by Rachel Greszler
Some 99% of American companies are small businesses, and 100% of businesses started out small, but a recently finalized rule from the Biden administration’s Labor Department will make it harder for small businesses to start, grow and succeed.
As of last May 1, a White House news release pointed out, “Young firms, which often start small with few employees, are a driving force in job creation.” That’s been particularly true since the COVID-19 pandemic, as small businesses with fewer than 50 employees have accounted for a growing share of new jobs.
But a new Biden administration rule that significantly restricts the ability of businesses to hire contractors (also known as independent workers, freelancers or gig workers) will instead drive out small-business job creation.
That’s because small businesses rely heavily on contractors, both to help them grow and to maintain day-to-day operations. But the new rule significantly restricts the ability for companies to hire contractors.
Businesses with four or fewer employees use 6.7 contractors, on average. That’s how they compete with bigger companies and how they expand over time.
Imagine a small landscaping company that has three employees and contracts with a half-dozen others for services, such as tree removal, stonework and lighting installation.
If the company owner had to treat those contract workers as formal employees, he would have to be in charge of, and liable for, the work they perform (even though he’s not an expert in, and does not supervise, their services); would have to restrict their hours; and provide various employee benefits and tax payments.
Under the Labor Department’s recently finalized rule that’s scheduled to take effect March 11, at least some of the factors specified in the rule would signal that these landscape service contractors should instead be treated as employees.
Since it’s unlikely that the owner could provide those contractors with enough work and because they likely want to have control over their work, it’s likely that the owner would have to cut ties with those contractors and stop offering their services.
But offering fewer services will make it harder to compete with bigger companies who have the scale and resources to employ specialized workers in-house.
The more restrictive definition of independent contracting is likely to hurt not just small businesses, but their current employees as well. For example, one of the easiest ways for companies to provide paid family leave to employees with minimal disruptions is to hire independent contractors to fill in for them. But under the new rule, performing work that’s integral to the employer’s business indicates employee status, which would make it more difficult and costly to provide paid family leave.
The administration estimates that its rule will affect 35% of businesses, or 2.8 million in total, that engage with independent contractors, but that’s almost certainly an underestimate. A 2021 survey by Gusto, a provider of payroll and human resources services used by more than 200,000 small and medium-sized businesses, found that 62% of businesses said that their company’s success was dependent on independent contractors or that it would be much harder to have a profitable business without independent contractors, and 90% of businesses said they plan to maintain or increase their use of contractors in the future.
In addition to constraints the rule will place on small businesses’ use of contractors, the rule is utterly confusing and ambiguous. While big businesses often have lawyers and “compensation, benefits, and job specialist analysts” to interpret the 106-page rule and try to determine the status of each of their employees and contractors, it will be far more difficult and costly for small businesses to attempt to understand and comply with the rule.
Whereas the current rule requires businesses to look at just two core factors in most cases—the business’s control over the work and the worker’s opportunity for profit or loss—the proposed rule contains six factors, as well as multiple (and potentially conflicting) factors within factors.
Moreover, whereas the current rule prioritizes two core factors, the new rule ensures subjectivity and confusion by specifying that “no one factor or subset of factors is necessarily dispositive.” In other words, there’s no way for employers to know whether they’ve made the appropriate determination unless they’re charged with improperly classifying workers and have to defend their rationale.
Even then, reasonable-minded investigators of worker-classification violations could come to different conclusions depending on the weight they apply to each factor.
Already, Sen. Bill Cassidy, R-La., introduced a Congressional Review Act, or CRA, to repeal the new independent contractor rule, but to take effect, that CRA would presumably require enough votes to override a presidential veto.
To provide a permanent and comprehensive solution, including much-needed clarity on independent contractor status, Congress should establish a bright-line and consistent test to unambiguously determine who is an “employee” and who is an “independent contractor.”
That definition should be the same across employment, tax, labor, pension, and health care laws. Where ambiguity exists, the choice should be left to workers and employers to decide their preferred status.
The 21st Century Worker Act would provide such clarity and consistency across federal law while prioritizing the freedom and opportunities for millions of small businesses and tens of millions of independent workers to run their businesses and earn their livelihoods in the ways that work best for them.
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Rachel Greszler is a senior research fellow in workforce and public finance in the Thomas A. Roe Institute for economic policy studies at The Heritage Foundation.
