The Biden administration has unveiled a proposed rule that could raise costs for trucking companies and gig transportation, such as Uber and Lyft, that rely on independent contractors.
The 184-page proposed rule, revealed by the U.S. Department of Labor’s Wage and Hour Division (WHD) on Tuesday, reinstates guidance similar to that used under the Obama administration that is considered less favorable to classifying workers as independent contractors.
“Through our enforcement in the wage and hour division, we know that misclassification is occurring in many industries and sectors,” said Principal Deputy Administrator of WHD Jessica Looman during a media briefing Tuesday. “We believe the proposed regulation would better protect workers from misclassification, while at the same time providing a consistent approach for those businesses that engage or wish to engage with independent business contractors.”
In early 2021, just before the Biden administration came into office, the Trump administration published its own independent contractor status that is considered far more favorable to establishing that a worker can be independent.
After Biden’s DOL promptly withdrew that guidance, a federal court ordered that the Trump rule be put back into place, saying that the Biden administration did not follow proper procedure in withdrawing it.
Turning back the clock on contractor status
The DOL’s new proposal would modify WHD regulations to revise its analysis for determining employee or independent contractor classification under the Fair Labor Standards Act (FLSA) “to be more consistent with judicial precedent and the act’s text and purpose.”
The Department of Labor proposes:
- Not using “core factors” and instead returning to a totality-of-the-circumstances analysis of the economic reality test that has a refined focus on whether each factor shows the worker is economically dependent upon the employer for work versus being in business for themself, does not use predetermined weighting of factors and considers the factors comprehensively instead of as discrete and unrelated.
- Returning the consideration of investment to a stand-alone factor, focusing on whether the worker’s investment is capital or entrepreneurial in nature, and considering the worker’s investments on a relative basis with the employer’s investment.
- Providing additional analysis of the control factor, including detailed discussions of how scheduling, supervision, price setting and the ability to work for others should be considered when analyzing the degree of control over a worker, and not limiting control to that which is actually exerted.
- Returning to the long-standing departmental interpretation of the integral factor, which considers whether the work is integral to the employer’s business rather than whether it is exclusively part of an “integrated unit of production.”
No ABC test
DOL states in the proposed rule that it had considered codifying an ABC test to determine independent contractor status under the FLSA similar to the ABC test adopted under California’s new state wage and hour law, known as AB5. The law makes it difficult, if not impossible, for trucking companies in that state to use independent contractors.
“However, the department believes it is legally constrained from adopting an ABC test because the Supreme Court has held that the economic reality test is the applicable standard for determining workers’ classification under the FLSA as an employee or independent contractor,” the proposed rule states.
“Because the ABC test is inconsistent with Supreme Court precedent interpreting the FLSA, the department believes that it could only implement an ABC test if the Supreme Court revisits its precedent or if Congress passes legislation that alters the applicable analysis under the FLSA.”
Boosting costs
Still, the change in policy could place a heavier burden on trucking companies that rely on an independent contractor model to show that their drivers are in fact independent workers and not employees — an adjustment that would boost operational costs.
As it relates to trucking, Looman said during the briefing that the new guidance “will be very fact-specific depending on the nature of the trucker’s relationship in terms of whether or not they are properly classified as an independent contractor or an employee.”
Nick Geale, vice president of workforce policy at American Trucking Associations, said his group “is reviewing the new proposed rule and looks forward to providing feedback to the department, but we are disappointed this proposal seeks to undo the current rule which has brought needed clarity to the issue of independent contractor status.”
Ride sharing companies like Uber (NYSE: UBER) and Lyft (NASDAQ: LYFT), which also rely heavily on independent contractors, could also see costs rise if forced to shift their operating structure.
“Broadly speaking, I think the concern is that additional costs to companies like Uber and Lyft ultimately lead to higher prices for consumers, which will drive demand down for these services and ultimately reduce the need for as many workers,” Matt Spoke, CEO of Moves Financial, which handles payments for gig-economy companies, told FreightWaves.
The National Retail Federation (NRF) quickly underscored its opposition as well. “The changes being proposed by the Labor Department will significantly increase costs for businesses across all industries and further drive already rampant inflation,” said NRF Senior Vice President of Government Relations David French in statement on Tuesday.
“NRF staunchly opposes a change in this important area of law, which is both unwarranted and unnecessary. This decision will only foster massive confusion, endless litigation, reduced innovation and fewer opportunities for employees and independent contractors alike.”
The public will have 45 days to comment on the rule after it is published in the Federal Register on Thursday.
