The Labor Department’s new Independent Contractor Rule went into effect Monday, threatening gig workers’ independent status and the freedom and flexibility such workers have come to expect.
The new regulation imposes six criteria that employers must take into account when determining whether to classify a worker as an independent contractor or an employee—a distinction that for many businesses ultimately determines whether they can afford to hire the worker at all.
Independent contractor status grants workers greater liberty to choose their schedules, hours, mobility, and clientele, whereas the “employee” designation limits these freedoms in exchange for requiring employers to guarantee benefits, such as health coverage and paid time off. Independent contractors could still receive such benefits before the rule, and competitive gig companies often do offer workers similar perks. But by turning self-employed workers into corporate employees, the new rule turns those optional benefits into mandatory (and usually far less individualized) ones.
The major change, though, is that the rule stands to turn a sizable swath of workers into unionized employees—one of the ways in which President Joe Biden hopes to make good on his promise to become “the most pro-union president in American history.”
One problem with the measure is that it’s unclear whether any one of its six criteria “outweighs the other,” making it impossible for businesses to gauge whether they are on the right side of the law. Though the Department of Labor claims the subjectivity of its standards—such as a worker’s “skill and initiative,” the “investments by the worker and potential employer,” and the “nature and degree” of worker autonomy—is meant to grant employers agency over worker designations, the U.S. Chamber of Commerce alleges that these nebulous parameters are crafted with the opposite intention in mind.
To their point, the rule’s sextet of definitive criteria concludes with a vague caveat: “additional factors may be relevant.”
The new rule is constructed in such a way that “the only time [employers] can be confident is if they call a worker an employee,” Marc Freedman, the Chamber’s vice president of workplace policy, told the Associated Press. Larger companies like Lyft and Uber might have the resources to protect workers’ independent contractor status and hash it out in court if need be, but smaller competitors are stuck between a rock and a hard place: less able to afford the legal risks, but unable to shoulder the costs of treating independent workers as employees either. The rule threatens to run them out of the market.
Sen. Bill Cassidy (R–La.), who plans to introduce a resolution to repeal the rule, adds that the new regulations will bully employees as well. “Independent contractors…are shielded from forced or coerced unionization that would strip their flexibility away,” Cassidy has said, making the self-employed a critical target “for large labor unions who want more workers paying forced union dues.”
It makes sense that unions would be bullish on the Biden measure: In a 2022 McKinsey study, more than a third (36 percent) of the workers surveyed identified as independent contractors. That’s a whopping 33 percent increase from 2016, suggesting that the portion of the American workforce forgoing the traditional 9-to-5 format in favor of self-employment is rising. That’s a threat to these unions’ business model.
A rule that restricts workers’ independence is hardly a winning proposition among those it aims to protect. A Bureau of Labor Statistics (BLS) survey reveals that “fewer than 1 in 10 independent contractors would prefer a traditional work arrangement” to their current one, and that nearly 4 in 5 are happier to be self-employed than in a traditional corporate job. A Harvard Business Review study yields some insight as to why: 59 percent of the respondents cited workplace flexibility and autonomy as being more important than salary or other benefits.
It’s not just workplace flexibility that the self-employed find so appealing: Pay still matters—and when it does, independence still wins. While the union-friendly outlet More Perfect Union alleges that the forthcoming rule “will mean higher wages and overtime pay for millions of workers in gig jobs, healthcare, construction, and more,” the data tell a different story. According to the BLS, among full-time workers, independent contractors’ median weekly earnings are nearly identical to those of traditional workers. Part-time independent contractors’ median earnings are 30 percent higher than the median earnings of traditional part-time workers ($333 to $255).
Part of that might owe to the rigidity to which corporations must often adhere when setting employees’ hours. Whether they’re part-time or full-time, there are limits on just how much traditional employees can work in a given day or week, with few opportunities to put in an extra bit of hustle if they have a big car payment coming up—or, conversely, to take a little time off to deal with a stressful life event. In a review of the public comments made to the Labor Department following the rule’s proposal, Quartz quoted a nurse who reported that “being able to work on the side as an independent contractor for [an] infusion company allows me to work extra without burning out.”
No wonder that when the California State Legislature passed its infamous Assembly Bill 5 (on which the new Independent Contractor Rule is modeled), self-employment declined by 10.5 percent and California’s work force shrank by 4.4 percent, on average, among affected occupations.
Meanwhile, the costs of both enforcing and conforming to the new rule could be staggering. Susan Houseman, a labor economist at the Upjohn Institute, notes that for the rule to be effective, it “must be coupled with enforcement—yet dollars (in inflation adjusted terms) for enforcement of such employment regulations have dramatically declined over the decades.” With a sizable share of the population now identifying as independent contractors and with 40 percent of workers reporting that they had done some freelance work over the past year, cracking down on alleged worker misclassification could place a heavy burden on American taxpayers.
Consumers could also face higher prices as businesses struggle to foot the bill of transitioning their independent contractors to “employee” status. Reuters reports that businesses spend around 30 percent more for each employee than they do for every contractor.
So what’s the advantage of reclassifying independent workers as employees? The same as the disadvantage: It makes it harder for workers to be their own boss, to choose their own schedules, to represent themselves, to set their priorities as they see fit. If you believe in the evolution of the workplace and worker self-determination, this is bad. But if you believe in a one-size-fits-all work model where individuals are employed by traditional businesses and represented by traditional unions, this is great.
Originally published by the Reason Foundation. Republished with permission.
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