News Release

US DEPARTMENT OF LABOR ANNOUNCES FINAL RULE ON CLASSIFYING WORKERS AS EMPLOYEES OR INDEPENDENT CONTRACTORS UNDER THE FAIR LABOR STANDARDS ACT

Rescinds 2021 independent contractor rule; replaces it with analysis consistent with caselawWASHINGTON – The U.S. Department of Labor today announced a final rule to help employers and workers better understand when a worker qualifies as an employee and when they may be considered an independent contractor under the Fair Labor Standards Act.

The rule provides guidance on proper classification and seeks to combat employee misclassification, a serious problem that impacts workers’ rights to minimum wage and overtime pay, facilitates wage theft, allows some employers to undercut their law-abiding competition and hurts the economy at-large.

“Misclassifying employees as independent contractors is a serious issue that deprives workers of basic rights and protections,” explained Acting Secretary of Labor Julie Su. “This rule will help protect workers, especially those facing the greatest risk of exploitation, by making sure they are classified properly and that they receive the wages they’ve earned.”

The guidance provided by the final rule aligns with longstanding judicial precedent on which employers have previously relied to determine a worker’s status as either an employee or independent contractor. The new rule will preserve essential worker rights and provide consistency for entities covered by the Fair Labor Standards Act.

The new “independent contractor” rule restores the multifactor analysis used by courts for decades, ensuring that all relevant factors are analyzed to determine whether a worker is an employee or an independent contractor. The rule addresses six factors that guide the analysis of a worker’s relationship with an employer, including any opportunity for profit or loss a worker might have; the financial stake and nature of any resources a worker has invested in the work; the degree of permanence of the work relationship; the degree of control an employer has over the person’s work; whether the work the person does is essential to the employer’s business; and a factor regarding the worker’s skill and initiative.

The rule separately rescinds the 2021 Independent Contractor Rule that the department believes is not consistent with the law and longstanding judicial precedent.

In crafting the new rule, the department’s Wage and Hour Division considered feedback provided by stakeholders at forums in the summer of 2022 and during the comment period after the proposal’s announcement in October 2022. The final rule takes effect on March 11, 2024.

Agency

Wage and Hour Division
Date

January 9, 2024
Release Number

23-2369-NAT

a new rule just issued by the Biden Administration will essentially ban independent contractor status for gig workers under the Fair Labor Standards Act. It will threaten a crucial source of livelihood for millions by putting these jobs at risk. For example, a recent study projected that this sort of policy would result in more than 73,000 lost app-based jobs in Massachusetts alone.

In the wake of successful wage negotiations by the United Auto Workers and other unions, the Biden Administration thinks these workers would be better off if they are converted to full-time employees who are eligible for union membership and traditional employee benefits. But that would destroy the flexibility and independence these workers value most.

A far better solution would be to allow companies to extend benefits to gig workers without making them employees and taking away their autonomy.

Workers in the gig economy have the freedom to set their own schedules and decide when and where they work. This flexibility is not just a perk; it’s a fundamental factor that contributes to high job satisfaction in this field. The Bureau of Labor Statistics found that79% of independent workers prefer their current arrangements over traditional employment, which can take away their flexibility.

The new rule from the Department of Labor seems better suited for the economy of 1923 than 2023. Rather than going to the same shift every day, many independent workers complete tasks at odd hours they can squeeze in between parenting and other family obligations or as part-time work to supplement their regular income.

California’s recent failed attempt at this policy should also serve as a cautionary tale. The state’s law aimed to classify gig workers as traditional employees, but it led to job losses across the state. Small businesses like theaters and music venues were particularly hard hit. The ensuing bipartisan backlash led the state to later exempt110 professions from the regulations.

It’s clear that a one-size-fits-all approach doesn’t work. However, there’s no doubt that the existing regulatory structures for work in the U.S. need to be overhauled to meet modern economic and labor requirements.

Under current regulations, companies are not allowed to provide standard employment-based benefits such as paid time off, healthcare, and retirement plans to independent workers. If a company wants to provide benefits, they would have to convert them to regular employees. The workers would lose their independence and flexibility, forcing many to quit.

Instead of banning independent contractors outright, we should give workers the choice to remain independent while giving companies the option to extend benefits if they want to do so.

The easiest way to accomplish this would be to establish benefit savings accounts that would let companies extend special benefit bonuses to their contractors. Workers would then use these bonuses to pay for their own benefits on a tax-free basis. This would create a parallel structure that already lets companies pay for employee benefits without paying taxes on those expenses. And the plan lets contractors prioritize the benefits they want most.

Creating benefit savings accounts aligns with the interests of both gig workers and companies. For gig workers, it preserves their flexibility while offering a safety net of benefits. For companies, it allows them to attract and retain talent, promote worker loyalty, and contribute to the overall well-being of their workforce.

About80% of gig workers say they want access to benefits like health insurance, and companies such as Uber are eager to provide them.

At leastnine states have already introduced legislation to reform laws that prohibit companies from giving benefits to non-employees. Utah has been aleaderon this issue, passing a law earlier this year to allow companies to provide benefits to independent contractors.

While this progress at the state level shows great potential, creating benefit savings accounts will require the federal government to make reforms too, so workers can use their benefit dollars without paying federal taxes.

By preserving flexibility and allowing benefits, we can uphold the core independence that fueled the growth of the gig economy while adapting to the evolving needs of its workforce in the 21st century. The Biden administration should reconsider its approach and work toward a more balanced solution that respects the choices and needs of millions of gig workers – and the businesses and consumers that rely on their services.

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