Federal Department of Labor weighs in on the Employee vs Contractor Debate

The U.S. Department of Labor last month said it would soon propose a rule that could make it easier to classify workers as independent contractors rather than employees, a major issue for the “gig economy” and other industries that use contractors to contain costs.

The potential misclassification of workers as independent contractors has been the subject of renewed scrutiny with the growth of the gig economy. The Obama administration issued informal guidance attempting to limit the scope of independent contractor status, but the current administration withdrew that guidance on June 7, 2017.

Independent contractors are not entitled to many of the legal protections afforded to employees, such as minimum wage and overtime pay. Employees can cost companies up to 40% more than contractors, according to several studies.

In determining the degree of economic dependence, the rule considers two factors:
(1) the nature and degree of the individual’s control over the work (i.e. the more control the worker has over their schedule, the performance of the work, selection of projects, and/or ability to work for others, the more likely they are to be an independent contractor), and
(2) the individual’s opportunity for profit or loss (i.e., the greater the risk, the more likely the individual is independent).

The proposed rule reminds that the reality of the working relationship, not the terms of a written contract or informal understanding, dictates the final determination of independence.

This proposal comes as Uber Technologies Inc and other gig economy firms are challenging a California law (AB5) adopted last year that makes it more difficult to treat workers as independent contractors.
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Uber and courier service Postmates Inc have filed a lawsuit claiming the AB5 law is unconstitutional. The companies have also launched a campaign to urge California voters to approve a ballot referendum in November that would exempt app-based services from the scope of the law.

More in our October Issue here. ​