Department of Labor goes Back, instead of to the Future, in New Independent Contractor Rule

What’s old is new again, as the DOL misses a big opportunity to adapt worker protections to the way the world works today.

Last week the Biden Administration issued a new rule on independent contractor classification, where it fired up the DeLorean’s flux capacitor and returned us to 1947-era rules for classifying workers as employees or independent workers. Although the Department of Labor (DOL) insists that the Rule and its interpretive guidance are “well-suited to the modern economy,” it’s clear that they missed a valuable opportunity to recognize and support the voluntarily independent workforce, given how radically our society has changed over the last 77 years.

People who set up their own businesses, either formally or informally, where they are the only employee, are increasingly becoming a critical part of today’s economy. Freelancers, solopreneurs, entrepreneurs and various forms of independent contractors have decided to work for themselves and now exist across numerous industries.?

Given this rule’s effective reversion to pre-2021 guidance, I don’t expect it to have radical or immediate impacts on the rise of the gig economy. But instead of making faster progress on adapting our regulations to better support this growing segment of the US workforce, we’ll continue to see classification issues battled out in courtrooms around the country.

Protecting workers from misclassification and exploitation is a critical role for our federal government to play, but I would also like to see our DOL follow the lead of states like Utah in creating modern ways to provide better worker protections—like Portable Benefits—regardless of worker classification.

American workers today view independent work as a bona fide career path.?

Surveys of Stride’s independent worker member base show that the overwhelming majority of independent workers (69%) don’t want to be employees and 81% said they are happy with the freedom and flexibility it provides. A majority enjoy what they do for a living, and report enjoying good work-life balance, with 55% stating it's less stressful than a normal job. They are united by pride in being their own boss and appreciate the full control they have over their working life, from their earnings to their time off.?

Many are doing it as their sole profession; many more are doing it as one part of a multi-profession life—whether the other work is traditional employment, a small business they’re running, or another part time gig, now 3-in-5 workers report generating income through two or more jobs. They create content, teach, research, consult, sell, market, design products, and deliver people & goods around the world.?

Independent work allows people flexibility and helps millions care for children, older family members and to build their careers in ways that have not existed until the last 10-15 years. Being able to work as a delivery driver, caregiver or independent artist also means many Americans take on paid pursuits to supplement many important roles in our society. Protecting these independent workers driving our economy doesn’t fit into an immediate post-World War II version of employment.

I do share the Department of Labor’s concern that workers could be exploited by unscrupulous business owners.?

Economic inequality and unequal bargaining power between workers and companies is real and companies that rob workers of fair wages and benefits should be punished. But the economy has evolved since the 1940s when the Fair Labor Standards Act was drafted and DOL’s decision to tether itself to a framework developed in that era does a disservice to today’s workers who crave independence.

The Department of Labor can’t ignore this large and growing way of working and this community of workers.?

If the new rule stands (litigation is expected on many fronts), many of the reasons why people choose to work for themselves as solopreneurs could be insufficient to continue to grant them the independent worker status that they enjoy. For example, the DOL framework refines the “managerial skill” inquiry to require consideration of “whether the worker exercises managerial skill that affects the worker's economic success or failure in performing the work.”

But many people do not wish to manage others — it’s why they work alone and for themselves — and deliberately choose to start businesses that do not require overhead such as advertising and support staff. Without demonstrating that they use “managerial skill” as part of their work these workers could be classified as employees.

Similarly, many independent workers are paid by the hour or task and find a company’s offered hourly payment rate to be acceptable. But unless they have independently negotiated and demonstrated the ability to make a profit, they could be viewed as employees—even if they are currently “making a profit” in terms of their bottom-line earnings (something we at Stride help them to track & calculate) by accepting jobs at a rate set by an existing gig marketplace or platform while managing their own expenses. Moreover, workers and the entities that employ them cannot mutually agree to independent contractor status and have that agreement count as a factor in the classification analysis.

It’s unfortunate that DOL neglected to acknowledge the shortcomings of existing laws to support these workers and, instead, focused on interpreting the FLSA in a manner designed to maximize the possibility that workers lose their independent status.

The Department of Labor missed an opportunity to take worker protections forward to the new world of work—let’s go Back to the Future.

Some may choose traditional employment, but others affirmatively want the freedom to work for multiple employers. In this regard, they do not depend upon a particular employer for work as they may work for multiple employers simultaneously or, as DOL appears to overlook, a series of companies, perhaps under extended arrangements.?

One notable exception to the DOL’s rule & commentary was the provision of Benefits as a component of the test—since the DOL noted that the provision of benefits was outside the scope of the rule-making. At the same time, the DOL acknowledged that certain commenters called for greater access to benefits regardless of classification. At my company, Stride, we’re determined to make the benefits traditionally only available to W-2 employees easily accessible to the growing segment of the independent American labor force.?

As I have previously proposed, our federal government should—in future rule-making—follow the lead of states like Utah that have created a safe harbor to innovate on worker protections to accelerate access to benefits. Ideally, these benefits would be portable, or “Portable Benefits,” so that workers would be able to contribute to, invest, and access them regardless of their employment classification status. And most importantly, be tax advantaged, so that businesses would be incentivized to contribute to these portable benefit accounts on workers’ behalf.?

Rather than reclassify everyone as employees, the DOL should consider ways to make it easier for companies to offer benefits to their modern contract workers. This would be a key step to enabling more independent workers by accelerating access to the Portable Benefits every American needs to thrive.