Freelancers sue Labor Department over new contracting rule

Print Friendly, PDF & Email

A group of freelancers is suing the U.S. Department of Labor (DOL) over a new rule that encourages employers to classify independent contractors as employees.

Independent contractors perform services for companies but are not deemed employees. Many companies retain them instead of hiring employees in order to save money. Contractors have to pay their own taxes. After the year ends, they receive a 1099 IRS form if they billed more than $600.

The new rule, which is scheduled to come into force on March 11, comes in the wake of California’s controversial law known as AB5 that virtually outlaws independent contracting and clamps down on the gig economy. Critics say the state law is intended to benefit labor unions and will drive up costs for businesses. The U.S. Supreme Court has turned away challenges to the state law, most recently in June 2022.

The new legal complaint (pdf) in Warren v. U.S. Department of Labor was filed on Jan. 16 in U.S. District Court for the Northern District of Georgia, Gainesville Division.

The plaintiffs, Karon Warren, Deborah Kaplan, Kimberly Kavin, and Jennifer Singer, are freelance writers and editors. The plaintiffs founded Fight for Freelancers, a coalition of more than 2,500 freelancers, ranging from writers to truck drivers.

The defendants are: the U.S. Department of Labor; acting Labor Secretary Julie Su; Jessica Looman, administrator of the department’s Wage and Hour Division; and the department’s Wage and Hour Division itself.

Attorney Wilson Freeman of Pacific Legal Foundation (PLF) said the new rule hurts freelancers. PLF, a national nonprofit public interest law firm that challenges government abuses, is representing the plaintiffs.

“The Labor Department’s new classification rule makes it harder to be an independent contractor by muddying the waters between who is an independent contractor and who is an employee. These rules chill Americans’ ability to work by threatening businesses with ruinous civil and criminal liability,” Mr. Freeman said.

Although a 2021 DOL rule made the plaintiffs’ lives “easier by announcing a clear standard for delineating between independent contractors and employees” under the Fair Labor Standards Act (FLSA), in January 2024 the department arbitrarily reversed course by unveiling a new rule “that obscures the line between contractor and employee in an impenetrable fog,” according to the legal complaint.

The “vague, new standard provides no objective direction to anyone … [and] enables the Department’s enforcement officers and trial lawyers to label anyone performing services for another company to be deemed an ‘employee’ under essentially any circumstance.”

“Entrepreneurs and their clients must be able to understand the rules so they can structure their affairs to comply with the law. The Department’s new rule makes this impossible.”

Plaintiff Kimberly Kavin denounced the rule.

“Opposition among independent contractors to this proposed rule change has been widespread and overwhelming—just as they were with previous state and federal legislative attempts to limit the choice of self-employment since 2019.

“Misclassifying us as employees is not protecting us. It is attacking us and attempting to destroy our chosen careers,” she said.

The plaintiffs expect to spend a great deal of time reviewing the new rule and modifying their business practices to shield their clients from risks of liability, but they are concerned “there may be no way to safely arrange their relationships to avoid risks to their clients,” according to the legal complaint.

Mr. Freeman said the DOL withdrew “all of the guidance to regulated parties that the 2021 rule gave.”

The agency replaced the 2021 rule with a rule that emphasized two core factors when determining if a person was an employee or an independent contractor and replaced it with a rule  with “six, maybe seven factors, and it’s a totality of the circumstances test,” he said in an interview.

“It’s very open-ended, and very vague, and creates a lot of potential constitutional and statutory problems, potentially conflicts with the Fair Labor Standards Act.”

The federal Fair Labor Standards Act of 1938 mandates overtime pay and the minimum wage for certain employees. Employers who violate the law can receive criminal and civil penalties. The wage and hour provisions of the law do not cover independent contractors. Critics say the law is overly vague and has led to much litigation and contradictory court rulings over the years.

The new rule’s standard for classifying employees “poses a threat to their business” because they could be classified as employees under the FLSA, which is “an existential threat to their business,” the attorney said.

“It means they will no longer have the freedom that they want. They’ll no longer be able to work the way that they want, and they probably won’t be able to make as much money as they currently do.”

And his clients’ customers are “very concerned about their ability to continue to use my clients” in light of the new, confusing rule, Mr. Freeman told The Epoch Times.

The Epoch Times reached out for comment to the U.S. Department of Justice, which is representing the Labor Department. No comment had been received as of press time.

This article by Matthew Vadum appeared Jan. 18, 2024, in The Epoch Times.