Rudi_suardi | E+ | Getty Images
The Biden administration will soon issue a rule that will make it easier for employees to be considered “employees” rather than “independent contractors”.
The U.S. Department of Labor issued a proposed regulation notice Tuesday, indicating it plans to issue a formal regulation that would redefine how employers classify their employees.
The employee label carries employee protections such as minimum hourly wages and overtime. Employees who have been incorrectly classified as contractors may be eligible for compensation to cover a portion of the back payments. Employees are also eligible for unemployment benefits and employee benefits, for example.
More from Personal Finance: Millions of student loan borrowers could miss out on a waiver
The Department of Labor would repeal a Trump-era rule regarding independent contractors that went into effect in January 2021, shortly before President Biden took office. The agency would largely restore the previous status quo with a few changes, experts said.
Misclassification of workers as independent contractors — also known as freelancers or self-employed workers — rather than employees occurs in many industries, such as construction, healthcare, restaurants, retail and transportation, Labor Department officials said Tuesday.
Employers can benefit financially by classifying their workforce as contractors rather than employees. First, they don’t have to pay payroll taxes that fund Social Security or unemployment insurance programs.
Overall, the proposal relaxes classification guidelines and would therefore likely lead to more workers being viewed as employees rather than contractors, said Christopher Moran, a partner at Troutman Pepper Hamilton Sanders who specializes in labor and employment law.
“I think Trump narrowed it down a bit, and I think this” [Biden rule] broadens it a bit,” Moran said of the classification.
“I don’t see this one [rules] as game-changing,” he added. “The swings aren’t dramatic.”
Guidelines as simple as ABC?
The action comes as many states have enacted new guidelines — called “ABC” tests — that labor experts say will make it easier for workers to be considered employees rather than contractors.
Ten states apply that test to wage and hourly benefits, although some only apply to workers in certain industries, such as construction and landscaping, according to the Economic Policy Institute.
For example, in California, where the ABC test was passed in 2019, a ballot measure exempted ride-sharing drivers and other gig workers from app-based companies like Uber and Lyft. These companies often classify handymen as independent contractors.
“Millions of app-based workers choose this job because of the flexibility it offers,” said Kristin Sharp, CEO of the Flex Association. Members of the trading group include DoorDash, Gopuff, Grubhub, HopSkipDrive, Instacart, Lyft, Shipt, and Uber. “They overwhelmingly prefer to maintain their ability to choose when, where and how often they work.”
New federal rules wouldn’t replace state rules, Moran said.
It’s up to the business whether they look at this and say these people are really employees.
senior staff lawyer at the National Employment Law Project,
“Today’s proposed rule requires a considered approach and essentially takes us back to the Obama era, when our industry grew exponentially,” CR Wooters, Uber’s chief of federal affairs, said in a written statement.
“We look forward to a continued and constructive dialogue with the administration and [Labor] secretary [Martin] Walsh as this process progresses,” Wooters added.
Federal action would especially be a boon for “low-wage, vulnerable workers,” Labor Department officials said.
“We found that dishwashers were misclassified as independent contractors to avoid paying the overtime they were otherwise entitled to,” Jessica Looman, the agency’s chief deputy payroll and hours manager, said in a press interview.
The rule has not yet been established and it could take months to become final. The agency will request public comments for 45 days beginning Thursday.
From a legal standpoint, courts and the Department of Labor have long used an “economic reality test” regarding the classification of work under the Fair Labor Standards Act. Self-employed contractors are not economically dependent on their employer for their work and have their own business.
Certain factors are used to assess that question and are generally applied uniformly, experts say. But the Trump employment agency rule set a precedent for two “core factors.” Among other things, the Biden rule would undo the extra weight given to those two factors.
Labor Department officials said the new rules would provide clarity to employers, but experts said it’s unclear whether employers would change designations for their current workforce.
“I hope so,” Sally Dworak-Fisher, a senior staff attorney with the National Employment Law Project, said of reclassification. “But it’s up to the company whether they look at this and say these people are really employees.”