The Biden administration’s new labor rule will likely increase costs for employers and restrict Americans’ freedom to choose when and where they work, experts told the Daily Caller News Foundation.
Through the new rule, which goes into effect on March 11, the Department of Labor is reclassifying many workers who were previously classified as independent contractors to company employees under the Fair Labor Standards Act (FLSA) of 1938, thereby entitling them to benefits like overtime pay and a minimum wage, according to the DOL. The rule will severely hamper the flexibility afforded by many freelancing positions and could push many current employees out of work entirely as regulators crack down on the gig economy, according to experts who spoke to the DCNF.
“The consequence is that it gives regulators new powers to micromanage businesses that rely on contract labor and the workers who choose to be ‘independent contractors’ — the latter just being a fancy term for ‘freelancer.'” Sean Higgins, a labor policy expert at the Competitive Enterprise Institute, told the DCNF. “It gives the regulators the power to say that freelancers are not in fact freelancers and can only be hired as regular employees. In which case, many simply will not get work at all because many employers — so-called ‘gig economy’ ones in particular — use a business model that doesn’t involve having large numbers of regular employees.”
The FLSA seeks to ensure that labor conditions are not “detrimental to the maintenance of the minimum standard of living necessary for health, efficiency, and general well-being of workers,” according to the DOL. Under federal law, employees are required to be paid minimum wage for all hours worked and one and a half times pay for time worked over 40 hours in a week, while independent contractors are not.
Under the new rule, workers will now be examined to determine whether they are “economically dependent” on their employer to decide whether they are employees or not, meaning workers who rely on their job with their employer but utilize the flexibility of freelancing would be forcibly ushered in as employees if not terminated, according to the DOL. The new guidelines depart from criteria established in January 2021 under the Trump administration that looked at five key factors to determine employment status, with the level of control over the work and the worker’s opportunity for profit or loss being the two most important.
Proponents of the rule believe that the change will curtail abuse from companies that utilize freelance labor to avoid paying workers for all hours worked or paying below minimum wage. Democratic Massachusetts Sen. Elizabeth Warren has called out popular companies such as Uber, Lyft and Amazon, which currently offer people the opportunity to pick up jobs whenever they are available, transporting goods or ridesharing, and getting paid by the job instead of at a set rate.
“There are cases where unscrupulous employers abuse the independent contractor designation as a way to get around having to comply with rules and regulations relating to having traditional employees,” Higgins told the DCNF. “So some of the more egregious examples of this might be curtailed.”
Retaining employees has been estimated to cost 30% more compared to an independent contractor model due to the benefits that are required to be given to workers, according to Reuters. Around 64 million people said that they did some form of freelance work in the past 12 months ending in December, totaling around 40% of the total U.S. labor force.
“In cases where former freelancers are declared to be employees, they’ll lose the flexibility they once had to work when they wanted and for as long as they wanted,” Higgins told the DCNF. “In many cases, it doesn’t make economic sense for an employer to hire somebody as a traditional employee if they don’t work a full week. The employer has to monitor and schedule the workers’ hours to comply with various federal regulations, like overtime and unemployment. The trade-off is that traditional employees get things like overtime. That’s assuming the employer wants to hire the worker in the first place and the worker wants a full-time job. Neither is necessarily the case.”
California previously tried to implement a similar rule in 2019 under Julie Su, California’s former labor secretary, who is now the acting secretary of the U.S. Labor Department. Following the rule’s implementation, many California businesses had to cut jobs previously held by independent contractors.
“We’ve seen policies like this play out before,” Republican California Rep. Kevin Kiley said in a joint release Tuesday with North Carolina Rep. Virginia Foxx, who is the chair of the House Committee on Education and the Workforce. “As California’s Secretary of Labor, Julie Su was the architect and chief enforcer of AB 5 which wiped out countless independent contractors. Su is bringing that same radical, destructive ideology to the national level. Plain and simple, this rule constitutes a war on the independent contractor model. Working Americans should have the flexibility to earn a living as they see fit, unburdened by the Biden administration and its anti-worker agenda.”
Voters rejected the rule change in California in a referendum called Proposition 22, with 58% voting to remove the rule and 42% voting to keep it. A California judge tossed out the referendum, saying it was in conflict with the state legislature’s power to create worker compensation laws, but that ruling was overturned by an appeals court in March.
“Over half of the millions of freelancers in the U.S. are women,” Patrice Onwuka, director of the Center for Economic Opportunity at Independent Women’s Forum, told the DCNF. “They overwhelmingly choose independent contracting over employment for flexibility to balance important priorities such as raising children and caring for aging parents or sick spouses with work.”
More Americans have been taking freelancing gigs in the past few years, with an additional 4 million people taking up jobs in 2023 compared to 2022, according to a survey from freelancing platform Upwork. In 2023, people completing freelancing jobs contributed around $1.27 trillion to the U.S. economy, compared to $715 billion in 2014.
“Older Americans who find it difficult to get hired because of their age and individuals with health problems and disabilities will all be affected by the loss of independent contractor status,” Onwuka told the DCNF. “A significant proportion of freelancers (46%) say they cannot work in a traditional job because of their unique situations.”
Workers in recent months have increasingly turned to part-time work to make ends meet, with the U.S. most recently losing around 1.5 million full-time workers. Conversely, the number of part-time positions increased by 762,000 month-to-month in December, with the number of people with multiple jobs rising by 222,000 in the same time frame.
“It’ll likely be a drag on the economy,” Higgins told the DCNF. “Freelancers will lose work because clients will fear that hiring them could get them in trouble with regulators. Some businesses will simply close down because they rely on contract labor as their economic model. Lots of people will lose their side hustles.”
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