Gig Workers Face New Rules

Happy Tuesday! Reddit is preparing to go public, seeking a $6.4 billion valuation. But the heads of the social media network—which gave rise to r/wallstreetbets, the seedbed of meme stocks—are a little worried their users could wreck the IPO.

Quick Hits: Today’s Top Stories

• President Joe Biden unveiled a $7.3 trillion fiscal year 2025 budget proposal on Monday, building on the economic message laid out in his State of the Union address last week. The document—more of a policy vision board than a spending blueprint—included a plan to introduce a new mortgage tax credit and Medicare’s $2,000 out-of-pocket prescription drug cost cap to the commercial insurance market. The budget also aims to shore up Medicare and Social Security finances and cut low- and middle-income tax rates over the next decade. To fund these initiatives, the budget document proposed tax increases for corporations and higher-income households, plus a new 25 percent minimum tax on people worth $100 million or more.
• Secretary of Housing and Urban Development Marcia Fudge announced on Monday she’d be stepping down from her post effective next week in order to spend more time with her 92-year-old mother. The secretary is only the second cabinet member to resign since Biden took office—the first was Secretary of Labor Marty Walsh, who stepped down last year to head the National Hockey League Players’ Association. 
• Peter Navarro, a White House trade policy adviser in the Trump administration involved in the attempt to overturn the 2020 election, was ordered to report to prison on Monday to serve a four-month sentence for failing to comply with subpoenas from the House Select Committee on the January 6 Attack. Navarro’s lawyers are challenging the order in an effort to keep their client out of prison while they appeal the case. 
• One of the key witnesses cooperating with investigators in special counsel Jack Smith’s classified documents case against former President Donald Trump publicly identified himself in a Monday night interview with CNN. Brian Butler, previously known in public legal filings only as “Trump Employee 5,” discussed his role in unwittingly moving the classified documents at the heart of the case. “I think the American people have the right to know the facts,” Butler said, “that this is not a witch hunt.”
• Sen. Joni Ernst of Iowa plans to run for Senate Republican Conference Chair, Politico reported on Monday, challenging Sen. Tom Cotton of Arkansas for the third-ranking leadership position in the conference. Ernst currently serves as Republican Policy Committee chair, and yesterday Sen. Shelley Moore Capito of West Virginia announced that she will run for Ernst’s old job.

The Gig Is Up 

So ubiquitous is the gig economy in American life that, for many of us, the “taxi” has gone the way of the “tissue.” Just as a “Kleenex” is now the thing we blow our noses into, we now take an “Uber” when we want to go somewhere. And anyone who’s ever ridden in an Uber likely knows that for many drivers, that job may be but one of their many streams of income—one among a series of “gigs.” 

A new Biden administration rule that changes the criteria for determining who is considered an independent contractor under the Federal Labor Standards Act went into effect Monday, potentially redefining “gig work” as we know it. Advocates of the new rule say it will expand the benefits of full employment—federal minimum wage, unemployment insurance, overtime, and Social Security benefits—to millions of independent contractors, particularly those who are “misclassified” as such. Opponents, however, worry the change will have a chilling effect on hiring contractors, undermining the independent contracting model and forcing genuine contract workers out of the market.

Though estimates for how many people engage in contract-based and independent work can vary widely, workforce surveys suggest that at least 25 percent of U.S. workers engage in some form of gig work—as independent contractors, freelancers, or through other non-standard work arrangements—and that roughly 10 percent of the workforce rely exclusively on gig work as their primary source of income, according to figures compiled by Cornell’s School of Industrial and Labor Relations’ Gig Economy Data Hub. According to Upwork’s annual survey tracking freelancers, the proportion of independent contractors in the workforce has increased gradually over the last decade, with many workers being drawn to the flexibility—in both hours and location—that accompanies gig work.

The Biden administration’s new rule deals with how employers, the Department of Labor (DOL), and the courts should interpret provisions in the 1938 Fair Labor Standards Act (FLSA), which requires employers to provide people classified as “employees” with certain benefits and protections, like a federal minimum wage and overtime pay. Employers also have to fund unemployment insurance coverage, pitch in for half of Social Security and Medicare taxes for an employee, and cover workers’ compensation. But those requirements don’t exist for workers classified as “independent contractors.”

The law’s provisions are straightforward enough—except for one hiccup: The FLSA does not explicitly define who qualifies as an “independent contractor,” leaving the distinction up to interpretation. For many years, the court applied an “economic reality” test to determine whether someone was an employee or an independent contractor. In practice, this meant weighing a variety of elements of the employer-employee relationship to determine the employer’s responsibility, potentially generating inconsistent outcomes. 

The Trump administration tried to create a more consistent standard with a rule that came into force in early 2021. The Trump DOL guidance laid out five categories to determine someone’s status as an independent contractor. Two of those categories—the “nature and degree of the individual’s control over the work” and the contractor’s “opportunity for profit and loss”—were so-called “core factors,” given precedence in the decision-making process. The Biden administration attempted to rescind the rule, but was blocked by the courts from doing so because it had not adequately explained the change. 

President Joe Biden’s DOL has now issued its own rule that formally rescinds its Trump-era predecessor. The new guidance lays out six factors for consideration, and stipulates that “additional factors” may be considered beyond the six made explicit in the rule. Those explicit factors include: “opportunity for profit or loss depending on managerial skill; investments by the worker and the potential employer; degree of permanence of the work relationship; nature and degree of control; extent to which the work performed is an integral part of the potential employer’s business; and skill and initiative.” The new guidance requires that businesses and the DOL do not weigh any one factor more heavily than another, thereby stripping the rule of the Trump-era “core” factors that would have more importance in the final decision. 

Several trade organizations, including the Coalition for Workforce Innovation and the U.S. Chamber of Commerce, have filed suit against the DOL on the grounds that it hasn’t adequately justified the rule change. Sen. Bill Cassidy, a Louisiana Republican, and GOP Rep. Kevin Kiley of California last week introduced Congressional Review Act resolutions to overturn the rule, with dozens of co-sponsors. Neither the lawsuits nor the congressional action prevented the new guidance from going into force yesterday.

The administration and its allies argue the rule represents a return to the previous understanding of “independent contractor,” taking into account multiple factors. “It’s really just a restoration, not a revolution,” Sally Dworak-Fisher—a senior staff attorney at the National Employment Law Project, an advocacy organization in favor of the rule change—told TMD. 

Uber, at least, didn’t seem bothered by the change. “This rule does not materially change the law under which we operate, and will not impact the classification of the over one million Americans who turn to Uber to earn money flexibly,” the company said in a statement when the final rule was announced in January. “Drivers across the country have made it overwhelmingly clear […] that they do not want to lose the unique independence they enjoy. As this rule is implemented, we look forward to working with the Biden administration and making sure they continue to hear directly from drivers.”

Even if the new Biden administration factors mirror those from the pre-Trump common law approach, some groups argue the new rule creates legal ambiguity because the guidance is so broadly written and not explicitly hierarchical. “A company trying to classify someone as an independent contractor is going to be left wondering which factors the Department of Labor actually cares about,” Marc Freedman, vice president of workplace policy at the U.S. Chamber of Commerce, told TMD. 

The Chamber’s lawsuit also expressed concerns that the six factors meant to determine a worker’s status could, in practice, be weighted toward finding that the individual is an employee, rather than a contractor—whether they want that status or not. “There are an awful lot of people operating as sole proprietors, who, in certain situations, could end up looking like employees,” Freedman said, speaking of individuals who have made careers in contract work. “There’s two small business angles of jeopardy here: One is that you have businesses who [aren’t] going to understand when they’ve classified someone properly, and the other is you have the sole proprietors [independent contractors] who are operating as small businesses who may be in jeopardy of being able to maintain their operations.” 

Freelance writers and editors, who make their careers doing work for multiple publications, are among those filing suit, citing fears that they may lose business if employers are concerned about running afoul of the new rule. If, for example, their written work is deemed “integral” to the employer’s business, as defined in the new rule, it’s unclear whether they would be properly classified as a contractor under the guidance.

The DOL has said the rule is aimed at fixing “misclassifications”: individuals—particularly in low-skilled labor positions—who are working as independent contractors and shouldn’t be. “Misclassifying employees as independent contractors is a serious issue that deprives workers of basic rights and protections,” Acting Secretary of Labor Julie Su said when the final rule was announced in January. “This rule will help protect workers, especially those facing the greatest risk of exploitation, by making sure they are classified properly and that they receive the wages they’ve earned.”

It’s not clear exactly what percentage of independent contractors are, in fact, misclassified, nor is it easy to find out: In order to be reclassified, workers will have to file a complaint with the DOL or sue their employer for the wages they believe they’re owed, assuming they have a claim of being wronged as a result of their misclassification. “[Misclassification] is really just a way of transferring the cost of doing business onto the backs of workers who can least afford it,” Dworak-Fisher told TMD. “It not only hurts the workers themselves, it hurts law-abiding businesses that play by the rules. Because when companies do this, they can save payroll costs, because they don’t have to pay that into the social safety net or withhold taxes. It creates a race to the bottom.” 

Freedman argues that the new rule wasn’t necessary to combat misclassification—which, he argues, was already covered in the FLSA. “[The rules are] like a speed limit,” Freedman told TMD. “If the speed limit is 60, you don’t need to drop it to 40 to catch the people who are going 80.” 

In making these employment standards broader, Freedman said, the DOL may have some business owners wondering whether they can hire contractors at all. “The way this regulation operates is that it’s not just that they’re dropping the speed limit, it’s that they’re not going to tell you when you’re going too fast,” he told TMD. “Because under the way that regulation operates, you won’t know whether you’ve really classified someone properly until the Department of Labor tells you.” 

Worth Your Time

• Writing for the Financial Times, John Burn-Murdoch examined the striking data behind the racial realignment in American politics. “Data from America’s gold-standard national election surveys show Democrats’ advantage among Black, Latino, and Asian voters at its lowest since 1960,” he wrote. “Part of this is due to fading memories and weakening ties. Black Americans who lived through the civil rights era still support the party at very high levels, but younger generations are wavering. There’s also the weakening correlation between income and voter choice in U.S. politics. The image of the GOP as the party of wealthy country club elites is dimming, opening the door to working- and middle-class voters of all ethnicities. More ominous for the Democrats is a less widely understood dynamic: many of America’s non-white voters have long held much more conservative views than their voting patterns would suggest. The migration we’re seeing today is not so much natural Democrats becoming disillusioned but natural Republicans realizing they’ve been voting for the wrong party.”

Presented Without Comment 

Hungarian Prime Minister Viktor Orbán, after meeting with former President Donald Trump at Mar-a-Lago: “He will not give a penny into the Ukraine-Russia war and therefore the war will end.” 

Also Presented Without Comment

KMBC News: Effigy of Biden Hit at Johnson County Republican Party Fundraising Event

Toeing the Company Line

• It’s Tuesday, which means Dispatch Live (🔒) returns tonight! This week’s edition will start at 7:30 p.m. ET/4:30 p.m. ET and feature Steve, Jonah, and Declan talking about the Dispatch’s recent editorial about the 2024 election. Keep an eye out for an email later today with information on how to tune in.
• Alex fact-checked an anecdote included in GOP Sen. Katie Britt’s State of the Union rebuttal and assessed some misleading allegations of voter fraud in a Texas primary.
• In the newsletters: The Dispatch Politics team reported on President Joe Biden’s burst of campaigning following the State of the Union address, Kevin argued (🔒) that business groups are getting the labor supply “problem” wrong, and Nick questioned (🔒) what it is that former President Donald Trump actually fights for.
• On the podcasts: Michael moderated a debate (🔒) between Emily Zanotti and Elizabeth Nolan Brown about surrogacy on The Skiff, and Sarah and David analyzed a dissent from denial from Justice Clarence Thomas on bias response teams at a Virginia university on the latest Advisory Opinions.
• On the site today: Stirewalt chronicles how Republicans are playing catch up on mail-in voting, and Eric Edelman, Reuel Marc Gerecht, and Ray Takeyh predict what will happen when Iran gets its long-sought nuclear weapon.

Let Us Know

How much freedom do you think employers and employees should have in negotiating the terms of their employment agreement—including defining their own independent contractor status?