In a move that surprised no one, the Biden administration announced today it was officially rolling back the Trump administration’s rule under the Fair Labor Standards Act (FLSA) to determine when workers are traditional employees and when they are contractors. It was unsurprising because it was what President Biden’s union allies wanted. The fact that the previous administration’s rule was perfectly sensible was irrelevant.
The issue of when a worker is a contractor—that is, a freelancer—is significant because most so-called gig economy companies rely on contractors as their main workforce. App-based rideshare businesses Uber and Lyft are probably the best-known examples. The companies argue that the flexibility of contract work is crucial to their operations.
Critics, especially unions, claim the companies are misclassifying workers as contractors to circumvent federal regulations on things like health insurance and overtime, since those apply mainly to traditional employees. Contractors are legally considered to be independent businesses. As it happens, contract workers are also much harder for unions to organize. The National Labor Relations Act, the law covering union organizing, mainly applies to traditional employees.
Amazingly, the FLSA has no clear rule for when a worker is an employee or a contractor. Instead, the Department of Labor uses six factors that indicate whether a worker might be ab employee. None of them is considered definitive.
This situation was never ideal and it became an even bigger problem over the past decade as apps made gig work more common and more popular. California spent the better part of 2019 and 2020 locked in a fight over the issue. Golden State lawmakers passed AB5 in late 2019, a law that forced most companies to treat contractors as employees. This proved to be a major headache for the companies, their workers, and traditional freelancers. The law was subsequently partially repealed by voters through Proposition 22.
The Trump administration attempted to provide some clarity on the matter by issuing a guideline stating that two of the six factors the FLSA used—an individual’s degree or control over the work and his or her ability to profit or make a loss from it—were the “core factors” to be considered. The guideline was just that, a guideline, not a regulation with a bright line. Courts and regulators could have still considered the FLSA’s other four factors. States also still had the ability of setting higher standards than the federal government. The Trump-era rule wouldn’t have overridden California’s AB5. The previous administration was merely telling businesses, regulators, unions and workers that the two core factors were what they should look at first.
Well, the Biden administration said that the new rule had to be rolled back because it created the possibility that the reach of federal regulators might in some way be limited. “By withdrawing the Independent Contractor Rule, we will help preserve essential worker rights and stop the erosion of worker protections that would have occurred had the rule gone into effect,” said Secretary of Labor Marty Walsh. He added that the Department was “committed to ensuring that employees are recognized clearly and correctly.” How exactly does reverting to the old six-factor test that created the problem in the first place make things clearer?