Loyola University Chicago School of Law, JD 2023
On October 11, 2022, the Department of Labor released a proposal to redefine independent contractor classifications under the Fair Labor Standards act. The change in definition, if approved, will have major implications for gig workers and companies such as Uber, Doordash, Grubhub, etc. These companies have already had a drop in stock value because of the announcement and the companies are at risk of losing more value as the gig economy destabilizes.
The employee or independent contractor classification and its intended purpose
While the official announcement was not placed on the Federal Register until October 13, an online copy of the proposal was made available on October 11, 2022. The proposal is a 184-page document with a great deal of information including legalese and economic analysis of the impact of the proposal. To summarize, the proposal states that the FLSA was enacted in 1938 to eliminate labor conditions detrimental to the minimum standard of living for workers. These protections do not extend to independent contractors who are not considered economically dependent on their employer (i.e. because they are in business for themselves). The difference between an employee and an independent contractor was based on a “economic reality test” which determines if a worker is economically dependent on a specific employer.
Why the DOL change is important for gig workers
The standard of review from 1938 until 2021 was to look at the entirety of the factors (profit, investment, permanency, degree of employer control, etc.) to determine economic dependence. This standard was changed in January 2021 when the Department of Labor published a rule for the economic reality test that defined a 5-factor test. Two factors were focused on as the “core factors” of analysis. These two factors, the nature of degree of control over work and worker’s opportunity for profit or loss, were given more weight than the other factors. This change seems to favor gig work companies as the workers choose the work they complete and receive direct profit from their work. An independent contractor is not entitled to benefits under the FLSA and the contracting company therefore avoids substantial costs associated with their workers’ compensation. It appears that the current Department of Labor agrees with this analysis, as they have drafted this proposal to return to the prior mode of analysis and use a more holistic standard of review.
Why this proposal negatively impacts the gig economy and how it impacts you
The first major impact is the immediate drop in stock values for multiple gig companies. This drop will likely continue once the proposal is officially announced by the Department of Labor. This drop in value will affect the investors of each respective company, from board members to individual investors.
The next impact is to the workers themselves. The proposal could have a positive impact on gig workers as the broader approach to economic dependence will include more gig workers as employees instead of independent contractors. This would mean that the workers would be entitled to employee benefits such as health insurance and paid time off. However, this could also present a problem as the employer would need to cut costs to afford benefits for their employees. Cutting costs either would mean using less workers or increasing the cost of their services. Less workers would require the current gig workers to complete the work with less support. This in turn would decrease the quality of life of the worker or decrease the amount of gig requests completed, thereby also decreasing the demand for the services of the gig company. Alternatively, an increase in price would also decrease the demand for the services of companies like Uber. Either scenario listed also impacts consumers who will have to wait longer for the offered services or pay a higher price.
A return to 2008 Labor Law or the beginning of change?
Representatives from Lyft and Uber have already commented on the announcement. Both had a very pragmatic approach to the announcement, hoping to work with the Department of Labor and stating that the proposal will not change anything with employment at their respective companies. Whether this is true is uncertain as the economic situation now is not the same as it was under the Obama administration. Gig Companies (referred to as app-based companies in the article) pushed for legislation after a California bill was passed that created a state level test for what constituted an employee. Proposal 22 was passed by voters in 2020 but was found unconstitutional in 2021 because it limited the state legislature’s ability to regulate wages. Uber has filed an appeal to the 9th circuit court of appeals to have the bill upheld.
In addition, the US Chamber of Commerce has filed an Amicus Brief urging the California Court of Appeals to uphold Proposal 22. Unlike in the past, the current regulatory environment is very heated with both sides fighting to define what an employee means for benefit purposes. There is now a movement for California Gig workers to unionize. The FTC has also taken an interest in how gig companies treat their employees, providing an official statement and asking workers to reach out to the regulatory agency if their labor rights are being violated.
The current proposal from the Department of Labor will likely intensify the debate between industry leaders and proponents of workers’ rights. It is uncertain what impact the proposal from the Department of Labor will have on the Gig economy, but the debate between industry leaders and labor advocates will continue as demand continues to grow for Uber, Lyft, and all the other app-based gig companies.