Labor Department moves to change independent contractor classification rule

The Biden administration has issued a highly anticipated proposal on how it will approach independent contractor status under federal wage law, its second attempt to undo a Trump-era standard that it says leaves workers vulnerable to misclassification.

The proposal, released Tuesday by the US Labor Department, clarifies when workers should be classified as independent contractors who are in business for themselves, or employees who are afforded the full minimum wage, overtime, and other protections provided under the Fair Labor Standards Act.

Gig companies such as Uber Technologies Inc. and Lyft Inc., and construction, trucking, and other industries that use independent contractors to staff their fleets were watching closely for the rule. Shares of Uber and Lyft tumbled Tuesday after the DOL announced the proposal.

The acting head of the DOL’s Wage and Hour Division said Tuesday the rulemaking wasn’t likely to result in large worker classification changes.

“What we anticipate is that this will really help provide guidance to both avoid and prevent misclassification,” Jessica Looman said during a press call. “But this is a framework that has been used and has been well recognized and understood.”

When determining a worker’s status, the Biden administration will use a multi-factor economic realities test that considers various factors of the working relationship to determine whether the worker is truly in business for themselves. The proposed changes would be a return to a “ totality-of-the circumstances” analysis, according to the proposal, that would consider all of the factors involved in the working relationship equally.

The rulemaking also would rescind a Trump-era rule that outlined a similar multi-factor test, but that gave greater weight to how much control workers have over their job duties and their opportunities for profit or loss when determining whether a worker is an employee or an independent contractor.

Biden DOL officials said the simplified Trump independent contractor test is inconsistent with federal court decisions, and would result in more workers being misclassified as independent contractors when they should be employees.

This is the second time the DOL has tried to rescind the IC rule promulgated by the Trump administration, which made it easier for businesses to classify workers as independent contractors.

The Trump standard was reinstated after a federal court in Texas ruled in March that the DOL failed to consider meaningful policy alternatives before revoking the rule.

In response, the Biden administration began a rulemaking process again this summer, which it said was necessary to combat misclassification.

The proposed rule will be officially published in the Federal Register on Oct. 13. The public will have 45 days to comment.