A controversial new rule that would maintain the status quo for independent contractors will likely be overturned by Biden. But it could live on as a model policy for states.
Wednesday morning, the Trump administration published a controversial new rule that would it make easier for Uber, Instacart, and Grubhub to continue to classify their drivers, shoppers, and couriers as independent contractors, in a move that could save them and other companies over $3 billion annually.
It’s no sure thing that this rule—one of many midnight regulations the outgoing administration is pushing through in Trump’s final days—will ever take effect under President Joe Biden, who plans to classify more of those workers as employees. Nevertheless, it could serve as a policy model for state labor agencies, or a guidepost for courts, Department of Labor (DOL) officials said on a press call.
Over the last few years, worker classification, particularly in the gig economy, has become a hot-button issue. App-based delivery services contend that workers who sign up and get jobs through their platforms do so of their own volition, which makes them independent contractors. That’s not a value-neutral designation. Companies don’t have to pay contractors minimum wage or overtime, nor are those workers eligible for unemployment insurance or workers’ compensation.
Higher labor costs pose an existential threat to these companies, who already struggle to turn profits.
Many workers, and their advocates, say the app companies influence their decisions to pick up shifts, and exert control over their work while they’re on the job. For those reasons, they contend they’re more like employees, and entitled to better pay and labor protections. But higher labor costs pose an existential threat to these companies, who already struggle to turn profits. They have fought hard to preserve the status quo.
For instance: After California legislators passed Assembly Bill 5, a law that would reclassify many of those gig workers as employees, the Silicon Valley companies refused to comply. In 2020, they poured more than $200 million into a campaign to pass Proposition 22, a ballot measure to exempt them from the law and keep their workers classified as contractors. The measure passed by a wide margin in November, and Uber and Lyft are now eyeing similar reforms in other states with AB 5-style laws, such as Massachusetts.
During a shorter-than-usual 30-day comment period, the department received over 1,800 public comments, the majority of which backed the rule, officials said on Wednesday. Patrick Pizzella, the deputy labor secretary, said the department “heard loud and clear” from independent contractors who said they were frustrated by AB 5. He added that the passage of Proposition 22 was a “remarkable statement” in support of the new rule, although the companies that bankrolled that ballot campaign have since been accused of confusing voters with misleading statements.
“Yet another example of the Trump administration’s relentless push to stack the deck against workers at every turn.”
Under the new rule, the department’s wage and hour division, which enforces federal labor law, would use a five-part “economic reality” test to determine whether a worker is financially dependent on an employer, thus making them an employee. In that test, two factors have the greatest weight: the degree of the employer’s control over the work, and the worker’s opportunity for profit or loss based on their personal initiative. The amount of skill required to do the work, the permanence of the working relationship, and integration into the business are also considered.
Progressives say that test is an unreasonably high bar to clear, tougher than the three-part ABC test that has been adopted by some states and which formed the backbone of California’s AB 5. When the DOL rule was first proposed in September—delayed after months of departmental infighting—Rebecca Dixon of the National Employment Law Project said it was “yet another example of the Trump administration’s relentless push to stack the deck against workers at every turn,” and a way to “cheat workers” and avoid paying minimum wage. The Economic Policy Institute, a left-leaning think tank, calculated it would cost workers at least $3.7 billion every year, in the form of reduced pay and benefits and more paperwork.
Pizzella, however, said on Wednesday that the new rule “respects the time-honored American tradition of being your own boss,” and would improve the lives of gig workers by ensuring “the flexibility and vast entrepreneurial opportunities” of independent contract work.
“We certainly believe that this is a model that states can adopt.”
Despite fears that tech companies may have an outsize influence in the next administration, this rule, which does not take effect until March, is likely to fall by the wayside. Last month, Biden spokesperson Jen Psaki said the next President would issue a memo on his first day to halt or delay midnight regulations, and named this rule specifically as one to “freeze.” Furthermore, a Democrat-controlled Senate and House of Representatives could annul it through the Congressional Review Act.
But that doesn’t make this late-hour action an entirely symbolic one. On the press call, department administrator Cheryl Stanton said the rule is supported by decades of case law, which means that a possible court challenge could be upheld. More importantly, Stanton said, she and others in the department believe the economic reality test could be a model policy for states to follow and adopt. Federal labor laws can be superseded by state regulations.
“[W]hat we learned in this comment process is this is a very important tool as a policy matter,” Stanton said. “We certainly believe that this is a model that states can adopt, rather than adapting the ABC test.”