The administration of U.S. President Joe Biden will release a final rule as soon as this week that will make it more difficult for companies to treat workers as independent contractors rather than employees that typically cost a company more, an administration official said.
The U.S. Department of Labor rule, which was first proposed in 2022 and is likely to face legal challenges, will require that workers be considered employees entitled to more benefits and legal protections than contractors when they are “economically dependent” on a company.
A range of industries will likely be affected by the rule, which will take effect later this year, but its potential impact on app-based services that rely heavily on contract workers has garnered the most attention. Shares of Uber Technologies Inc, Lyft Inc and DoorDash all tumbled at least 10% when the draft rule was proposed in October 2022.
The rule is among the most impactful regulations ever issued by the Labor Department office that enforces U.S. wage laws, according to Marc Freedman, vice president at the U.S. Chamber of Commerce, the largest U.S. business lobby. But he said the draft version of the rule provides little guidance to companies on where to draw the line between employees and contractors.
“Economic dependence is an elusive concept that in some cases may end up being defined by the eyes of the beholder,” Freedman said.
The Labor Department in the proposed rule said it would consider factors such as a worker’s “opportunity for profit or loss, investment, permanency, the degree of control by the employer over the worker, (and) whether the work is an integral part of the employer’s business.”
The rule replaces a Trump administration regulation that said workers who own their own businesses or have the ability to work for competing companies, such as a driver who works for Uber and Lyft, can be treated as contractors.
The department’s sharp break from the Trump-era regulation will likely be the focus of lawsuits challenging the new rule, legal experts have said. Federal law requires agencies to adequately explain their decision to withdraw and replace existing rules.
The Biden administration has said the Trump-era rule violated U.S. wage laws and was out of step with decades of federal court decisions, and worker advocates have said a more strict standard was necessary to combat the rampant misclassification of workers in some industries.
The left-leaning Economic Policy Institute in a report last year estimated that a truck driver treated as a contractor earns up to $18,000 less per year than one who is deemed an employee, while construction workers’ earnings drop by nearly $17,000 and home health aides lose out on up to $9,500 in pay and benefits.
Business groups sharply criticized the draft rule after it was proposed. Any change in policy is expected to increase labor costs for many sectors including trucking, retail and manufacturing.
Most federal and state labor laws, such as those requiring a minimum wage and overtime pay, only apply to a company’s employees, who studies suggest can cost companies up to 30% more than independent contractors.
Nearly 40% of U.S. workers, or more than 64 million people, did some freelance work in the past 12 months, according to a December survey by freelancing marketplace Upwork.