New Law Redefines Employees and Contractors

The income Vivian Marlene Dunbar, age 75, earns as a freelance signature gatherer for ballot initiatives in California means she can afford groceries, pay medical bills and keep her car.

Working as an independent contractor gives her the flexibility she wants and needs to schedule around doctors' appointments. She likes never having to answer to a boss.

It's the same for Lila Stromer, 65, a freelance academic editor in New York City for the last 14 years, and Roger Baumgarten, 63, a full-time freelance photographer in Mechanicsburg, Pennsylvania, since 2017, working mostly for nonprofit groups and health care systems.

AARP estimates that more than a quarter (27%) of older workers do freelance or gig work. Many worry a new Department of Labor (DOL) rule set to go into effect on March 11 may limit the work available to contractors, significantly shrinking their income as they head into retirement.

Like most independent contractors, Stromer and Baumgarten consider themselves to be small-business owners or "solopreneurs" rather than gig workers like Uber drivers.

For one thing, gig workers tend to freelance on top of holding a traditional job. Only 6% of gig workers (1% of all adults) earned at least 90% of their income from gig activities, according to Federal Reserve data.

"I like what I do — having my own business — and until my marbles go away, I plan to keep on working," says Stromer. "After just six months of freelancing, I thought to myself, I don't ever want another full-time job again."

These older Americans and many others like them prefer being independent contractors because they can, say, set a schedule that allows them to care for a sick spouse or arrange their work to accommodate their own disability if they have one.

The new DOL rule rescinds a 2021 worker-classification regulation that had a looser definition of who is an independent contractor, replacing it with a six-factor test for companies to consider as they classify workers as employees or contractors.

The six factors — none of which carry more weight than the others, according to the DOL — include:

• 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.
• Skill and initiative.

The DOL says "additional factors" could be considered, too, but doesn't specify what those are. The rule aims to correct worker misclassification, which has historically been a problem. Some companies classify workers as contractors instead of employees to avoid giving them benefits or contributing to taxes.

"Misclassifying employees as independent contractors is a serious issue that deprives workers of basic rights and protections," Acting Secretary of Labor Julie Su says in a DOL press release. "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."

In fiscal year 2023, the DOL investigated more than 600 employers who had misclassified over 23,000 workers as independent contractors, resulting in workers receiving more than $13 million in back wages, according to a DOL spokesperson. Proponents of the new rule though say it could prevent more people from being misclassified in the first place.

Sally Dworak-Fisher, a senior staff attorney at the National Employment Law Project, which supports the rule, says the six factors are the same ones courts have historically used, based on legal precedent, to decide who should be covered under the Fair Labor Standards Act, a labor law that establishes minimum wage and overtime pay.

"This rule is about restoring an analysis courts have used for decades and making sure that vulnerable workers or workers subject to exploitation are protected as employees and given minimum wage and overtime," she says.

In-home caregivers and construction workers are examples of occupations at high risk of misclassification, Dworak-Fisher says.

A company that willfully violates the FLSA could be criminally prosecuted and face up to $10,000 in fines.

Data suggest worker misclassification may be the exception rather than the rule in many industries. Surveys consistently show that most independent contractors prefer their independence. Around 79% of them prefer their arrangement over a traditional job, according to the U.S. Bureau of Labor Statistics, while fewer than one in 10 contractors want a traditional work arrangement.

Dworak-Fisher believes true independent contractors in business for themselves are unlikely to be affected by the new rule. "The north star for all the factors is: is this person running their own business or are they dependent upon working in the business of another?" she says.

The DOL recognizes independent contractors in business for themselves play an important role in the economy, a department spokesperson says. "The Department does not believe that this rule will result in widespread reclassification or a reduction in self-employment," says the spokesperson.

Yet, with "in business for themselves" not clearly defined in the rule and the factors not completely cut and dry, an unintended consequence could limit work opportunities for legitimate independent contractors, including older Americans, says Michael Lombardino, an attorney at the law firm Haynes and Boone in Dallas.

"It's definitely murky," he says about the rule. A Haynes and Boone bulletin on the new rule that Lombardino co-authored noted that "many features of the final rule will make it more difficult to classify certain workers as independent contractors."

Liya Palagashvili, an economist at the Mercatus Center, a free-market think tank at George Mason University in Arlington, Virginia, believes the rule will likely affect two groups the most: women, who tend to pursue flexible work opportunities more so than men, and older Americans.

"Since a lot of older Americans do seek out these flexible forms of work as they near retirement — or after — this rule will likely lead to reduced work opportunities for them," she says.

Implemented in 2020 when acting U.S. Labor Secretary Su was California's labor commissioner, California's Assembly Bill 5, or AB5, similarly set out to protect workers by getting more people on the payrolls. But many Californians working as legitimate contractors suddenly lost income after businesses and nonprofits stopped working with them as freelancers and didn't hire them as employees.

In a recent study, Palagashvili found that after California passed its law seeking to reduce the misclassification of workers, overall employment in the affected occupations fell by 4.4% on average, while self-employment shrank by 10.5%. The state ultimately exempted 110 occupations from the law after Californians complained. The DOL rule has no exemptions.

"These results suggest the DOL rule may lead to a significant decrease in self-employment in the U.S.," Palagashvili says.

Instead of restricting independent contracting, the government could better support the workforce by encouraging options that allow contractors to maintain their non-traditional employment arrangements while still accessing benefits, says Palagashvili.

Stromer in New York fears her clients will sever their relationship with her out of an abundance of caution, not wanting to inadvertently apply the rule incorrectly. "It's going to handcuff clients so they're afraid to work with me," she says. "I feel like I'm fighting for my business, and it's exasperating."

Baumgarten also worries that his largest client, a health system with an in-house photography studio, may decide it's too risky to work with contractors and cut him loose. "This rule is intruding on an entirely voluntary relationship that works for my client and works for me," Baumgarten says. "I just want to be left alone."

In recent weeks, independent contractors in fields from writing to trucking have brought a series of lawsuits against the DOL in an attempt to stop the rule from going into effect. One came from a group of four freelance writers and editors, all women over age 50, including Kim Kavin, 51.

Kavin owns her own freelance writing and editing business in New Jersey and leads Fight For Freelancers USA, a nonpartisan coalition of freelancers from across the country that spans professions from translation to interior design. Around 20% of group members are ages 55 to 64 and nearly 10% are age 65 and older.

Some members turned to freelancing after suffering age discrimination that cost them a traditional job, says Kavin. "They still want to work and earn, and the way they're able to do it is as independent contractors," she says.

Kavin says she does well as a freelancer and does not want a traditional job, even if she could find one at her age. "It's a lot harder to find a traditional job in your 50s than in your 30s, especially one with the significantly higher level of income that I've been able to achieve as a freelancer," she says. "If I lose this self-employed business that I just spent 20 years building up, there may be no other place for me to go."