Last year, the Department of Labor (DOL) issued a final rule outlining how the federal agency differentiates between employees and independent contractors under the Fair Labor Standards Act (FLSA), the U.S. labor law that establishes minimum wage, overtime pay, recordkeeping, and youth employment standards. 

The rule proved controversial before it went into effect, but it ultimately didn’t change much for workers.

In short, the rule determines who receives FLSA benefits. Employees are guaranteed overtime pay and a minimum wage; independent contractors are not. There have been several legal challenges to the rule. The U.S. Chamber of Commerce also publicly opposed the rule last year, saying that it “threatens the flexibility of individuals to work when and how they want and could have significant negative impacts on our economy.”

Wading through the anti-worker/pro-business noise can be difficult, especially when countless articles, court filings, and congressional committee meetings have been devoted to this topic over the last five years. So, before the Trump administration takes office and potentially shakes things up again, let’s look at what has happened and what’s at stake. 

Understanding worker classification 

The DOL administers and enforces the FLSA, which includes the worker classification rule. Under the FLSA, employees must be paid a minimum wage and be compensated for overtime. Their taxes are reported and withheld, and the employer matches the required taxes for Medicare and Social Security. Some employees are also eligible for benefits, such as health insurance, worker’s compensation, paid time off, and the ability to unionize. Independent contractors (ICs) receive none of these benefits.

The FLSA never defines the terms “employee” or “independent contractor,” leaving classification up for interpretation on a case-by-case basis. The original classification rule is the result of two Supreme Court decisions from 1947, United States v. Silk and Rutherford FoodCorp v. McComb. 

The “economic realities” test established by the cases used the following six factors, which, when combined, were intended to show whether workers should be classified as employees or ICs (essentially in business for themselves):

• Opportunity: An IC can negotiate contracted work, decide not to take the work, or potentially increase their compensation by other personal actions.
• Investment: An IC invests in the tools of their trade, making some kind of material contribution to the project’s effort.
• Permanence: An IC performs work for the client that makes up only part of their total income.
• Control: An IC can decide when and how to complete assigned work.
• Integrality: An IC performs work that is outside the scope of what the business primarily offers (e.g., a toymaker can’t use an IC to make toys but can use an IC to do the payroll for the toy factory).
• Skill: An IC markets a specific set of skills that they also market to other potential clients.

This test was in place at the DOL until January 2021, when the Trump administration changed it. 

The 2021 rule mainly changed the impact of the factors for determining the classification. Under this rule, control and opportunity were the primary factors to consider. If these factors were not determinative, permanence, integrality, and skill could be applied to make the final determination. The DOL 2021 rule did not take investment into account.

The impetus for the Trump administration to change the DOL rule was likely opposition to California’s Assembly Bill 5 (AB 5), a state law that went into effect in 2020 that requires companies to use a three-pronged approach—an “ABC test”—to classify workers as employees rather than independent contractors for insurance and wage protections.

California’s worker classification legislation

The state Supreme Court adopted the ABC test to determine employment status. The A prong corresponds to the control factor in the federal test, the B prong to the integrality factor, and the C prong to the skill factor. However, the three prongs of the ABC test are narrowly interpreted with equal weight, and all three must be met for a worker to be considered an IC. For those who oppose the test, the most contentious factor is prong B, which asks the central question: Does the worker perform work that is outside the usual course of the hiring entity’s business?

The goal of AB 5 was to protect workers and ensure they are paid fairly and have recourse for bad working conditions. However, prong B requires that independent contractors not perform work integral to an employer’s business. The bill’s opponents, including Uber and Postmates, were the exact companies the bill intended to target. Under the bill, Uber drivers would have to be considered employees of Uber since they provide work integral to the company’s operations. However, Uber and other companies argued that they are tech businesses that provide a platform for a service and that they do not, in fact, provide the service itself. Broadly, tech companies also asserted that their IC workers still pass the ABC test and should not be reclassified as employees.

Tech companies filed a series of lawsuits regarding the bill, and in September 2020, California’s Assembly Bill 2257 (AB 2257) passed. Under the law, the ABC test remains the default standard for worker classification, but it includes more than 100 exemptions, including a business-to-business exemption for “quasi-public corporations” that have retained a contractor. 

AB 2257 is the result of intense lobbying and public relations campaigns from tech companies now exempt from the original law. Uber and Lyft, with support from tech companies like DoorDash, Postmates, and Instacart, wrote a ballot initiative called Proposition 22, which grants app-based companies the right to continue to maintain their workers as independent contractors with minor additional benefits, such as stipends for health insurance. Gig companies spent millions of dollars promoting the proposition, which passed with 59% of the vote.

Continuing the battle in Washington

Shortly before California passed AB 5 in 2019, the U.S. House of Representatives introduced the Protect the Right to Organize (PRO) Act, which also proposed using the ABC test for worker classification, rather than the economic realities test. The PRO Act did not pass the Senate, and the DOL 2021 rule went into effect at the end of the Trump administration. The Biden administration tried to rescind the rule immediately after taking office in 2021 but was unsuccessful. Soon after, the Biden administration went to work on the new DOL rule.

The final rule was announced in January 2024 and went into effect in March. While it’s hardly new or groundbreaking, the new rule restores the economic realities test that was in place before Trump changed it, including weighing all of the factors equally. 

Before the rule was finalized, DOL administrators appeared before congressional committees to defend it. Republican detractors warned that the new rule would cause the same problems as AB 5 in California, but without the exemptions provided by AB 2257 or special handling equivalents like Prop 22. Couched as concern for the “economic devastation” to millions of ICs in the U.S., the real issue for detractors is prioritizing the concerns of corporations over those of workers, allowing corporations to continue misclassifying workers in order to deny them higher pay and benefits. 

Thirty-three states use the ABC test in full, and eight states require ICs to pass only two of the three prongs. Other states’ regulations align with federal regulations because DOL guidelines allow states to interpret guidelines within their existing structures. 

Vulnerable workers 

Subjecting gig workers to the whims of a presidential administration’s political leanings or a state’s particular interpretation of regulations makes an already vulnerable workforce even more prone to exploitation. In the growing U.S. gig economy, which includes nearly 8 million Uber drivers, the problems are easy to see and difficult to counter. Worker misclassification takes many shapes, and it’s a longstanding issue that effectively allows for wage theft, making it lucrative for the companies that practice it—as demonstrated by the millions of dollars poured into the Prop 22 campaign in California and others like it in states like Minnesota and Colorado.

According to the Gig Economy Data Hub, there is a central problem with any regulation that seeks to classify workers: The advantages and challenges of gig work are not evenly distributed. In practice, this means that the work that some people turn to for supplemental income is “the source of high financial volatility” for others. This is mainly due to the vast range of jobs available under the umbrella of independent contractors. It’s also worth noting that people of color are more likely to be in nonstandard work arrangements that are lower paid and offer less flexibility, which means they are also made more vulnerable by the lack of employment protections.

One potential step in the right direction would be to add a new employment category, breaking with the DOL’s outdated binary employment classification system. In the U.K., there is a third category of workers, though its employment status structure is similar to what American CEOs are advocating for. The limited benefits of California’s Prop 22 exemplify what workers under this third classification might expect to receive. The U.S. is a long way from even considering this type of provision, especially considering how under-resourced the DOL is for enforcing existing labor laws and protections. This is true even at the state level. In California, gig workers are already reporting difficulty filing claims against companies that fail to provide the limited benefits promised under the new law. 

Despite legal challenges, Prop 22 was upheld in July 2024, and after Uber challenged the constitutionality of AB 5, that law was also upheld. The California Supreme Court ruled that the state legislature can continue making laws that impact companies differently. These rulings impacted more than 1.4 million California workers, the bulk of whom drive and perform delivery work for companies such as Uber, Lyft, DoorDash, and Instacart. In effect, the tech companies did not successfully undo the new law’s protections, but they don’t have to provide even a fraction of the benefits they would if their workers were classified as employees. 

As far as the new federal rule, in the end not much changed for workers. The states that employ the ABC test have more stringent rules than the federal government, and federal labor laws are considered minimum standards, so state laws take precedence. 
In mere days, the Trump administration will reenter the White House and, along with it, a host of new agency officials. This includes President-elect Donald Trump’s pick for labor secretary, Lori Chavez-DeRemer. Considered a “pro-union Republican,” the former Oregon congresswoman was one of three House Republicans to support the PRO Act. She also has a record of voting against working people.