In Defense of the Biden Department of Labor's Proposal for Defining an Employee Versus an Independent Contractor
A very long but well-considered explanation placed in a historical context is about how the government negotiates for fair labor rights with an app
An article on MSNBC by Noah Rothman is titled This new Biden proposal would throttle the 'gig economy. As the title states, Mr. Rothman poses the issue as an economic policy although the proposal is just a rule about how to legally distinguish an employee from a person who owns their own business.
By confusing rule guidelines with an alleged inflationary economic policy, Mr. Rothman reduces the rights of workers to a budget deficit echoing Erin Cooperrider characterizing overcrowded housing as a “density bonus”. Beyond the limits of Rothman’s perceptions, ownership is the difference between a slave and a free man and so this very technical issue needs to be gotten right, in large part because of the gig economy.
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, ABC, which was supposed to remedy the supposed indignities endured by participants in the so-called “gig economy.” said Noah Rothman.
The Department of Labor has published an exceedingly long discussion of the issues placing the rule in a historical context.
Mr. Rothman describes the Department of Labor’s new guidelines as ones “that happen to align with what union labor activists have long demanded”. and ”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”.
In fact, the totality of circumstances approach was operative long before the Obama administration. The Department of Labor argues that a primary reason to return to a totality of circumstances analysis is that there are so many court precedents that are based on it. The Department of Labor documents the history of the rules, laying particular emphasis on two Supreme Court rulings that both occurred on On June 16, 1947, United States v. Silk, and Rutherford Food Corp. v. McComb. The central theme is captured in the words” Accordingly, the Court rejected an approach based on “isolated factors” and again considered “the circumstances of the whole activity”, which is the difference between 2021 IC Rule (Independent Contractor Status Under the Fair Labor Standards Act) and the current new proposal of the Labor Department.
However, upon further consideration, the Department believes that the multifactor economic reality test relied on by courts where no one factor or set of factors is presumed to carry more weight remains a helpful tool when evaluating modern work arrangements. The test's vitality is confirmed by its application over seven decades that have seen monumental shifts in the economy. source Department of Labor
2021 IC Rule isolates two factors as more decisive than the others.
In the 2021 IC Rule, two of the five factors—the nature and degree of control over the work and the worker's opportunity for profit or loss—were designated as “core factors” that carry greater weight in the analysis. This approach is discarded in the new proposed rule that argues that 2021 IC Rule departs from decades of case law and could potentially create havoc in legal interpretations. Therefore, the Department now believes it is appropriate to rescind the 2021 IC Rule and set forth an analysis for determining employee or independent contractor status that is more consistent with judicial precedent and provides more flexibility when applied to the entire economy.
In justifying this stratified analysis, the 2021 IC Rule disagreed that, as a general matter, the economic reality test “requires factors to be unweighted or weighted equally,” asserting that “the Department's review of case law indicates that courts of appeals have effectively been affording the control and opportunity factors greater weight, even if they did not always explicitly acknowledge doing so.
Upon further review of judicial precedent, the Department is not aware of any court that has, as a general and fixed rule, elevated any one economic reality factor or subset of factors above others, and there is no statutory basis for such a predetermined weighting of the factors.” source Department of Labor
According to Mr. Rothman, “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.” In The Labor Department’s interpretation, the proposed new rule for distinguishing an employee from an independent contractor is more fluid and less restrictive than 2021 IC Rule enacted in January of 2021.
Rothman begins his article with the words, “with four weeks to go before the midterms” implying it the new rule is politically timed issue, but the story reaches back to January 2021, a post-election time of transition from Trump to Biden administration.
As reported by the Labor Department: “The effective date of the 2021 IC Rule was March 8, 2021. On March 4, 2021, the Department published a rule delaying the effective date of the 2021 IC Rule (Delay Rule) and on May 6, 2021, it published a rule withdrawing the 2021 IC Rule (Withdrawal Rule). On March 14, 2022, in a lawsuit challenging the Department's delay and withdrawal of the 2021 IC Rule, a Federal district court in the Eastern District of Texas issued a decision vacating the Delay and Withdrawal Rules. The district court concluded that the 2021 IC Rule became effective on the original effective date of March 8, 2021…… The Department filed a notice of appeal of the district court's decision. In response to a request by the Department informing the court of this rulemaking, the Fifth Circuit Court of Appeals entered an order staying the appeal until December 7, 2022 (subject to considering a further stay at that time).”
Mr. Rothman claims that the proposed new rule ”would extend needed benefits and protections to contract labor.” but only if a hybrid definition were being proposed in which one could be both an employee and an independent contractor. The rule does not do that. It only reverts to the previous approach in which the entire circumstances are taken into account in determining whether a worker is dependent on the employer for work or is in business for himself, without designating, across the entire economy, some factors as more important than others.
The Department of Labor now argues that “confusion and inefficiency due to overlapping factors” were overstated in the 2021 IC Rule and that if each factor is framed by whether the worker is economically dependent or in business for themself, the rationale for considering facts under more than one factor is clearer.
The difference is in the rules that apply to each definition, for example, employers are required by law to pay employees (but not independent contractors) a minimum wage. The new rules are not proposing to extend the minimum wage to independent contractors. It is setting the rules for when a worker is legally an employee and subject to rules of the Fair Labor Standards Act versus an independent contractor, in which rules do not apply. There is always a trade-off.
Considering how 2021 IC Rule affects Uber:
The 2021 IC Rule identified four reasons underlying the need to promulgate the rule including (4) the shortcomings of the economic reality test that are more apparent in the modern economy.
Uber is an example of the modern economy.
2021 IC Rule identified three other non-core factors: the amount of skill required for the work, the degree of permanence of the working relationship between the worker and the employer, and whether the work is part of an integrated unit of production (which it cautioned is “different from the concept of the importance or centrality of the individual's work to the potential employer's business). The 2021 IC Rule provided that these other factors are “less probative and, in some cases, may not be probative at all” of economic dependence and are “highly unlikely, either individually or collectively, to outweigh the combined probative value of the two core factors.” source Department of Labor- (emphasis by author)
An example of “an integrated unit of production” is production line assembly work. An example of “the importance or centrality of the individual's work to the potential employer's business” is driving a cab for Uber. In the public perception, Uber is a company that provides taxi transportation, but Uber says it is a marketplace based on an app. Uber got around the legal requirements for taxi medallions and permits by defining itself as an app instead of taxi service. Therefore Uber does not own the taxicab. The taxicabs are owned by the drivers. This may raise other definitive questions, such as is a taxicab necessary for an app to perform its business. The probable answer to that is no. But if one asks if a taxicab is necessary for a taxi service to perform its business, the answer is yes.
Unlike historical guidelines, 2021 IC Rule does not include investments as a factor and so diminishes the importance of ownership of the taxi that delivers the service that the app markets. Instead, 2021 IC Rule conflates investment with opportunity for profit and loss, but as the Department of Labor points out the courts have not always ruled that investments and opportunity for profit and loss qualify the worker in the same way, using as an example that “In Cromwell v. Driftwood Electrical Contractors, Inc., the Fifth Circuit conversely found that the investment factor indicated independent contractor status because the workers “invested a relatively substantial amount in their trucks, equipment, and tools” but that their opportunity for profit or loss was “severely limit[ed]. The same argument can be applied to Uber as will be shown. However, It can also be argued that if the vehicle is also used for personal reasons, it is not a capital business investment. The approach to considering a worker's use of a personal vehicle that the worker already owns to perform work is consistent with examining the whole context of economic realities of the worker's relationship with the employer.
The Department of Labor claims that “ in "the 2021 IC Rule, the Department stated that “technological and social changes have made shortcomings of the economic realities test more apparent in the modern economy,” thus justifying the 2021 IC Rule's characterization of the integral, investment, and permanence factors as less important in determining a worker's classification.”
In the case of Uber, the investment factor of the taxicab applies if Uber were to be defined as a taxicab service, but not if Uber is defined as a marketplace app, but 2021 IC Rule took the investment factor out of the equation, identifying two factors as more decisive than the others. Those two factors are the nature and degree of control over the work and the worker's opportunity for profit or loss If 2021 IC Rule is applied, the definition is simple. Uber drivers are employees and not independent contractors because the app controls the driver’s opportunity for profit and loss.
Yeah that’s a feature of the Uber driver app — it doesn’t tell you where the customer wants to go until you start the ride! source
If, under this interpretation, Uber wants to treat drivers as independent contractors, features of its app that conceal the destination of a job from the driver until after the driver accepts the job must be removed. A driver does not have enough information to know if a pick-up is profitable if the destination is unknown prior to accepting the job and does not have control over the work affecting the driver’s opportunity for profit or loss. For example, some trips may require a driver to drop a rider off in a distant location with little opportunity to pick up a far on the return trip.
Contrary to Mr. Rothman’s claims that assessing the totality of circumstances results in gains for independent contractors, by which he confusedly means redefining independent contractors as employees, which would be a gain for the worker, if the ruling is properly assessed. As long as the marketplace app controls how information is released that affects drivers’ decisions that impact the driver’s ability to make a profit or policies target drivers for the choices they make, by the standards of 2021 IC Rule, or by the standards of the new rule, the worker should be qualified as an employee. That is just fair.
The Labor Department is proposing to return to treating the worker's investment as a separate factor from the opportunity for profit or loss factor. It will be interesting to see where that goes.
Next, Rothman draws a false equivalency between a Department of Labor rule change and a Protect the Right to Organize (PRO) Act that failed to pass Congress and uses it to frame the administration and the courts as stepping over Congress to get their way. The only explanation for such an accusation is that the bill includes a definition of an employee but it is a common practice to place definitions in a bill. The central purpose of the bill is the right to organize, which is not in the proposed rule change.
Rothman then goes on to claim that 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.” Once again the Pro Act includes a definition of an employee but the main body of the bill is about the right to organize, while the California law is about defining an employee versus and independent contractor, using three criteria.
The Department of Labor considered formulating the new rule on the California law but rejected it saying that:
…the Department believes it is legally constrained from adopting an ABC test because the Supreme Court has held that the economic reality test is the applicable standard for determining workers' classification under the FLSA as an employee or independent contractor. Moreover, the Supreme Court has stated that the existence of employment relationships under the FLSA “does not depend on such isolated factors” as the three independently determinative factors in the ABC test, “but rather upon the circumstances of the whole activity.” Because the ABC test is inconsistent with Supreme Court precedent interpreting the FLSA, the Department believes that it could only implement an ABC test if the Supreme Court revisits its precedent or if Congress passes legislation to amend the FLSA. e factors.” source Department of Labor
However, Rothman proceeds to use criticism of the California law as if it can be applied to the new rule proposed by the Labor Department, which does not use isolated criteria but instead uses the totality of circumstances approach, which is the basis of legal precedence going back for decades, whereas 2021 IC rule has been in effect only since March of 2021- and yet Mr. Rothman goes on as if there is an unprecedented change that is about to be implemented.
The proposed ruling is open for public comment until 11/28/2022. all the more reason to provide a link to the source, which Rothman never does.
Rothman ends by saying:
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.
The new rule is more flexible and adaptable to individual circumstances than the current rule. Mr. Rothman is not concerned with the fairness of the rule to workers, which is a matter of how it is interpreted. Mr. Rothman is concerned that some workers who are currently classified as independent contractors may be reclassified as employees. The reason why the workers are all classified as independent contractors now is that that is the way Uber set it up in the manner of large internet venues. Large internet platforms make the rules and the user takes them or leaves them. If the return to historical standards is targeting anything, it is self-governing internet apps that function as a law onto themselves. Some workers may prefer to remain, independent contractors, because independent contractors define their own opportunities, but if the app prevents an independent contractor from defining their own opportunities, it defeats the advantage of being an independent contractor. That is what the interpretation will need to determine.
The wealth divide is not good for the economy as a whole. Take a look around. How difficult is it to find services in your neighborhood? If properly implemented, rules like the Department of Labor’s new rule can incrementally turn our economy around again so that it starts to have a middle sector again.
Mr. Rothman closes with:
But by then, you’ll have to wait another two years to register your dissatisfaction
Who is being political now?
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