Labor Department ignores the costs of its new rule for independent contractors

Last week, the Department of Labor (DOL) closed the public comment period for its new proposed rule to alter the definition of what it means to be an independent contractor in the era of the Uber and DoorDash driver. The rule, which received more than 55,000 public comments, limits the circumstances under which a worker can legally be classified as an independent contractor.

By doing so, the DOL is hoping that organizations will hire more workers as official employees instead. At first glance, it seems like a win for those who might be reclassified as employees and receive proper benefits and protections.

But there are reasons to doubt this will be the case. The DOL has a legal obligation to provide a “reasoned determination” of both the benefits and the costs, in its entirety, when proposing new regulations. With this new rule, the DOL has failed to provide the public with an analysis of the full costs.

Notably absent from its analysis is the real risk that the rule would not confer its intended benefits on many independent contractors — those who would neither become employees nor be able to maintain their jobs as contractors in the new landscape. The loss of contracting jobs could further harm workers who may already be suffering from hiring freezes and layoffs as we approach recession territory.

The DOL hides this cost consideration because it makes an implicit and unwarranted assumption that 100 percent of potential contracting jobs will be turned into employment jobs. I’m not aware of any research studies or anecdotal evidence to support this assumption.

In fact, the existing research, while limited, shows that not all contractors would be hired as employees. For example, a recent analysis estimates the impact of reclassifying ridesharing and delivery drivers as employees in Massachusetts. The report finds that reclassifying drivers “would result in a loss of at least 49,270 app-based [ridesharing] and [delivery] jobs in Massachusetts, which is equivalent to losing 58% of these earning opportunities in the state.”

Moreover, there is anecdotal evidence of job losses in response to California’s AB5, which also restricted independent contracting opportunities. Reports described job losses for the creative community of freelancers, such as professional choral artists, classical performers and singers, dancers, actors and musicians. Several other reports showed job losses for translators and interpreters, court transcript editors, writers and truck drivers. Due to this backlash, California later exempted these professions, and many others, from AB5.

One of the reasons for this outcome is that employees are much more expensive than contractors (up to 30 percent more). Owing to these substantial additional costs, organizations, especially small businesses, may not be able to hire all their contractors as employees. In fact, according to tax data, between 2000 and 2016, small firms (those with fewer than 20 employees) saw the greatest growth in the hiring of contractors compared with medium-sized or large firms.

But in addition to the direct costs, the DOL’s almost 200-page rule creates more complexity in determining whether a worker is indeed an independent contractor. Therefore, even if a worker is properly classified, the new rule may still deter organizations, especially small businesses that cannot afford extensive legal counsel, from working with contractors altogether. Indeed, for this reason, the Small Business Administration submitted a public comment requesting that the DOL issue a new analysis of the rule that would include proper cost considerations for small businesses.

Beyond overlooking job losses and costs for small businesses, the DOL did not consider the impact of its rule on workers who would prefer to be independent contractors. As the Bureau of Labor Statistics reports, 79 percent of full-time contractors prefer their arrangements over employment. Workers cite dependent care obligations, personal circumstances or a strong preference for job flexibility as their primary reasons.

In particular, restricting contracting opportunities would disadvantage many women who are primary caregivers and turn to independent work for job flexibility. Survey evidence shows that as many as 96 percent of women in these roles indicated that the primary benefit was flexible hours. The survey also found that one-quarter of the women had recently left employment voluntarily, a majority of whom wanted flexibility or needed more time to care for a child, parent or relative.

The DOL has an obligation to assess these negative consequences of the rule. When all things are considered, it may be the case that the costs of this rule outweigh the benefits. Instead of curtailing flexible job opportunities for workers, regulators and policymakers should look to help independent contractors by expanding their access to portable benefits. This would create a fairer system for all workers — both employees and independent contractors.

Removing legal barriers that prevent independent contractors from accessing benefits without having them be reclassified as employees is long overdue.

Liya Palagashvili is a senior research fellow with the Mercatus Center at George Mason University and author of the study “Analyzing the Department of Labor’s Rule on Restricting Independent Contractors” and co-author of the study “Women as Independent Workers in the Gig Economy.”