Biden rule threatens to throw independent contracting into disarray

On March 11, just four days after President Biden gives his annual state of the union address, the state of independent contracting in America will get a major downgrade.

That’s because a new rule from the Biden administration’s Department of Labor will take effect, completely redefining who qualifies as an independent contractor as opposed to an employee under the Fair Labor and Standards Act. The change could harm tens of millions of small businesses and the 64 million Americans they rely on for independent contracting work. It might even put the federal government’s own relationship with some of its estimated 5 million federal contractors in jeopardy.

This week, Sen. Bill Cassidy (R-La.) and Rep. Kevin Kiley (R-Calif.) are introducing a resolution under the Congressional Review Act — a tool Congress can use to overturn certain agency actions — to try to put a stop to the change.

The new rule overturns a 2021 rule that provided significant clarity to the distinction between independent contractors and employees. Under the 2021 rule, employers can usually determine whether a worker is an employee or independent contractor based on just two factors: the individual’s control over his or her work, and the individual’s opportunity for profit or loss.

Under the new rule, employers will have to evaluate a worker’s status based on six additional expansive factors. For example, non-exercised control — meaning just the possibility that one could exercise control over the individual — is added to the “control” factor. “Initiative” is added to the skills factor. Moreover, the rule eliminates the “core” factors and says that no single factor or subset of factors can be elevated above others, stating instead that “the weight to give each factor may depend on the facts and circumstances of the particular case.” Finally, the new rule specifies that the factors are “non-exhaustive,” and thus any number of other, unspecified factors may be relevant.

In short, this is a recipe for ambiguity and confusion.

The rule’s definition literally enables billions of different ways to reach either of the two outcomes. Even reasonable judges will inevitably come to different decisions because the definition is being made deliberately amorphous and subjective. For employers, it will be nearly impossible to know if they are making the right determination. This matters because, under the FLSA, workers who are classified as employees (as opposed to independent contractors) are covered by minimum wage and overtime laws. Moreover, employers must withhold taxes from employees’ paychecks, and they may be required to provide employees with health insurance and other benefits.

The resulting increase in costs and loss of flexibility are some of the reasons employers and independent contractors lodged tens of thousands of comments in opposition to the rule, explaining how it would disrupt or destroy their businesses and livelihoods.

Their fears aren’t hypothetical. California today provides living proof of the new rule’s consequences. The Golden state passed a similar law to this rule in 2019. Even though the law now has over 100 exemptions, researchers found that it led to a 10.5 percent drop in self-employment. Despite the law’s goal of converting people from contractors to employees, total employment in the state fell by 4.4 percent.

It’s not unusual for federal regulations to seem impervious to the consequences they impose on American businesses and workers, because the federal government is often exempt from its own regulations. But not this time. Unlike other recent labor rules, the federal government is generally not exempt from this rule. And with a ratio of roughly 2.5 federal contractors for every federal employee, this change in the definition of an independent contractor could cause significant upheaval.

Often, federal contractors are employees of companies that are contracting with the federal government, and thus are already treated as employees under the FLSA. But there are also many cases whereby the federal government contracts directly with individuals.

For example, the U.S. Postal Service uses 7,900 contracted delivery services to reach about 3 million of its delivery points. The plainclothes carrier who delivers mail via her personal vehicle to my home in Shenandoah, Va., is presumably one of these contract drivers.

Under the Biden administration’s new rule, she and potentially thousands of individuals like her would almost certainly be considered employees. That is because the work these contractors perform is “integral” to the Postal Service; the Postal Service exercises a high degree of direct and indirect control over these individuals by mandating where and when the work must be done, and the delivery contractors are not exercising significant “skill” or “initiative.”

Converting potentially thousands of Postal Service carriers into employees — not to mention an unknown number of other federal contractors — would be incredibly expensive. As the Postal Service’s Office of the Inspector General explains, “The Postal Service uses [contracted delivery services], in part, to reduce labor costs related to delivery services as wage-earning contractors cost less to employ than wage- and benefits-earning employees.”  The combination of added taxes, benefits, and federal employee premiums could increase costs by 50 percent, or more than $200 million per year, for the Postal Service alone.

While it remains unclear how many of the roughly 5 million individuals who provide contracting services for the federal government could be considered employees under the new independent contractor rule, it is clear that the figure is not zero. Yet the Labor Department’s has failed to include any mention of a potential increase in federal employment costs. My Heritage Foundation colleague David Burton and I raised this concern in a comment we submitted on the proposed rule, but the department failed to acknowledge that concern or to include increased federal employment cost estimates.

This rule could therefore subject the federal government itself to thousands of misclassification lawsuits, forcing taxpayers to pick up the tab for back pay and taxes. Federal contractors could lose their jobs. Agencies could experience major disruptions. National security could be impaired, and taxpayers could be on the hook for converting an unknown number of contractors into federal employees.

Biden is unlikely to mention independent contracting in his state of the union address, but he should. For on March 11, when this rule takes effect, the livelihoods of millions of workers could be thrown into a state of disarray, along with the small businesses and federal agencies that rely on them.

Rachel Greszler is a senior research fellow at the Heritage Foundation’s Thomas A. Roe Institute.