With only four weeks to go before the midterms, the Department of Labor on Tuesday proposed new guidelines that happen to align with what union labor activists have long demanded. Proponents of the new rule, which would impose on businesses stricter definitions of what constitutes an employee, would extend needed benefits and protections to contract labor. Critics insist that the practical effect will be to throttle the sharing economy into submission. They’re both right, but, on balance, the losers from this rule will far outnumber its winners. The Biden administration is surely betting that new enthusiasm among Democratic activists will overcome the irritation this rule will inspire in everyone else.
The Labor Department’s new policy, should it go into effect, applies a test to determine whether firms’ contract laborers are, in fact, employees. The test would replace a Trump-era rule that evaluated a worker’s “core factors” and restore an Obama-era “totality-of-the-circumstances analysis” to gauge whether a laborer is economically dependent upon the firm they’re contracting with. It would stop comparing workers’ investments in their livelihoods in real terms with their employers. Instead, it would determine whether the costs a worker sinks into their craft are capital investments or entrepreneurial. It will gauge how much direct oversight an individual contractor has over their own schedule and pricing. Most crucially, employment status will again be a function of how “integral” a contractor’s contribution is.
The losers from this rule will far outnumber its winners.
Because the guidelines lack any congressional buy-in, the Labor Department insists the test only applies to existing laws that are already on the books, like federal minimum wage statutes. “But,” as The New York Times reports, “many employers and regulators in other jurisdictions are likely to consider the department’s interpretation when making decisions about worker classification, and many judges are likely to use it as a guide.”
As the Times's Noam Scheiber observes, that’s no accident: The rules are a direct threat to “gig companies and other service providers” who rely on contract labor. The Labor Department’s new rule is akin to what the Biden administration and its allies in Congress tried (and failed) to pass into law with the Protect the Right to Organize (PRO) Act. Where Congress fails to act, it seems, an activist executive and judiciary will do in a pinch.
But that connection to the PRO Act should make the White House and labor activists nervous. After all, the new rules are likely to impose new costs on companies that depend upon contract labor — costs that will be passed on to you, the consumer. The “PRO Act” was modeled after a 2019 California law, AB5, which was supposed to remedy the supposed indignities endured by participants in the so-called “gig economy.” It was hailed as a “victory for workers,” but the workers themselves didn’t seem to appreciate the reform much.
The law’s practical effect was to make freelance labor impractical. Overnight, independent writers, graphic designers, photographers, journalists and content producers found themselves unemployable. Local papers had to contract out of state to get the scoop on what was happening just next door. Music festivals ceased operations and performing arts groups went on hiatus. But it was the law’s attack on the popular ride-sharing services Uber and Lyft that proved a bridge too far. In 2020, a ballot measure defining “app-based transportation” drivers as independent contractors passed by nearly 3 million votes. California lawmakers repealed AB5 not long thereafter.
Consumers aren’t the only Americans satisfied with the “gig economy.” According to a December 2021 Pew Research Center survey, nearly 80% of current or one-time gig workers say their experience was a positive one. That is true “regardless of age, gender, racial and ethnic background or household income,” Pew added. And when they’re asked why they took on gig work in the first place, majorities say it was to “save up extra money” or “cover gaps, changes in income.” Still others cite the autonomy gig work provides them, or even just doing something “fun” in their spare time. Only 28% say they chose gig labor in lieu of more traditional employment opportunities.
The scale of the administration’s gamble is even more apparent after the reaction to this move from the affected industries. “It’s becoming increasingly difficult for independent contractors in trucking to remain as such,” said Matt Schrap, CEO of a West Coast-based firm that represents drayage drivers. “It’s unfortunate, because it’s taking away these entrepreneurial opportunities for people.” The National Retail Federation isn’t thrilled either. “The changes being proposed by the Labor Department will significantly increase costs for businesses across all industries and further drive already rampant inflation,” said a representative for the organization.
According to a December 2021 Pew Research Center survey, nearly 80 percent of current or one-time gig workers say their experience was a positive one.
As for ride-sharing firms and popular delivery services like Instacart and DoorDash, their spokespeople are doing their best to calm investors. But those investors are unconvinced, with the companies’ stock prices plummeting. As Wedbush Securities analyst Dan Ives told Barron's, the new rule is “a clear blow to the gig economy” that will “throw the business model upside down and cause some major structural changes if it holds.”
In sum, if you never use a ride-sharing service, order delivery, purchase everything in bulk via wholesalers, and avoid patronizing any firm that relies on over-the-road trucking for its inventory, you should be fine. Everyone else? Not so much.
The Department of Labor has chosen to emphasize the benefits that will be enjoyed by workers in fields like at-home health care, janitorial services and construction. “We have seen in many cases that employers misclassify their employees as independent contractors, particularly among our nation’s most vulnerable workers,” says Labor Secretary Marty Walsh. That’s doubtlessly true, but it’s also misdirection. This rule is targeting the whole sharing economy. And if it goes into effect later next month, the daily conveniences you take for granted are going to get a lot more expensive.
But by then, you’ll have to wait another two years to register your dissatisfaction.
