By Donielle Tigay Stutland, J.D.
Commissioner Slaughter notes that the proposed rule does not reflect current labor market realities and warns that it will have anticompetitive consequences.
In light of the Department of Labor’s (DOL’s) September 22, 2020 announcement of a proposed rule to address how to determine whether a worker is an employee or independent contractor under the Fair Labor Standards Act (FLSA), FTC Commissioner Rebecca Slaughter, writing on behalf of herself and not the FTC, issued a comment letter to the DOL urging the Department to reconsider the proposed rule. The letter argued that the proposed rule does not reflect current labor market competition and competition related issues, including concentration and monopsony power, and Slaughter contended that there will likely be anticompetitive consequences under the proposed rule.
Proposed Rule. On September 22, 2020, the DOL announced a proposed rule intended to address how to distinguish between an employee or an independent contractor under the FLSA. The proposed rule sets forth a five-factor test to determine if a worker is economically dependent on another’s business or is in business for themselves. The first two factors are deemed “core factors,” and are as follows: (1) the nature and degree of the individual’s control over the work and (2) the individual’s opportunity for profit or loss. The proposed rule also contains three other factors that may contribute to the analysis, but carry less weight than the first two factors: (1) the amount of skill required for the work; (2) the degree of permanence of the working relationship between the individual and the potential employer; and (3) whether the work is part of an integrated unit of production. Additionally, the DOL advised that the actual practice is more relevant than what may be contractually or theoretically possible in determining whether a worker is an employee or an independent contractor. The notice of proposed rulemaking has a 30-day review and public comment period.
Slaughter’s comments. Slaughter began her critique by noting that the proposed rule failed to consider the reality of labor markets, including concentration and monopsony power, which could have a negative effect on competition for workers’ labor. The comment letter reflected on the negative effects that monopsony power can have, particularly for low-wage workers and Black and Latinx workers. Slaughter noted that in these markets, workers are most in need of the FLSA’s protections and suffer most from misclassification. Further, the FTC Commissioner suggested that in labor markets, this could result in firms hiring fewer employees and paying lower wages to their workers. While the FTC would enforce this through the mergers & acquisition review process and protocols it has in place, the Commissioner noted that, “once a violation has occurred or is imminent is no substitute for ex ante rulemaking by the Department of Labor to curb employer monopsony power.”
Harming competition. The proposed rule is likely to harm competition, according to Slaughter. The comment letter suggested that harm to competition could happen in several ways, as the proposed rule would surely permit more misclassifications of workers as independent contractors. First, the letter suggested that firms that rely on the proposed rule and do misclassify employees as independent contractors would have an unfair competitive advantage because they would be able to avoid legal obligations and would be able to offer lower compensation in such cases. Additionally, she argued that the misclassification of workers would diminish the ability of workers to compete for better wages and working conditions, which would undermine bargaining power, by not affording workers protections under the FLSA.
Finally, the comment letter argued that the proposed rule fails to consider anticompetitive vertical restraints. Slaughter observed that restraints such non-competes can be anticompetitive, and can offer employees subject to them fewer competitive choices, particularly among low-wage workers. Given that the FTC already monitors anticompetitive vertical restraints, the letter suggested that by promulgating a rule that could make this behavior more likely, the rule would only add, “to an under-resourced FTC’s voluminous workload.” The Commissioner also took issue with the claims that the proposed rule will foster competition around independent contractors. She noted that often times when low wage workers are working for several entities at the same time, including for competitors, it may just be evidence that misclassified workers are “systemically underpaid.”
Labor exemption confusion. Finally, Slaughter said that the proposed rule would create legal confusion around the labor exemption to the antitrust laws. She argued that the proposed rule would have uncertainty as to whether independent contractors would qualify for the collective bargaining exemption under antitrust laws. While Commissioner Slaughter indicated that she believes that even properly classified independent contractors should be afforded the right to organize against unfair labor practices and to seek better working conditions and wages, she noted that the jurisprudence remains unclear in this area and it is important for workers to not be misclassified, as it could potentially limit the rights to organize.
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