On Tuesday, the U.S. Department of Labor issued a new rule requiring companies to classify certain workers as employees instead of lower-cost independent contractors, which upsets business groups and is expected to lead to legal disputes.

Classifying "Gig" Workers as Employees

The rule is expected to raise labor costs for businesses in trucking, manufacturing, healthcare, and app-based "gig" services that heavily depend on contract labor or freelancing.

Federal and state laws only pertain to company "employees" when mandating minimum wage and overtime pay, as employing workers can be up to 30% more expensive compared to hiring independent contractors, according to research.

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Rule Implications

The rule will make workers need to be seen as employees instead of contractors if they are economically reliant on a company. It replaces a regulation from the Trump administration, which was preferred by business groups that allowed workers who own their businesses or have the freedom to work for competing companies to be treated as contractors. The new rule follows a long-standing court standard used to decide how workers should be classified, considering factors like the level of control companies have over workers and whether the work is essential to a company's business.

The Labor Department doesn't anticipate the rule to lead entire industries to reclassify workers, but it will enable effective enforcement against businesses who intentionally misclassify workers to cut costs, which doesn't go as far as California and some other states' wage laws, which impose even more restrictions on independent contracting.

Business Group and Lawmakers' Stance

On Tuesday, business groups and Republican lawmakers heavily criticized the rule scheduled for March 11, claiming it would lead to millions of workers losing opportunities to earn money and creating confusion that could result in expensive legal battles. U.S. Senator Bill Cassidy from Louisiana stated he would introduce a resolution to repeal the rule supporting labor unions. Acting U.S. Labor Secretary Julie Su noted on a call with reporters that misclassifying workers as contractors instead of employees affects low-income workers who would gain the most from legal protections like a minimum wage and unemployment insurance. Su emphasized that a century of labor protections is only based on the employer-employee relationship.

Worker advocates and certain Democratic officials praised the rule, deeming it essential for securing fundamental protections for workers. U.S. Rep. Bobby Scott, a Democrat from Virginia, emphasized that worker misclassification negatively impacts law-abiding businesses that are forced to compete with dishonest employers, cutting labor costs.

On the other hand, some business groups argue that the rule will rob millions of workers of flexibility and opportunities. Marc Freedman, vice president at the U.S. Chamber of Commerce, the largest business group in the U.S., stated that the company contemplated legal challenges to the rule and emphasized that the rule is unnecessary given the Department's successes in addressing misclassification without additional regulations.

Potential Impact on "Gig" Workers

The Labor Department created the rule to address industries like construction and healthcare, where worker misclassification is prevalent. However, the rule's possible effects on app-based delivery and ride-hailing services, which heavily rely on contract "gig" labor, have attracted the most attention.

The Chamber of Progress, a tech company trade group, mentioned that the rule might affect gig workers, depending on how the Labor Department enforces it. According to the group, if independent contractors are reclassified as employees, around 3.4 million gig workers could be negatively impacted, leading to an estimated $31 billion in lost income.

Uber Technologies and Lyft company have voiced concerns about the rule but don't anticipate their drivers being classified as employees and alter their business operations. 

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