New Labor rule will harm freelance work under the guise of helping workers

The complexity and ambiguity of the new rule may lead to inconsistent worker status determinations.

The January 2024 Final Rule issued by the Department of Labor took effect last week. It signifies a pivotal shift in the classification of independent contractors under the Fair Labor Standards Act.

Echoing California's controversial Assembly Bill 5, which has been disastrous for businesses in the state, this federal legislative change is set to transform the landscape of the gig economy across the nation, aiming to address supposed concerns regarding worker exploitation and misclassification. This move is part of a broader trend toward supposedly enhancing worker protections, a response to the evolving challenges faced by today’s labor force.

The catalyst for this significant shift was the Dynamex decision, which eventually led to the enactment of Assembly Bill 5 in California. This legislation introduced the onerous, almost impossible-to-meet “ABC” test, fundamentally altering the interaction between businesses and their freelance or contractual workforce.

Small businesses, in particular, have felt the brunt of these changes, grappling with the increased costs and administrative demands of transitioning independent contractors to employee status. Some businesses have even had to pay penalties as a result. According to a survey by the National Federation of Independent Business, nearly 30 percent of small businesses anticipated a negative impact on their operations due to AB 5, underscoring the widespread apprehension surrounding this legislative shift.

At the heart of the federal realignment is Julie Su, the current Secretary of Labor who had been a staunch proponent of Assembly Bill 5. Her advocacy for expanding employee protections reflects an agenda of tackling what she sees as systemic issues within the labor market, such declining union membership and arguably inequitable tax practices. Supporters of the new rule argue that classifying more workers as employees will ensure access to essential benefits such as healthcare, minimum wage, and the opportunity for unionization.

However, the transition from the "economic realities" framework to a much more detailed "totality-of-the-circumstances" approach has sparked debate. Many California businesses still have yet to fully embrace it. The new methodology requires an analysis of such factors such as managerial skill, investment, and the relationship’s nature. This could significantly complicate compliance efforts.

The complexity and ambiguity of this approach may lead to inconsistent worker status determinations, affecting not only gig workers, but also professionals such as doctors, lawyers, and engineers who traditionally operate independently.

The implications of this regulatory change extend beyond legal classifications, touching on the very fabric of the American workforce and its future. Critics rightly express concern over the potential stifling of entrepreneurial spirit and the restriction of flexible work opportunities much beloved by the American worker.

The gig economy, valued at an estimated $347 billion according to a report from Mastercard, has become an integral part of the economic landscape, offering flexibility and supplemental income to millions. The introduction of stringent reclassification criteria threatens to undermine these benefits and advances, potentially altering the dynamics of labor and employment for a significant segment of the population.

Moreover, the shift raises questions about the future of small businesses and individual workers who thrive on the independence and versatility that freelance work provides. The potential for reduced entrepreneurial opportunities and the challenge of generating supplemental income are critical issues that merit attention in the context of these regulatory changes.

A study by the Pew Research Center found that 16 percent of Americans have earned money through an online gig platform, highlighting the widespread impact of potential changes to independent contractor classifications.

The new rule at Labor is a clear indication of the emergence of a California-style regulatory overhaul of the workforce in the name of enhanced worker protections. However, this abrupt transition on a national level will stifle ongoing dialogue and suppress thoughtful consideration of the varied needs and realities of the workforce. Balancing protection with flexibility remains a critical challenge, as policymakers and stakeholders navigate the complexities of modern employment. The department’s rule is likely too much, too soon.

In crafting solutions, it is crucial to maintain a focus on protecting vulnerable workers while also supporting innovation and maintaining the flexibility that has become a hallmark of the American economy. Collaborative efforts between businesses, labor organizations, and policymakers can pave the way for regulations that uphold fair labor standards without shutting down economic growth and individual autonomy.

The conversation about labor classification and worker rights is far from over; it is an ongoing dialogue that requires attention, empathy, and innovation. The goal should be to craft a labor market that reflects the dignity of work, supports economic advancement, and adapts to the evolving landscape of employment in the 21st century. As we move forward, we must strive for a balanced approach that honors both the spirit of entrepreneurship and the fundamental rights of the American worker. To do otherwise, would just be politics as usual.

John-Paul S. Deol is a partner and leader of the nationwide Employment Law Practice Group at Dhillon Law Group.