Nothing has changed mass transit more than the app-based gig economy, which gives people the ability to call a ride from a mobile phone. Companies such as Uber, Lyft, Instacart, DoorDash, and Via Transit have used this technology to allow a network of independent drivers to provide rides and commercial deliveries all over America and in many other countries.
But on Oct. 13 the U.S. Department of Labor published a proposed rule that would change the definition of an independent contractor, potentially making drivers permanent employees of ride share and delivery companies. This could put these companies out of business because they rely on part time workers. Comments on the rule are due Nov. 28.
The Department of Labor estimates that there are 22 million independent contractors. Other estimates are closer to 60 million. The number is imprecise because people self-identify as independent contractors.
The app-based economy has benefited Americans by allowing them to monetize previously-unused portions of their time, raising income levels and providing opportunities for flexible work. Students can take part-time jobs when not studying. Moms can drive Lyfts while kids are in school. School-bus drivers can drive Ubers when their school shifts are over.
Ride share is popular. After California’s legislature passed AB5, a 2019 law that would have required many independent contractors to be employees, Golden State residents overwhelmingly passed Proposition 22 in 2020, to keep the current status of rideshare drivers if they met certain criteria. Due to challenges from the Service Employees International Union, the measure is still tied up in court.
Many app-based platforms rely on this network of independent contractors. The upside for these workers is the flexibility to set their own hours and the ability to work for a multitude of companies. The downside, according to the Department of Labor, is that many are not covered by the 1938 Fair Labor Standards Act’s minimum wage and overtime protections and don’t receive standard benefits.
No one mentions that benefits make up 31 percent of compensation costs, according to the latest Employment Cost Index published by the Labor Department, and wages and salaries the remaining 69 percent. If independent contractors were reclassified as employees, their take-home cash pay would decline. Some might already be receiving benefits through another job, or another working family member, and prefer the extra dollars.
Democratic administrations favor having fewer independent contractors and a standardized set of benefits. This gives more power to unions to organize workers. If Uber were the employer of all drivers, a union could ask Uber to support unionizing the labor force. It is practically impossible to organize independent contractors. Public sector unions made 90 percent of their contributions to Democratic candidates in the 2020 election cycle, according to OpenSecrets.com.
With the share of wage and salary workers who belong to unions declining from 20 percent in 1983 to 10 percent in 2021, unions are under pressure to recruit more members to fund union officials’ salaries and member pension plans.
This role of independent contractors in the economy has led to a game of policy ping-pong between administrations. In 2015 the Obama Department of Labor issued an Administrator’s Interpretation which concluded that most workers are employees. The Trump administration withdrew the interpretation in 2017, and issued a new rule, effective March 2021, which focused on whether the workers had control over their work and their opportunities for profit or loss.
The Biden administration sought to reverse the Trump administration’s rule in March 2021, but U.S. District Court for the Eastern District of Texas concluded that the Labor Department had not given the public enough opportunity to comment on the change, and kept the Trump administration rule.
The new Labor Department proposed rule is complex and mirrors the Obama-era rule. It suggests a six-part “economic realities test,” including the following factors:
(1) the worker’s opportunity for profit or loss; (2) the nature and extent of the worker’s investment in the business; (3) the permanency of the relationship; (4) the degree of control exercised or retained by the employer; (5) the extent to which the work performed is an integral part of the employer’s business; and (6) whether the work performed requires special skill and initiative.
Some of these factors are unclear. It is possible to be both in business for yourself and economically dependent on your clients. Some drivers, landscaping firms, and attorneys are all independent contractors, in business for themselves but economically dependent on their clients for business.
For many independent contractors, identifying one employer is not easy. Some people drive for multiple companies, and it is common to see both Lyft and Uber signs in a vehicle. Which one would be considered the employer?
The new rule, if adopted as proposed, would add another layer of complexity to small businesses, independent drivers, and potential enforcement actions.
The Internal Revenue Service has a 20-factor test for independent contractors, and anti-discrimination laws have their own common-law test. In addition, States have their own criteria for unemployment, workers compensation, wage and hour rules, and taxes. It is already difficult for small businesses and independent contractors, who have little knowledge of law, to stay out of trouble.
Americans do not want to move back to the 17th, 18th, and 19th centuries, and most of the 20th century, when people had to rely on hailing a passing taxi or go to a taxi stand to find one. In those days the platform economy, with Uber and DoorDash, was unimaginable.
The new Labor Department proposed rule would be a serious setback for people who use app-based ride share services and drivers who provide them. Who knows if your Uber will survive?