationship,” “the skill required for the job” and “the integration of the worker’s effort with the production process” – were deemed secondary, though they can overrule the core factors if they strongly point to an alternate classification. This comports with prior regulations and precedent, which mandated considering the totality of employment circumstances.
This limits unscrupulous employers’ ability to strongarm their workers into unfair employment relationships, and it limits the legal costs caused by the prior ambiguity. But now the DOL has proposed revoking the reform.
In changing direction, the DOL cited only four external economic studies, which either didn’t apply to the issue or were fundamentally flawed. It also argues that the reform can’t be implemented because of legal and regulatory precedent. However, the DOL’s primary responsibility is to create and revise the regulations that courts interpret (in particular, the DOL seems to have completely forgotten the Chevron doctrine), so their argument is backwards.
Lastly, the DOL’s proposal adopted wholesale a limited and inaccurate study published by the Economic Policy Institute (EPI). This suggests that it failed to do the barest due diligence of conducting its own economic impact analysis. I reanalyzed EPI’s study with my colleague Liya Palagashvili, using widely accepted conclusions from labor economics research. We found that withdrawing the new rule would cost workers and employers billions of dollars every year.
In particular, the DOL failed to account for three empirical facts:
First, workers bear the majority of the cost of employment regulations, and benefit from wage increases when those costs are relaxed (as they would under the revised independent contractor rule).
Second, employers respond to employment cost increases by decreasing their workforces. When employment costs fall, an expansion in labor demand creates new jobs.
Third, the average worker values flexibility, and recent studies suggest a willingness to exchange at least 10 percent of salary for greater control of their work.
Bolstering this case, research also finds that the workers who self-select into independent working arrangements value flexibility much, much more — such that some might choose to be unemployed rather than work where they can’t control their own hours or workplace.
In the end, it makes political sense for a proudly union-friendly administration to kill this rule. Under current regulations, unions can’t organize independent contractors. But instead of cramming every possible worker into the “employee” classification, political leaders should create ways that allow independent workers to benefit from labor organization.
The DOL’s ineffectual attempt to retract a sensible rule harms its reputation. The Biden administration would be better served by helping unions adapt to the future, rather than trying to drag the labor market back to the 1950s.
Michael Farren is a research fellow with the Mercatus Center at George Mason University and a coauthor of a new public interest comment, “Evaluating the Department of Labor’s Withdrawal of the Independent Contractor Rule.”