Power to the… regulators? That’s what new worker classification rule will do

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The US Labor Department’s new worker classification rule is a major step backwards, causing trouble for worker and employer alike as they try to deal with the uncertainties and contradictions inherent in this horribly misguided effort.

The department should have simply left well enough alone. The previous administration attempted to bring clarity to the rule, which determines when a worker is a traditional employee and when they are an independent contractor, aka a freelancer.

The Trump administration narrowed the rule’s scope in 2021 to two key factors for determining classification: the degree of control by the workers and their opportunity “for profit or loss” – i.e., whether they were assuming any economic risk for the work. In short, if the workers were mostly calling the shots, they were freelancers. This allowed much-needed flexibility to deal with the changing economy and the growth of the so-called “gig” economy.

The Biden administration rule discards that common-sense approach to largely revert to old rules created long before the rise of the gig economy. This makes about as much sense as applying horse-and-buggy regulations to Teslas.

The department’s new version will expand the rule to six different vaguely-defined factors for determining classification, such as the “degree of permanence” of the work relationship and how “integral” the work is to the employer’s business. None of these factors or any combination of them are determinative, however. Determinations will be made on a case-by-case base basis, i.e., what regulators decide.

This is extremely bad news for workers who prize flexible work hours. Employers will be far more wary of hiring them, even as contractors, since doing so might put the employers in legal and regulatory jeopardy. Companies instead will be pushed to hire workers as full employees. This will require the companies to take control of workers’ hours to comply with overtime and unemployment rules. It will be bad for consumers who have come to like the speed and convenience provided by the gig economy.

The administration should abandon this misguided rulemaking and restore the 2021 version.

Advocates for the expanded rule, such as Acting Secretary of Labor Julie Su, claim that they’re acting to protect workers. “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,” Su said.

This is contrary to what actual freelance workers say. Polls consistently show that most prefer the freedom that comes with being a contractor. California discovered this when the state tried to force more workers into being classified as employees under the AB5 law. The legislature ended up having to carve myriad exceptions into the law. AB5 may also have held back the Golden State’s economic recovery from the COVID-19 pandemic.

The worker, it should be noted, has no say in the matter. As the department notes in its FAQ:

[Question] Can a worker voluntarily waive employee status and choose to be classified as an independent contractor?

[Answer] No. Under the FLSA, a worker is an employee and not an independent contractor if they are, as a matter of economic reality, economically dependent on the employer for work.

That determination of whether they are dependent is wholly up to a regulator. And this rule gives the regulator way more power to do that.