Possible Contractor Classification Changes in a Biden Administration

A federal push to classify more contractors as employees should balance company responsibilities with worker protections and choices

The Biden Administration’s agenda prioritizes worker rights, including possible changes intended to protect gig economy workers.

As we covered in our previous blog, one of the Biden Department of Labor’s (DOL) first acts was to restore the longstanding terms defining a contractor vs. an employee. Expect the administration to next focus on classifying more individuals as employees entitled to benefits and protections under the Fair Labor Standards Act (FLSA).

But the role of freelancers, contractors, and gig workers has transformed in recent years, with more people choosing independent work. Thus, any new legislation or DOL rulings should balance the responsibilities of companies with an evolving culture — and the diverse preferences of workers.

Let’s look at what may happen, how state law has played out, and why many individuals choose an independent way of working.

Biden Administration statements and priorities on contractors

President Joe Biden’s first budget request includes “$7.5 billion in the coming fiscal year to boost worker-protection efforts, including to root out misclassification.”

The administration is taking aim at companies that regard workers as contractors to avoid issuing benefits and paying payroll taxes and overtime, despite workers meeting the definition of employees under current tests. But there is also a push to change this definition, a shift that especially impacts companies with business models based on freelance work.

On April 29, Labor Secretary Marty Walsh said that “in a lot of cases gig workers should be classified as employees” — a statement that sent alarm bells ringing through gig companies like Uber, Lyft, Instacart, DoorDash, and Amazon Flex. Some labor leaders and legal analysts praised the idea, hoping the DOL will “potentially sue companies like Uber under existing federal law.”

A law floated as a model for new federal rules is California’s Assembly Bill 5 (AB5), which was passed in 2019, went into effect on January 1, 2020, and built on a 2018 court ruling reinforcing the “ABC test.” Known as the “gig worker bill,” this measure resembles federal classification tests but narrows and simplifies them.

The ABC test “assumes that workers are employees unless the company that hires them can prove the following three things:”

1. The worker is free to perform services without the control or direction of the company.
2. The worker is performing work tasks that are outside the usual course of the company’s business activities.
3. The worker is customarily engaged in an independently established trade, occupation, or business of the same nature as that involved in the work performed.

Given that companies like Uber, Lyft, and DoorDash direct their drivers and the work certainly reflects “usual … business activities,” many of their contractors became classified as employees in California.

In response, those companies launched a successful $200-million-plus campaign to pass Proposition 22 in November 2020. California voters approved the measure, which exempted “app-based rideshare and delivery companies” from California’s ABC test.

Proposition 22 essentially saved the business model of these types of companies in California. But critics of the law, including some who opposed AB5, don’t like that the rules are inconsistent.

And more types of contractors fought for and eventually achieved their own exceptions.

Non-ridesharing and delivery business models affected by California’s law

Creative contractors, including freelance artists, writers, and photographers, also weren’t fans of California’s gig worker law. And the ABC test wasn’t the only rule buffeted by AB5.

The law set a limit on creative freelancers completing a maximum of 35 “pieces” per company. If the number was exceeded, a company had to classify the worker as an employee. This rule resulted in massive income losses for California freelancers who wanted to stay independent.

For example, in December 2019, a freelance cartoonist told CNBC that he’d lost 40% of his income since the law was passed in September of that year:

LaBrash, based in Los Angeles, suddenly found potential projects drying up when he submitted onboarding paperwork to potential clients and they discovered he lived in California.

Some major media outlets, including Vox Media and SB Nation, immediately cut loose contract writers who lived in California to avoid compliance.

Several political action groups formed to oppose the law, such as California Freelance Writers United Against AB5. In addition, the American Society of Journalists and Authors and the National Press Photographers Association filed suit against the state in December 2019, claiming the law “unconstitutionally restricts free speech and the media.”

In the face of these challenges and the pandemic economy, California allowed new exemptions to AB5 under Assembly Bill 2257 in September 2020. This “emergency measure” exempts 109 categories of workers from California’s ABC test, including many creative, professional services, entertainment, insurance, and other workers.

But some industries, notably trucking and motion picture and television, remain subject to AB5 and are still fighting the measure. While California could be a precursor to similar efforts on the national level, the state’s experience should also influence federal officials who consider imposing a nationwide rule. The state’s gig worker law didn’t just encounter fierce resistance from employers — but also many of the contract workers it was designed to protect.

The growing popularity of freelance work

Part of the pushback against California’s law is a symptom of widespread changes to how people work. Fifty-nine million Americans did some form of freelancing in 2020, and projections state this number could reach as high as 86.5 million by 2027 — just over half of the U.S. workforce.

This shift is partially driven by companies that find it more affordable and easier to hire freelance workers, including organizations that want to sidestep employee protections and expenses. But the trend also reflects choices by individuals who don’t like traditional employment.

A survey by FlexJobs, a job board for remote and flexible positions, found that:

• 70% of respondents chose to freelance to “attain healthier work-life balance”
• 62% prioritized a flexible work schedule
• 56% valued the freedom of the arrangement
• 55% cited the ability to work anywhere

The number of contractors has been growing since 2014, with the growth rate expected to accelerate after the remote work models adopted during COVID-19 become the norm. A December 2020 Pew Research survey found that 38% of respondents said most of their jobs could be done remotely, a number that rose to 58% of those with bachelor’s degrees and 68% with postgraduate degrees.

And beyond changing how people work, the pandemic also reshaped priorities. A wave of employees has been “epiphany-quitting” positions in the face of burnout, a desire for work-life balance, and a re-evaluation of what’s important in their lives. Many of these individuals are turning to freelance positions.

Balancing company responsibilities, worker protections, and individual choices

The push for greater worker protections is a worthy goal, as many employers do misclassify workers and take advantage of the contractor model. Critics of the gig economy have pointed out some exploitative practices, the lack of essential benefits, and payment structures that make it difficult for some workers to earn a living wage.

For example, a 2018 Federal Reserve report found that “58 percent of full-time gig workers said they would have a hard time coming up with $400 to cover an emergency bill.” And many companies abuse contractor classifications to avoid costs and regulations — and confusing rules and lax enforcement can allow them to get away with it.

But the way millions of Americans choose to work is also changing, as individuals want the flexibility of freelancing. These people range from blue-collar gig workers to white-collar professional services contractors and include part- and full-time freelancers.

Thus, as California’s experience shows, any new federal rules should account for this diversity while safeguarding the rights and dignity of workers.

Karp HR solutions can help you evaluate how to classify and structure your workforce while providing customized benefits that attract talent without breaking the bank. Contact us today for a free consultation.