A new independent contractor rule from the U.S. Department of Labor (DOL) could spark an increase in misclassification lawsuits and make businesses less likely to hire gig workers, experts say. The final rule restores a previous multifactor standard that required companies to weigh a variety of economic factors together to determine whether a worker is an employee or an independent contractor. It took effect March 11.
Significant Changes Ahead
Many businesses are already familiar with the reinstated standard from prior to 2021. However, the regulation represents a major shift back to a more employee-friendly test that is prompting concern across various industries.
Experts say the new rule has major ramifications for the gig economy in particular. App-based platforms have typically classified their drivers and workers as independent contractors up to this point. Now, companies like Uber, Lyft and Instacart face renewed scrutiny.
Additionally, the rule change is expected to significantly impact sectors like construction, transportation, trucking and media. Small businesses also face new compliance hurdles they may struggle to meet.
The New Test
The updated standard does away with a 2021 regulation where two core factors—control over the work and opportunity for profit or loss—carried greater weight in classification decisions.
Instead, the DOL reinstated a “totality-of-the-circumstances” analysis with six key factors, none of which takes priority over the others:
The degree of employer control over how the work is performed;
The worker’s opportunity for profit or loss;
The amount of skill and initiative the work requires;
The permanence of the working relationship;
The worker’s investment in equipment and materials;
Whether the service provided is integral to the employer’s business.
Other relevant factors may also come into play. Experts caution that this multifaceted approach makes worker classification more complex.
Criticisms and Concerns
The rule change prompted swift criticism from several major business groups. Opponents argue the new test unfairly favors classifying workers as employees rather than independent contractors.
They warn the added ambiguity and compliance burdens will threaten flexible earning opportunities currently available to millions through gig work. There are also predictions that the revived standard will leave companies more vulnerable to worker misclassification claims and lawsuits under the Fair Labor Standards Act.
One organization projects an initial flood of cases seeking overtime pay and benefits but expects litigation to slow over time as jurisprudence develops.
What Should Employers Do?
Experts urge employers to take proactive steps in response to the changing regulatory landscape around independent contractor hiring.
Suggested best practices include conducting an inventory of all worker classification arrangements to identify potential trouble spots.
It is also smart to review independent contractor agreements to make sure protocols are consistently followed companywide. Using class action waivers in arbitration pacts with contractors can help mitigate legal risks from the new rule.
Some advisors recommend holding off on plans to engage short-term contractors until things settle amid the uncertainty. Others contend the updated test reflects longstanding protocols that responsible employers should already be following.
Will the Rule Stick?
The final rule marks a return to an Obama-era approach after the Trump administration moved the classification framework in a more business-friendly direction.
Such oscillation has some employment attorneys, and even lawmakers, questioning the long-term staying power of the Biden administration’s stance.
One business group said the Labor Department “is repealing common-sense rules” with its shift. Meanwhile, a Congressional effort is already underway to repeal the rule under the Congressional Review Act.
The concern is that continued regulatory flip-flopping in this critical area will undermine compliance and confidence. Employers are sure to keep close watch on whether this tightening of independent contractor hiring rules can withstand political and legal scrutiny.
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