Home News New worker classification rule could disrupt US gig economy

New worker classification rule could disrupt US gig economy

by SuperiorInvest

Key takeaways

  • Uber drivers and other gig economy workers could legally be classified as employees under a new Department of Labor rule that goes into effect in March.
  • The new rule already faces at least one lawsuit, filed by freelance writers who want to remain “independent contractors” rather than employees.
  • Employees are entitled to overtime pay, minimum wage, and other benefits not available to contractors.
  • While people who work as contractors value flexibility, employment law experts say there is no reason employers can’t offer flexible schedules along with employee status and the benefits that come with it.

App-based ride-sharing services like Uber (UBER) and Lyft (LYFT) earned the title “disruptors” for the way they drove traditional taxi companies out of business. Now, they’re trying to fend off the disruption that could be coming, in the form of a new federal labor rule.

A new worker classification regulation released this month already faces at least one legal challenge, and will likely see more pushback from gig economy companies whose business model it threatens. The new law could upend the gig economy and affect many of the roughly 22.1 million Americans who work as independent contractors, employment experts say.

Earlier this month, the Labor Department released details about a rule that sets standards for when a worker counts as an employee rather than an independent contractor, entitling them to overtime pay, unemployment insurance and a host of other benefits under the law. The new rule, first proposed in 2022, will go into effect in March.

This week, a group of freelancers, including three New Jersey-based writers, sued the Department of Labor to overturn the new rule. At least one major business lobby is also considering legal action.

If the government were to grant “employee” status to workers currently classified as contractors, it would threaten the business models of companies like Uber, Lyft, and Doordash (DASH), whose contract workers cost their employers far less than traditional employees.

Uber and the Flex Association, a trade group representing gig economy companies, released statements last week saying the rule would have no immediate impact on their businesses.

“This rule does not materially change the law under which we operate and will not affect the classification of the more than one million Americans who turn to Uber to earn money flexibly,” Uber’s statement read.

Millions could be reclassified under new rules

Erin Hatton, a sociology professor at the University at Buffalo who has studied the gig economy, predicted that when the new rule goes into effect, Uber and Lyft drivers, and millions of other gig workers, could actually be reclassified as employees.

“Your employment model will not survive a change that allows you to interpret your employees as legally covered employees,” Hatton said. “They have a lot of money and they will fight this with all their might.”

The U.S. Chamber of Commerce, a business lobbying group, said it was considering suing to stop the rule.

“The new Department of Labor regulation that redefines when someone is an employee or an independent contractor is clearly biased toward declaring most independent contractors employees, a move that will decrease flexibility and opportunity and result in lost employment opportunities.” income for millions of Americans,” Marc Freedman, the chamber’s vice president of labor policy, said in a statement. “It threatens people’s flexibility to work when and how they want and could have significant negative impacts on our economy.”

When is a worker an employee?

The rule refers to a distinction that has become increasingly important amid the rise of companies that offer transportation, dog walking, food delivery and a host of other services: When is a worker an employee and when is he or she? just a contractor?

The difference is important because labor laws at the federal, state, and local levels impose a series of obligations on employers toward their employees. Nationwide, those considered “employees” are entitled to a minimum wage, overtime pay, the right to form unions, and other Fair Labor Standards Act protections. Employers also have to contribute to Social Security and Medicare when they cut employees’ salaries.

At the state level, employees get unemployment insurance and can claim workers’ compensation insurance if they are injured on the job. In some states, they are also entitled to paid family leave and sick days.

None of that applies to independent contractors, which, in the eyes of labor law, are more of a small business, each establishing an equal business relationship with the employer.

Rather than being subject to regulations, terms of employment are set by a mutually agreed upon contract, even if it is usually written by the large company and is a take-it-or-leave-it approach for the contractor. said Samantha Prince, a law professor at Penn State Dickinson Law and an expert on worker classification and the gig economy.

The new regulation, similar to a previous Obama-era rule, says there are six factors to evaluate whether someone is an independent contractor or an employee: “the opportunity to make profits or losses depending on management skill, the worker’s investments and the potential employer, the degree of permanence of the employment relationship, the nature and degree of control, the extent to which the work performed is an integral part of the prospective employer’s business, and skill and initiative.

Contractors miss out on wages and benefits

In reality, how those standards apply to a given worker will be determined by the judges who evaluate those factors in court cases, Prince said. For example, many Uber drivers appear to meet four of the six criteria to be considered employees, he said.

“And will that be enough for a court to say that, for purposes of the FLSA, Uber drivers are employees?” he said. “It’s possible.”

Because it is cheaper and easier to hire a contractor than an employee, companies have incentives to classify people as contractors as a cost-cutting measure, even when it is not appropriate.

For example, misclassification is widespread in the construction industry, according to an analysis by the Century Foundation, a progressive think tank, which found that between 10% and 19% of the entire workforce (up to 2, 1 million people) were misclassified or paid according to the table.

Due to the lack of benefits and overtime pay, independent contractors often receive less compensation for performing the same jobs. A typical person working in construction as an independent contractor would earn up to $16,729 less per year in income and benefits compared to what they would earn as an employee, estimated the Economic Policy Institute, a progressive think tank.

Despite the drawbacks, many contractors say they would prefer not to be considered employees and have rejected worker classification rules.

“This lawsuit seeks to vindicate the right of individual business owners to remain independent in the face of a concerted effort to force them into employment relationships that they do not want or need,” the independent professional’s lawsuit reads.

Flexibility or benefits? Employees can have both

A 2023 survey by job search site Indeed found that people who work as independent contractors value the independence and schedule flexibility that come with those roles, preferring those benefits over higher salaries.

However, Prince and Hatton said there is no legal reason why employers cannot offer flexible work arrangements along with the benefits that come with employee status.

“There’s no law that says you can’t be an employee and have flexible hours,” Prince said.

“It’s a completely false dichotomy between this flexibility (sometimes true and not always so true) and permanent employment or legally classified employment,” Hatton said. “These simply do not have to be mutually exclusive.”

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