Is This the Year the Independent Contractor Wall Comes Tumbling Down?

For more than a decade, a war has been raging between companies and workers who want to utilize an independent contractor relationship on one hand, and labor unions and governments that seek to reclassify millions of such workers as employees on the other.

On May 4, 2021, the U.S. Department of Labor (DOL) rescinded a Trump-era rule that would have made it easier for businesses to classify workers as independent contractors instead of statutory employees under the federal Fair Labor Standards Act. Secretary of Labor, Marty Walsh, stated: “By withdrawing the independent contractor rule, we will help preserve essential worker rights and stop the erosion of worker protections that would have occurred had the rule gone into effect….Too often, workers lose important wage and related protections when employers misclassify them as independent contractors.”

Secretary Walsh also told Reuters that a lot of U.S. gig workers should be classified as “employees” who deserve work benefits. According to Reuters, Secretary Walsh said in the same interview that the DOL would have “conversations” in coming months with companies that employ gig labor to make sure workers have access to consistent wages, sick time, healthcare and “all of the things that an average employee in America can access.” It is not clear that business models based on using millions of independent contractors can survive such re-classification.

Secretary Walsh (a former union member) also remarked that: “We are looking at it, but in a lot of cases gig workers should be classified as employees… in some cases they are treated respectfully and in some cases they are not and I think it has to be consistent across the board. These companies are making profits and revenue and I’m not (going to) begrudge anyone for that because that’s what we are about in America. But we also want to make sure that success trickles down to the worker.”

Secretary Walsh further spoke about the risks that result from not having gig companies paying unemployment insurance for such workers – a scenario that has played out during the Pandemic, leaving the U.S. government to foot the bill: “If the federal government didn’t cover the gig economy workers, those workers would not only have lost their job, but they wouldn’t have had any unemployment benefits to keep their family moving forward. We’d have a lot more difficult situation all across the country.”

Secretary Walsh’s views on the issue could usher in new rulings from the DOL, which sets legal guidelines for how employers treat workers, and its rules are often followed by the states. His comments immediately impacted share prices of various technology and transportation companies.

Ironically, while the DOL purportedly wants to protect said workers, it is unclear how many gig workers want such protection. For example, an Uber spokesman said last week that an overwhelming majority of app-based workers want to stay independent because it allows them to work when, where and how they want with flexibility no traditional job can match.

The federal and state governments will see billions of dollars in tax revenue from reclassification while organized labor seeks to make millions of “new” employees eligible for union membership. But few seemingly appreciate the overall price tag, which is not limited to overtime pay. If workers are re-classified as employees, they are then entitled to the “whole package” of employment benefits: health care, pensions, sick leave, and social security contributions to name a few items. These are tremendous costs to instantly levy on employers still recovering from a pandemic shutdown.

At the same time, the plaintiffs’ bar has discovered it is relatively easy to win wage claims, and that misclassification class actions can be worth hundreds of millions of dollars in recoveries. Accordingly, while the DOL may “talk” to companies, the plaintiffs’ bar will likely step up their efforts to sue companies that use large numbers of gig workers and contractors.

The stakes are huge: As many as 55 million people in the United States were gig workers — or 34% of the workforce — in 2017 according to the International Labor Organization, and this total was projected to rise to 43% in 2020. In sum, this is a multi-trillion-dollar issue.

This could be the year the independent contractor wall that separates contractors from wage and benefit protections finally falls. It is going to be an interesting year.

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