The U.S. Department of Labor issued a final rule that compels companies to categorize certain workers as employees rather than more economical independent contractors, leading to discontent among business groups and likely triggering legal challenges.
The rule is anticipated to elevate labor costs for sectors heavily reliant on contract labor or freelancers, including trucking, manufacturing, healthcare, and app-based "gig" services. Federal and state labor laws, like minimum wage and overtime pay requirements, generally apply only to a company's employees, and studies suggest that employees can cost companies up to 30% more than independent contractors.
Under the new rule, workers are to be considered employees when they are "economically dependent" on a company, but it does not go as far as some state wage laws that impose more stringent limits on independent contracting. This rule replaces a regulation from the Trump administration that facilitated the classification of workers as independent contractors, allowing even those with their own businesses or working for competing companies to be treated as contractors.
Acting U.S. Labor Secretary Julie Su emphasized that misclassifying workers as contractors disproportionately harms low-income workers who could benefit from legal protections provided to employees. The rule is set to be effective from March 11 and is expected to face legal challenges from trade groups and businesses.
While the Labor Department argues that the rule is intended to address misclassification issues, particularly in industries like construction and healthcare, business groups assert that it leans excessively towards classifying workers as employees, potentially depriving millions of workers of flexibility and opportunities. The U.S. Chamber of Commerce is considering challenging the rule in court, stating that it is unnecessary given the Department's success in addressing misclassification issues.
The new rule's impact on app-based delivery and ride-hailing services, relying on contract "gig" labor, has drawn considerable attention. Uber and Lyft have expressed concerns but do not anticipate a reclassification of their drivers as employees. The Labor Department will consider factors like a worker's opportunity for profit or loss, the degree of company control, and the work's importance to the company's business when determining worker classification, leading to concerns about confusion and inconsistent results among business groups.
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