Last month, the Department of Labor (DOL) abruptly proposed removing a new rule that would specify which workers are “independent contractors”. A brief review shows that his rationale for backtracking is disappointing at best, revealing a lack of in-depth analysis of the economic impact and a left versus right power struggle.
Sadly, millions of workers and employers who need this clarity are caught in the middle.
Rule, finalized in January, updated the “economic realities” test that determines whether workers are independent contractors or employees. The difference matters. Many labor regulations (such as minimum wages and overtime) and government programs (such as unemployment insurance and workers’ compensation) that increase the cost of employment generally only apply to employees.
Unfortunately, the classification of workers has been murky since the passage of the Fair Labor Standards Act (FLSA) in 1938. The legislation is intentionally vague in order to ensure that most workers are considered default employees. Its amorphous nature was supposed to prevent employers from finding economic loopholes that could allow them to classify workers as subcontractors.
But the ambiguity unintentionally facilitated the incorrect classification of workers as unscrupulous companies. Employers generally control the classification of the jobs they create, and most workers have a limited ability to challenge it due to legal, monetary and bureaucratic costs. Unless a misclassification has caused glaring harm, the easiest solution for most workers is to simply find another job, leaving the same problem trapping another worker.
Additionally, ambiguity can be a concern for employers who use independent contractors. At any time, their business model could be called into question. The only thing between them and the prohibitive fines (and back pay and regulatory fees) is a judge’s interpretation of intentionally non-specific DOL regulations.
The clarity provided by the revised independent contractor rule was a welcome respite. Rather than making revolutionary changes, he reexamined the employment factors used by previous regulations and case law. Two fundamental factors – the “control of the worker over his work” and “the desirability of making a profit or a loss” – were considered to be the main determinants of whether someone is in business for himself, and therefore an entrepreneur.
The other factors – “the permanence of the employment relationship”, “the competence required for the job” and “the integration of the worker’s effort into the production process” – were considered secondary, although they may override the essential factors if they strongly point to another classification. This is consistent with previous regulations and precedents, which required that all the circumstances of the job be taken into account.
This limits the ability of unscrupulous employers to force their workers into unfair labor relations, and it limits the legal costs caused by prior ambiguity. But now the DOL has offered to revoke the reform.
In changing direction, the DOL cited only four external economic studies, which are did not apply to question or were fundamentally flawed. He also argues that the reform cannot be implemented due to legal and regulatory precedents. However, the primary responsibility of the DOL is to create and revise the regulations that the courts interpret (in particular, the DOL seems to have completely forgotten the Chevron doctrine), so their argument is backwards.
Finally, the DOL proposal broadly adopted a limited and inaccurate study published by the Institute for Economic Policy (PEV). This suggests that it did not exercise the strictest due diligence in carrying out its own economic impact analysis. I reanalyzed The EPI study with my colleague Liya Palagashvili, using widely accepted findings from labor economics research. We found that removing the new rule would cost workers and employers billions of dollars every year.
In particular, the DOL ignored three empirical facts:
First, workers are in the majority regulations on the cost of employment and benefit from wage increases when these costs are relaxed (as they would under the revised independent contractor rule).
Second, employers respond increases in salary costs by reducing their workforce. When labor costs fall, an expanding demand for labor creates new jobs.
Third, the the average worker values flexibility, and recent studies suggest a willingness to trade at least 10 percent of the salary for better control of their work.
To support this case, research also reveals that workers who choose self-employment arrangements themselves value flexibility much more, so that choose to be unemployed rather than working where they cannot control their own hours or place of work.
Ultimately, it makes political sense that a proudly union-friendly administration to kill this rule. Under current regulations, unions cannot organize independent contractors. But instead of cramming all possible workers into the “employee” classification, political leaders should create ways that allow the self-employed to benefit from the organization of work.
The DOL’s ineffective attempt to withdraw a sane rule damages its reputation. The Biden administration would be better served by helping unions adjust for the future, rather than trying to bring the labor market back to the 1950s.
Michael farren is a researcher at the Mercatus Center at George Mason University and co-author of a new public interest comment, “Assessment of the Ministry of Labor’s Withdrawal of the Independent Contractor Rule”.