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Thursday, February 1, 2024

Labor Department’s New Rule Is Bad News for Independent Contractors

The Department of Labor’s new worker classification rule is a blatant power grab designed to make it more difficult for people to work as independent contractors.

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In what is sure to have significant implications for millions of American workers, specifically gig economy workers and contractors, the Department of Labor (DOL) issued its long-awaited final worker classification rule in January.

The new rule revises the process to determine whether a worker is an employee or independent contractor under the Fair Labor Standards Act. The government argues the rule is necessary to ensure that all workers are provided fair wages and overtime since independent contractors (people who work for themselves or a business on a contractual basis) are not given the same benefits, such as tax withholdings and paid time off, as traditional employees. However, this argument appears designed to mask the government’s true intention, which is to reduce the number of independent contractors in the country.

The DOL has been trying for years, at times unsuccessfully, to implement new rules that would make it more difficult for workers to be classified as contractors, believing the existing Independent Contractor Rule to be inadequate. However, that rule served an important purpose. It emphasized giving workers control over their work environment and the freedom to pursue “entrepreneurial opportunities” that best fit their needs.

The new DOL rule waters down those provisions by requiring other economic factors to be considered equally when evaluating a worker’s classification status. In so doing, the DOL dismisses the many good reasons that a person may have for choosing to work as an independent contractor, such as desiring greater control over their work schedule and environment and the freedom to choose their clients.

A growing body of research suggests that workers like the flexibility that independent contracting provides. A recent study by MBO Partners found that 63 percent of independent contractors said “working independently was their choice,” with 80 percent reporting that they “always wanted to be their own boss.” That same survey found that 77 percent of workers are very satisfied with independent work and 78 percent have no plans to leave it. This is consistent with other research. A 2022 Upwork study found that 73 percent of freelancers chose their line of work because of the flexibility it provides them to “pursue the work they find meaningful.”

Perhaps that is why independent contracting has experienced such rapid growth over the last few years. As recently as 2021, it was estimated that roughly 36 percent of Americans, or some 59 million people, were freelancers. By 2023, that number had climbed to 38 percent of Americans, or roughly 64 million people. This change represents a substantial shift in the labor market over a relatively short time, making the rule change even more significant.

While the new rule will not take effect until March 11, numerous organizations have already expressed concern that the rule change will generate unnecessary confusion. For instance, the Associated Builders and Contractors commented on January 9 that the new rule “creates an ambiguous and difficult-to-interpret standard for determining independent contractor status” that may result in independent contractors losing “opportunities for work.”

Meanwhile, the American Trucking Association stated that the rule would “undermine the livelihoods of hundreds of thousands of truckers across the country.” Numerous other organizations like the Owner-Operator Independent Drivers Association, National Retail Federation, and National Association of Wholesaler-Distributors have also expressed strong opposition to the new rule, with many arguing that it will reduce innovation and open the door to “endless litigation.”

In a statement criticizing the move, the U.S. Chamber of Commerce said that the rule is “clearly biased toward declaring most independent contractors as employees” and it would carefully weigh all of its actions moving forward, “including litigation.” Separately, a coalition of business groups have already filed a legal challenge to the new rule arguing that the DOL did not follow appropriate procedures in passing new regulations.

How these lawsuits will play out is yet to be determined, but one thing is certain: none of what will happen next should be surprising. The DOL’s new worker classification rule is a blatant power grab designed to make it more difficult for people to work as independent contractors. The rule change was not needed and will lead to unnecessary confusion for employers concerned about remaining compliant with the law. In the end, it is workers and consumers who will suffer the consequences. Workers will have fewer opportunities to engage in the work of their choice and consumers will have fewer services to choose from, as companies scale back their use of contractors. That is not a world that anyone should desire.

  • Nate Scherer is a policy analyst with the American Consumer Institute, a nonprofit education and research organization. For more information about the Institute, visit us at www.TheAmericanConsumer.Org or follow us on X @ConsumerPal.