Two weeks ago, the U.S. Department of Labor published a new rule to distinguish between employees and independent contractors. It also published more than 300 pages of “guidance” to explain what the rule does.
Despite (or maybe because of) such voluminous guidance, the rule has caused widespread confusion. Some have wondered how it will affect access to benefits or the right to join a union. Others have asked how the rule affects state laws, such as California’s now infamous AB 5.
A few have even suggested that the new rule preempts state laws and requires businesses to reclassify all their contractors as employees.
The answer is that it’s complicated. Rather than create a new, uniform standard for classifying workers, the rule adds just another layer to the existing web of overlapping classification tests. This snarl has grown so complex that even practicing lawyers find it impossible to untangle. The rule, then, only highlights how badly we need a real national solution.
On its face, the rule has only one purpose: to distinguish between contractors and employees under the Fair Labor Standards Act. To do that, it uses a six-part test that is highly confusing, because none of the factors dictates the result by itself.
Instead, businesses have to look at all the factors, “weigh” them against one another, and make a judgment call. As if that weren’t confusing enough, the factors are all relative. They employ words such as “integral” and “highly skilled” which mean nothing without a concrete comparison. Even worse, the rule also throws in a seventh “catch-all” factor to sweep any anything else that might be relevant in a given case.
This structure would be complex enough on its own. But rule also bounces up against half-a-dozen existing federal tests. Those tests dictate a worker’s status for things such as unionization, antidiscrimination, taxes, and benefits. These other tests also “weigh” multiple factors, all of which are different. So in theory, a worker could be an employee under one federal law but a contractor under another.
The situation gets even more tangled in the states. Every state in the country has its own classification tests. And even within a single state, the tests differ from statute to statute. A state might use an eleven-part “economic realities” test for wage-and-hour laws, a three-part “ABC” test for unemployment laws, and an open-ended “common law” test for workers’ compensation laws. None of these tests match up perfectly, and most of them differ from their federal counterparts. So when workers, businesses, and even regulators try to figure out the proper classification, they are often at a loss.
This confusion has serious consequences. Worker classification affects not only minimum wages and overtime, but also fringe benefits, taxes, insurance, liability for injuries, and union organizing. It can even implicate antitrust law. So if a business classifies a worker incorrectly, it can face serious legal penalties. And those penalties aren’t just monetary: some states have even made misclassification a crime.
And make no mistake, this isn’t only a problem for companies; it’s a problem for workers too. Look no further than what has happened in California. In 2020, the state changed its classification rules to crack down on supposed misclassification. The state’s goal was to shift workers out of independent contracting and into employment. But not only did contracting dry up, so did employment. A new study shows that more than ten percent of contractors and four percent of employees in the affected professions simply lost their jobs. Businesses were so afraid of the new classification rules that they cut opportunities across the board.
The result is a mess that cries out for a national solution. We need a single, uniform standard for classifying workers. Workers and businesses need to know how to arrange their affairs. If they want to be employers and employees, they should know how to do that. And if they want to be independent contractors, they should know how to do that, too.
The standard should be clear, objective, and definitive. It should let businesses and workers choose their own paths. Just as important, it should help them feel confident that their choice will apply everywhere and for all purposes.
Unfortunately what the Department of Labor is offering is neither uniform nor clear. It is merely layering one more confusing, multi-factor test on top of an already tangled pile of them. It is time to sweep that pile away and replace it with a workable standard. The department hasn’t done that, but we can still hope that a new administration will.
Tammy McCutchen served as administrator of the Labor Department’s Wage and Hour Division under President George W. Bush. Alex MacDonald is a shareholder with Littler Mendelson’s Workplace Policy Institute.
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