Beware the labor regs of March!

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A new rule from the federal government meant to protect workers is set to take effect today, March 11. It will instead leave most workers worse off by limiting their options for employment. Businesses will likely pull back from hiring entirely in many cases because the rules make it too risky.

The rulemaking in question is the Labor Department’s (DOL) worker misclassification rule. The stated intent is to prevent situations where employers exploit workers. The rule is extremely vague on when business activities trip the line to exploitation however. DOL essentially leaves it up to federal regulators to decide. The rules won’t change things overnight. Regulators will still have to pursue cases based on them and court fights are sure to follow. But today is the day the mischief will officially start.

Due process demands that federal agencies make their rules as clear as possible so employers can avoid violating them. Employers are likely to avoid an activity altogether if they fear they can inadvertently get themselves in trouble for doing it.

The DOL rule is meant to prevent situations where workers are classified as independent contractors – basically, a freelance worker – when they are in fact a traditional employee. A freelancer is, legally speaking, their own business and thus exempted from traditional employment regulations such as overtime and minimum wage. DOL argues that employers frequently misclassify their workers as contractors to get around having abide by these rules.

It’s not clear how many workers feel they are being exploited, however. Many choose freelance work because it offers much more flexibility, allowing them to control the number of hours they work. A traditional employer, by contrast, has to exert control over a worker’s schedule to abide by rules like overtime since they’re based on the number of hours worked.

There is no clear definition under federal law for what defines an employer-employee relationship. Regulators look at six factors involved, such as the worker’s investment in facilities and equipment or  the permanency of the relationship between the parties, among other factors. None of the six – or any combination of them – is definitive, however. The result is that hiring a contractor becomes legally risky for companies, who therefore will avoid it to the extent that they can. That’s bad news for so-called gig economy companies that rely heavily on short-term contract labor.

Individual workers, incidentally, have no say in this. The new rule explicitly says that workers cannot waive their status as employees voluntarily.

California lawmakers passed a worker misclassification law, AB5, in 2019, confident that that they were protecting workers by ensuring that they would get the protection of overtime and minimum wage laws. Instead, AB5 pushed people out of work altogether and damaged the state’s economy. George Mason’s Mercatus Institute released a study last year that found that the law reduced overall employment in the Golden State by 4.4 percent and freelance employment there by 10 percent. The DOL’s rule is similar in most respects to AB5.

DOL wasn’t the only agency making mischief. The National Labor Relations Board (NLRB) had a joint employer rule set to go into effect on March 11 as well. The rule was another the-cure-is-worse-than-the-disease scenario. It would have expanded the situations where one company can be held legally accountable for workplace violations at a second company. Joint employer creates a legal minefield for businesses, especially for corporations that franchise their brand. Most franchisees are independent businesses that merely rent the corporate brand. To avoid liability, the parent corporations would be forced to either take more direct control of their franchisees or pull back from franchising altogether. Either result would be a blow to entrepreneurialism since opening a franchise has been a common way to get started in business. And fewer businesses means fewer employers and less hiring.

Businesses and workers caught a break when a federal judge struck down the NLRB rulemaking on Friday, just days before it would have gone into effect.

The underlying problem is that government officials tend to look at changes in the economy and the nature of work as problems to be fixed and not opportunities for workers to innovate. American workers are a resilient bunch. The Biden administration should try empowering them rather than coddling them.