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Stern test for US gig economy?

IFM_ US gig economy
In their recent statements, Uber and the Flex Association—a trade association that advocates for gig economy businesses—said that the rule would not immediately affect their operations

The term “disruptors” was applied to app-based ride-sharing services like Uber and Lyft because of how they forced established taxi companies out of business. They are currently attempting to stave off the potential upheaval in the shape of a new federal labour law.

Now a new worker classification rule has already been the target of at least one court challenge, and businesses in the gig economy that it threatens to disrupt will probably oppose it further. Employment experts predict that the new rule will have a significant impact on the estimated 22.1 million Americans who work as independent contractors, upending the gig economy.

The Department of Labour published information regarding a law that establishes criteria for determining when an individual qualifies as an employee to receive overtime compensation, unemployment insurance, and a host of other legal advantages. The new rule will take effect in March 2024.

Three authors from New Jersey are among the group of freelancers who sued the Department of Labour in January 2024 to have the new regulation overturned. Legal action is also being considered by at least one significant industry lobbying group.

The business models of companies like Uber, Lyft, and Doordash would be jeopardised if the Joe Biden government was to grant “employee” status to workers categorised as contractors. This is because contract workers are far less expensive for their employers than traditional employees.

In their recent statements, Uber and the Flex Association—a trade association that advocates for gig economy businesses—said that the rule would not immediately affect their operations.

In a statement, Uber said that this rule “will not impact the classification of the over one million Americans who turn to Uber to earn money flexibly, nor does it materially change the law under which we operate.”

New regulations may reclassify millions

Millions of additional gig workers, including drivers for Uber and Lyft, may be reclassified as employees when the new law takes effect, according to Erin Hatton, a sociology professor at the University at Buffalo and expert on the gig economy.

“If their employees are viewed as legally covered employees, their employment model will not endure. They will fight back against this with all of their might because they have deep pockets,” stated Hatton.

The business lobbying group United States Chamber of Commerce announced that it was thinking of filing a lawsuit to overturn the rule.

Marc Freedman, vice president of workplace policy at the chamber, said in a statement that “the Department of Labour’s new regulation redefining when someone is an employee or an independent contractor is clearly biased towards declaring most independent contractors as employees, a move that will decrease flexibility and opportunity and result in lost earning opportunities for millions of Americans.”

The freedom of individuals to work when and how they want is threatened, and our economy may suffer grave consequences.

In a call with reporters acting United States Labour Secretary Julie Su stated that low-income workers are disproportionately harmed by the misclassification of workers as contractors rather than employees since they stand to lose the most from legal safeguards like unemployment insurance and minimum wage.

“The relationship between an employer and employee is the foundation of a century of labour protections for working people,” Su stated.

Advocates for workers and a few Democratic officials applauded the rule, arguing that it was essential to guarantee workers’ fundamental rights.

“Worker misclassification also undermines law-abiding businesses that are forced to compete with dishonest employers who use misclassification to unfairly cut down on labour costs,” said Virginia Democrat and US Representative Bobby Scott.

However, some industry associations contend that the law unfairly tilts the odds in favour of classifying workers as employees rather than contractors, depriving millions of workers of opportunity and flexibility.

Marc Freedman, vice president of the US Chamber of Commerce, said in a statement that “making matters worse, the rule is completely unnecessary, as the Department continues to report success in cracking down on bad actors that are misclassifying workers.”

The largest business body in the United States, the Chamber, he continued, is thinking of filing a legal challenge against the rule.

When does a worker become an employee?

The rule relates to a distinction that has grown in significance in light of the growth of gig-based businesses offering a wide range of services, including food delivery, dog walking, rides, and many more services: What distinguishes a worker as an employee from a contractor?

The distinction is significant because employers are subject to several duties under federal, state, and local labour laws regarding their workers.

The ‘Fair Labour Standards Act’ provides safeguards such as overtime compensation, minimum wage, union formation rights, and other benefits to individuals who are classified as ‘employees’ across the country. When employers reduce employee wages, they are also required to make Medicare and Social Security contributions.

In addition to workman’s compensation insurance in the event of an injury sustained on the job, employees are covered by unemployment insurance at the state level. They also have the right to paid sick days and family leave in several areas.

That doesn’t apply to independent contractors, who are treated more like small businesses under employment law and who individually enter into a business partnership with the employer on an equal basis.

According to Samantha Prince, a law professor at Penn State Dickinson Law and an authority on worker classification and the gig economy, the terms of employment are determined by a mutually agreed-upon contract rather than being subject to regulations.

This is true even though the contract is typically written by the big company and is a “take-it-or-leave-it” situation for the contractor.

“Opportunity for profit or loss depending on managerial skill, investments by the worker and the potential employer, the degree of permanence of the work relationship, the nature and degree of control, the extent to which the work performed is an integral part of the potential employer’s business, and skill and initiative” are the six factors listed in the new regulation, which is similar to an older Obama-era rule, to determine whether an individual is an employee or an independent contractor.

Contractors lose out big time

In actuality, judges assessing those variables in court cases will decide how those rules apply to any particular worker, according to Prince. For example, a lot of Uber drivers appear to fulfil four out of the six requirements to be classified as employees, according to her.

“And will that be sufficient for a judge to rule that Uber drivers are employees for the purposes of the FLSA?” That is conceivable,” she questioned.

Businesses have the incentive to categorise workers as contractors as a cost-cutting tactic, even when it isn’t suitable, because hiring a contractor is simpler and less expensive than hiring an employee.

A progressive think organisation called the Century Foundation conducted research that revealed widespread misclassification in the construction business, with as many as 2.1 million workers, or 10–19% of the total workforce, being paid under the table.

Independent contractors frequently receive lower pay for performing the same tasks since they do not receive benefits or overtime compensation.

The Economic Policy Institute, a progressive think tank, predicted that the average person working in construction as an independent contractor would make up to $16,729 less annually in wages and benefits than they would as an employee.

Notwithstanding the disadvantages, a large number of contractors express their preference to not be classified as employees and have rebelled against worker categorisation laws.

According to the freelancing complaint, “This lawsuit seeks to vindicate the right of individual entrepreneurs to remain independent in the face of a concerted effort to force them into neither employment relationships they want nor need.”

Advantages or flexibility?

According to a 2023 Indeed job study, individuals who work as independent contractors prioritise their independence and flexibility in terms of work hours, ranking these benefits over higher pay.

However, according to Prince and Hatton, there’s no legal reason why businesses can’t provide flexible work schedules in addition to the perks of employee status.

Prince asserted, “There is no legal restriction on having flexible hours while working as an employee.”

“This flexibility—sometimes true, sometimes not so true—and permanent employment or legally classified employment are not at all synonymous. Those don’t have to be exclusive of one another,” Hatton stated.

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