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Labor Dept. Ramming Through Rule That Could Cost Workers $3.7 Billion

October 27, 2020

By Steve Wishnia

App-based companies such as Uber, Lyft, and DoorDash argue that their workers are independent businesspeople utilizing their app to find customers, not employees of their taxi or food-delivery services.

WASHINGTON—A proposed rule the federal Department of Labor is trying to push through before the next Congress takes office would cost American workers at least $3.7 billion a year, the Economic Policy Institute estimated Oct. 26.

The proposed rule, announced Sept. 22, would widen when workers can be considered an independent contractor instead of an employee. The period for public comments on it, which the Labor Department limited to an unusually short 30 days, closed Oct. 26.

In comments submitted just before the deadline, EPI policy director Heidi Shierholz estimated that if an additional 530,000 full-time workers who make about $13 an hour were classified as independent contractors under the rule, it would reduce the value of their jobs by almost $7,000 a year: They would not be paid overtime, get paid vacation or sick days, or receive health or pension benefits. They would have to pay their own Social Security and Medicare taxes, and spend more time and money on tax preparation and paperwork.  

Defining them as independent contractors would also eliminate an average of more than $2,800 a year in employers’ contributions for Social Security, Medicare, unemployment benefits, and workers’ compensation—a total of at least $750 million, Shierholz projected. The workers would have to put an extra $1,400 into Social Security and Medicare. Independent contractors are not eligible for regular unemployment benefits or workers’ compensation, and don’t have to be paid minimum wage or overtime.

The argument over the definition boils down to when workers are genuinely running an their own business instead of being under an employer’s control. App-based companies such as Uber, Lyft, and DoorDash argue that their workers are independent businesspeople utilizing their app to find customers, not employees of their taxi or food-delivery services. Some office-cleaning contractors have defined janitors as “franchisees,” in which they are paid a flat rate to clean a section of a building and have to bring their own tools and supplies. 

The Labor Department rule would rely on two “core factors”: How much control workers have over the terms of their job, and whether they have an “opportunity for profit or loss based on initiative and/or investment.” If those factors aren’t conclusive, the department would consider three “guideposts”: the amount of skill required for the work; how permanent the relationship between the worker and the employer is; and whether the work is part of an “integrated unit of production.”

“The rule generally reads like it was written by an attorney for Uber or one of the app-based companies,” Catherine Ruckelshaus, legal director for the National Employment Law Project, told LaborPress in September. But it wouldn’t just affect workers for app-based companies, she added: Construction, home-care, domestic, farm, and janitorial workers are also commonly misclassified as independent contractors.

The rule’s methodology is similar to the National Labor Relations Board’s reasoning when it ruled in January 2019 that SuperShuttle airport-van drivers in the Dallas-Fort Worth area were independent contractors who couldn’t legally form a union: They owned their own vans, could set their own schedules, and took the risk of losing money—although the SuperShuttle company set prices and prohibited drivers from getting passengers independently.

Twenty of the 21 Republicans on the House Education and Labor Committee praised the proposal. “We support DOL’s efforts to protect and enhance the independent contractor model,” they said in a letter sent to Labor Secretary Eugene Scalia Oct. 26. The rule, they wrote, would provide “recognition of and respect for workers’ desires for flexibility and independence in the modern economy,” where “independent contractors have the ability to set their own hours, negotiate their earnings, and select their clients utilizing competing platforms.”

The Federal Labor Standards Act’s system for classifying workers, they added, “was created over 82 years ago in response to the Great Depression and has fallen woefully short of meeting the requirements of a modern workforce. Mandating all workers to be classified as employees, as proposed by Congressional Democrats, would expose businesses to increased risk of operational burdens and litigation, while resulting in reduced opportunity for workers and higher priced goods for consumers.”

The Protecting the Right to Organize Act, passed by the House in February, would define independent contractors by the “ABC test” used in California, Massachusetts, New Jersey, and Connecticut. To be “independent” under that test, a contractor must be “customarily engaged in an independently established trade, occupation, or business” doing work that’s “outside the usual course of the hiring entity’s business” and isn’t controlled by that entity.

New York State Attorney General Letitia James joined the attorney generals of 23 states and the District of Columbia in opposing the rule. “The Trump Administration’s proposed rule could lower wages and strip employer-sponsored health coverage for millions of workers,” she said in a statement. “Even more troubling is the fact that the Trump Administration has had no issue proposing this rule in the middle of a public health and economic crisis affecting every corner of this country.”

In a letter to Scalia Oct. 26, they said the Labor Department had failed to present evidence for its “logic-defying conclusion” that workers would earn more as independent contractors, and that it had completely failed to account for costs to workers and states from misclassification.

The group had asked Secretary Scalia in late September to extend the public-comment period to at least the standard 60 days, but was rejected.

Limiting the comments to 30 days makes it much more likely that the administration can finalize the rule before the end of the year. That would also shorten the deadline for Congress to void the rule if Trump is defeated for re-election and Democrats take control of the Senate: Under the Congressional Review Act of 1996, Congress can overrule regulations issued by government agencies if it does so within 60 days it’s in session after they have been approved. 

October 27, 2020

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