Trump Labor Department Pushes Quick-Boiling Independent Contractor Rule that the White House Has Left on Simmer

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by Erik Sherman

If 2020 has instituted a new astrological legacy — the Year of the Pandemic — it has a second identity. This is the year the independent contractor war fully broke out between unions and corporations, with government agencies taking sides and everyone risking big losses.

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The most recent development is an attempt by the Trump administration’s Department of Labor rulemakers to make it easier for companies to treat workers as independent contractors rather than employees. A try earlier this year resulted in a resounding court defeat for the DOL, setting the rules back to what they were. A second attempt is stuck in a review process even though the administration wanted to push the changes out fast enough to lock them in place before former Vice President Joseph R. Biden takes office.

But there was a November defeat, this time for unions in California that pushed last year for legislation to force Uber, Lyft and similar companies, as well as most businesses in the state, to treat contractors as regular employees. An industry-backed initiative petition with a large marketing budget overturned the apple cart.

Many workers who want to be contractors — some for child-rearing or other lifestyle choices and others because of the gig economy’s flexible structures — are caught in the crossfire, even as labor and business at state and national levels keep arguing over what is best for them.

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Independent cash

Corporations, often working with conservative lawmakers, have pushed to raise the ceiling on the number of people they can categorize as independent contractors. It’s all about adapting to the modern workplace, they say, giving people flexibility and letting workers chart their own courses. Independent contractors also cost employers less money. They don’t provide benefits or pay their half of workers’ Social Security, unemployment insurance, workers’ compensation insurance and more. Regular employees also trigger regulations and create reporting requirements.

Unions and Democratic officials, meanwhile, have claimed independent contractors are open to exploitation. Andrew Berns, chair of the employment law practice at New Jersey-based Einhorn, Barbarito, Frost & Botwinick, says there’s another incentive. “I’ve been doing employment law a long time and unions in my experience are interested in one thing — getting their members to pay dues,” said Berns, who represents both companies and independent contractors. He says governments have their own incentives for a move back toward regular employment because collecting taxes from them is easier.

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The fighting has become more bitter as companies strain to increase profits with a slowed economy and unions see their membership rolls shrinking every year as a percentage of working Americans.

Regulating status

The battleground is the Fair Labor Standards Act, originally drafted in 1938. It set out requirements like minimum wages and overtime pay, and instituted a prohibition on child labor.

But the FLSA defined an “employee” as “any individual employed by an employer.” It never mentioned independent contractors. An “employer” is “any person acting directly or indirectly in the interest of an employer in relation to an employee.” And “employ” means “to suffer or permit to work.”

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It’s a linguistic merry-go-round that leaves significant room for interpretation. Over the years, courts and administrative interpreters have established six factors intended to help determine whether a worker is an “employee” under the law:

  1. Whether the work is an integral part of what the business does.
  2. Whether a worker, through managerial skill, can affect his or her chance for profit or loss.
  3. The degree of relative investments made by the employer and worker.
  4. Whether the work requires special skills and initiative.
  5. The degree of permanence in the employer–worker relationship.
  6. The amount of control the employer exerts over the worker.

The room for interpretation has led to major conflict as both sides have tried to strengthen their positions.

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Unions try to outlaw contractors

Unions pushed at the end of 2019 to make it next to impossible for most companies to work with independent contractors, including people unfairly pushed into the role and people running their own businesses. California’s AB 5 came first, introduced and pushed by state assemblywoman Lorena Gonzalez, who made her union connections clear with a May 30, 2019 post on Twitter: “Dude. I am a Teamster. I ran for office as an organizer and labor leader. I believe in unions to my core. Stand in solidarity with workers every single day. Bought & paid for? No… I am the union.”

The bill forced California companies to discard the federal law’s six-part test independent contractor status and to ignore the more complicated IRS test. Instead, as the California Department of Industrial Relations explained, something called the “ABC” test replaced them. Californians could be considered independent contractors only if:

  1. The worker is free from the control and direction of the hiring entity in connection with the performance of the work, both under the contract for the performance of the work.
  2. The worker performs work that is outside the usual course of the hiring entity’s business.
  3. The worker is customarily engaged in an independently established trade, occupation, or business of the same nature as that involved in the work performed.

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The second point was the killer for many contractors. If there were any way to claim the work was part of a usual course of a company’s business, it couldn’t risk using an outsider. Yet companies didn’t hire massive numbers of new employees to do that work, an outcome AB5 was designed to generate.

An ever-growing list of special exceptions, like actors and tattoo artists, rendered AB5 a piece of legislation “that make no sense,” according to Natalma M. McKnew, a partner at the law firm Fox Rothschild. The application for an exemption was a form with “a union label on the bottom” that implied union control. For franchised businesses, McKnew’s area of expertise, the result was “a mess.”

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“AB5 says the franchisor is the employer of everybody down the system,” McKnew said, including the employees of the franchisees, which are generally small businesses.

Legislatures in other states teed up similar measures almost immediately. New Jersey lawmakers proposed an expedited bill but lost to a nimble campaign largely organized by independent contractors themselves. State senate president Stephen Sweeney, also 1st vice president of the Iron Workers AFL-CIO, pushed the hardest. The legislative job paid him $65,334 in 2019, while his total compensation from the union that year was $238,691, according to records filed with the state of New Jersey and the U.S. Department of Labor.

There have been efforts in Congress, which Biden has supported, to implement the ABC standard on a national basis.

Big business makes its own push

Unions weren’t alone in their attempt to control outcomes. AB5 took effect January 1, 2020, but an initiative petition campaign, Proposition 22, successfully exempted rideshare and delivery drivers, who major targets in the first place. Reverting to the original AB5 will be next to impossible; the legislation requires a seven-eighths legislative supermajority for any change.

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It didn’t come cheap. The campaign to gain exemptions spent an estimated $203 million on the project, ten times as much as those trying to defeat the measure. Four companies — Uber, Lyft, DoorDash, InstaCart, and Postmates — put up 95% of the total, or $192.8 million.

The Department of Labor is currently under the control of Eugene Scalia, son of the late Supreme Court Justice Antonin Scalia and a lawyer who made his reputation fighting regulations on behalf of corporations. The Wall Street Journal called him one of Wall Street’s “go-to guys for challenging financial regulations.”

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Scalia has worked to limit or overturn regulations intended to protect workers’ rights, like his June 2000 argument against Occupational Health and Safety Administration rules about ergonomics and carpal tunnel injuries. The former lobbyist’s public financial disclosure report during his nomination fight included dozens of large corporate and trade association clients. Scalia did pledge during his confirmation hearing to enforce federal labor laws, and said he would gain written waivers to make decisions that would affect former clients.

Any shift in the DOL’s rules that make it easier to green-light independent contractors would affect all large corporations. The agency tried to expedite a change this year, with relatively little time for review by a subagency of the White House’s Office of Management and Budget called the Office of Information and Regulatory Affairs (OIRA) — which provides feedback on proposed regulations.

When the DOL started using its new approach, 17 states and the District of Columbia sued. The court eviscerated the DOL’s work.

“The Court said, ‘You did it all wrong,’” McKnew said. “It was both procedural and substantive. The absence of sufficient review by the OIRA gave rise to a lot of both,” she added, pointing in part to reduced OIRA staffing while the administration pushed to get the rule out.

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Trying again

A new attempt to create a rule in the second half of 2020 has hit the shoals. The DOL provided only 30 days of public review — 60 days, at least, is common. Reception was mixed.

“The pervasive trend of employers misclassifying their employees as independent contractors has had severe consequences for workers and our economy,” said Rep. Bobby C. Scott (D-Va.), chair of the House Committee on Education and Labor, in a statement to Zenger News. “The Department’s proposal would leave workers even more vulnerable to misclassification by upending longstanding guidance on who is considered an employee under the Fair Labor Standards Act.”

Many approved the change, however. American Trucking Association EVP for Advocacy Bill Sullivan said in a statement to Zenger that his organization “supports the entrepreneurial opportunities of independent owner operators in trucking and appreciates the Department’s efforts to provide a clear definition of independent contractor for the benefit of everyone. Equally important to supporting these hard-working men and women in their independent businesses are the Department’s efforts to open more opportunities for affordable quality health insurance and retirement accounts.”

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Some who support the new rule have criticized its wording. The R Street Institute, a free-market think tank, said the form of independent work on marketplace platforms is significantly different from self-employment of the past. “[T]he language of the FLSA as currently written and interpreted by this rulemaking may not fit the actual needs of these workers or those who provide work to them,” it said in a regulatory filing.

The Society for Human Resource Management wrote that while it “supports” the new approach, its open to too much interpretation and uncertainty.

The rule had gone back to OIRA, which didn’t show the regulation in its queue for review until Dec. 21. Other DOL rules vying for oxygen include one dating to July 2020. A quick turnaround seems unlikely.

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The aftermath

If the DOL pushes the rule through before January 20 and sets it to take effect within 30 days, its future would depend in part on Georgia’s U.S. Senate runoff elections. A pair of wins could give Democrats a 50-50 split in the upper chamber of Congress, with ties broken by incoming vice president Kamala D. Harris breaking ties. In concert with a Democratic-run House of Representatives, they could invalidate the rule. 

Even with a Republican Senate majority, the DOL in a Biden administration could reconsider and replace the rule, although that would take longer. And there’s always a chance of more lawsuits.

“You can bet the state attorneys general that sued in the Scalia case will do that again and Biden will undertake a process of new regulation,” McKnew said.

The political tennis match will give workers whiplash. Some companies want to treat genuine employees as contractors. Some workers are happy as contractors running their own businesses even though unions want them to be someone else’;s employees. This either-or framing leaves many contractors in limbo, according to freelance writer and editor Kim Kavin, who has been active in promoting independent contractor interests.

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“The biggest lesson we have learned this past year is no one is actually listening to those of use earning our living as independent contractors,” said Kavin. “You have the Democrats lined up with the unions and the Republicans on the side of the corporations.” 

Some analysts say a double-digit percentage of the workforce is acting as independent contractors, whether full-time for their complete income or on the side to supplement their pay. Unless both sides of the battle can figure out an equitable solution, that’s a lot of voters who could become irate in time for the next election cycle.