DOL’s New Independent Contracting Rule: A 20th Century Policy for a 21st Century Economy
The Department of Labor (DOL) issued its long-awaited final rulemaking on independent contractor status for workers on Jan. 9. This rulemaking reversed a Trump-era rule that was more protective of independent contractor classification. However well-intentioned, the new rule will make it more difficult for workers to classify as contractors or gig-economy workers, which ultimately flies in the face of what workers themselves want. There are also better policy options that the administration overlooked to address its concerns about worker misclassification.
To understand how the new rule came about, it’s worth noting that the debate over worker classification largely took off in California with a 2018 state Supreme Court decision followed by the passage of the well-known A.B. 5 law. The upshot was California’s enactment of a so-called ABC test for employee classification, which involved a stringent three-part test that made it close to impossible to be classified as an independent contractor in the state. The law was significantly altered in the form of a voter referendum in 2020, exempting gig workers from its reach.
At the federal level, the Trump administration’s DOL issued its own rulemaking on independent contractor status in 2021, producing a rule that was more protective of contracting arrangements. While the Biden administration did not opt for a California-like ABC test, the new rule appears to be designed to make it more difficult to classify workers as contractors.
For instance, the new rule includes analyzing whether “the work performed” by a worker “is an integral part of the potential employer’s business.” The DOL notes that this “does not depend on whether any individual worker in particular is an integral part of the business, but rather whether the function they perform is an integral part of the business.” If the work is deemed an integral part of the business, that “weighs in favor of the worker being an employee.”
This factor alone could upend longstanding practices in many industries. As one example, most real estate agents are contractors who work for a real estate agency. All of them are engaged in work that is an “integral” part of the agency’s business—i.e., buying and selling houses. Similarly, gig-economy workers are almost all engaging in work that is integral to the company in which they are connected. Other factors of the new rule, such as the “degree of permanence of the work relationship” are similarly poised to make it harder to qualify for contractor status.
The ostensible rationale behind the department’s rule relates to concerns over worker misclassification, in which employers may be using contracting arrangements to circumvent a full-scale employee relationship. In turn, this could theoretically lead to workers being improperly denied many of the protections and benefits that often come with employee status, such as worker’s compensation, paid sick leave, and even health insurance. Put another way, Acting U.S. Labor Secretary Julie Su, in a statement coinciding with the rule, articulated the administration’s viewpoint that “[a] century of labor protections for working people is premised on the employer-employee relationship.”
While it is true that U.S. labor law has emphasized the employer-employee relationship since the 20th century, that does not mean that it’s the best model available to help workers in 2024. Specifically, the secretary overlooks two key points:
1. The Vast Majority of Contract Workers Prefer to Remain Contractors
Repeated surveys show that independent contractors and gig-economy workers prefer their status as contractors because of the flexibility it provides. Over 80 percent of gig workers say that they selected gig work by choice, not necessity. Further, over 60 percent of these workers specifically cited flexibility and the ability to choose their own hours as the reason they selected gig work—which is why this same percentage reported their intention to remain in the gig economy rather than return to more traditional employment arrangements. Overall, less than one in 10 independent contractors are looking for a more traditional employment relationship, with close to 80 percent preferring their current freelancing setup.
This should come as little surprise, as flexibility is, by far, the most important aspect of a job for current American workers, outpacing other considerations like salary or benefits. In other words, most workers do not want the greater rigidity that comes with the employer-employee relationship that Secretary Su heralds.
2. There Are Better Ways to Protect Workers
As noted, concerns that employees are being misclassified—and thereby being denied important protections and benefits—is the rationale driving the administration’s new rule. Under the secretary’s formulation, a “century of labor protections” have been “premised” on the employer-employee relationship, suggesting that employee status is the best or only means by which workers can be protected. This implies that either workers are subject to the unprotected, benefits-barren world of contracting or they must be full-scale employees.
This is a false choice. It also presupposes that 20th century labor policies are the best model for governing a 21st century economy. Could it possibly be that a legal system designed for factory workers churning out Model Ts from 9-to-5 is the most effective regulatory structure for a Colorado-based Millennial who, in between ski runs, operates as a freelance graphic designer?
The better policy response—one that the R Street Institute has long championed—would be the establishment of a flexible benefit model for contractors and gig workers. Specifically, the preservation of independent contracting status—or the creation of a newly formulated “flexible worker” status—could be coupled with worker-controlled benefits exchanges, which would create portable and individualized benefit options for these workers.
Such a system could operate similarly to a Simplified Employee Pension plan, or SEP-IRA, in that it could combine employer contributions with the ability for workers to make their own pre-tax contributions. The funds could then be put toward things like paid sick leave, unemployment insurance, or even health insurance, which could be purchasable via worker-controlled benefits exchanges.
This approach would both allow for independent contractors and gig workers to maintain the flexibility that they prefer, while also ensuring that they have additional protections and benefits to navigate life’s contingencies.
While protecting independent workers is a laudable goal, the administration’s plan for doing so misses the mark. It flies in the face of what workers actually want and bypasses a better 21st century model for workers.
To read more about this topic—and the importance of flexibility generally in our modern economy— check out Jarrett’s recent essay, “A Flexible Worker Agenda,” in the Winter Edition of National Affairs.