PROTECTING SMALL BUSINESS, PROMOTING ENTREPRENEURSHIP

SBE Council Comments on DOL’s Proposed Independent Contractor Rule

By at 13 December, 2022, 5:43 pm

The Honorable Martin J. Walsh

Secretary, U.S. Department of Labor

200 Constitution Avenue, NW

Washington, D.C. 20210

 

Re: Employee or Independent Contractor Classification Under the Fair Labor Standards Act (FLSA), 87 Fed. Reg. 62218

VIA ELECTRONIC SUBMISSION

 

Dear Secretary Walsh:

The Small Business & Entrepreneurship Council (SBE Council) appreciates the opportunity to comment on the Department of Labor’s (DOL’s) proposed rulemaking: “Employee or Independent Contractor Classification Under the Fair Labor Standards Act.”

SBE Council is an advocacy, research and education organization dedicated to promoting entrepreneurship and protecting small business. For 28 years our work has focused on strengthening policies and programs that encourage startup activity, small business growth, economic opportunity and resiliency through entrepreneurship. Much of our work focuses on modernizing rules and laws, lowering barriers to entry, eradicating unnecessary red tape, and advancing policies that strengthen capital formation, investment, access to markets, and innovation.

SBE Council strongly opposes DOL’s proposed changes to the current independent contractor classification rule, as it will upend flexibility, financial security and success for millions of self-employed Americans, small businesses and freelancers. The proposed rule would significantly turn back the clock on the type of policy that is needed for Americans to succeed and successfully navigate the modern economy. It would foist a groundless, archaic, inappropriate, complex and inflexible regulatory framework onto the productive and successful U.S. independent contractor model, which is making our economy more competitive, vibrant, and responsive to ever-changing economic conditions, and the global marketplace. 

The proposal is out-of-step with the foundational and growing shift in how people want to work. More people are starting independent businesses because they have access to modern tools and platforms that make it simple and affordable. Technology, the acceleration to digital, and changing consumer demands and needs have provided more people with an opportunity – and the courage – to bring their ideas and innovations to the marketplace through self-employment, entrepreneurship, and freelance work. Overwhelminglythese individuals made the choice to be to their own boss and want control over their own time, as validated by SBE Council’s recent report and survey on pandemic startups. When asked the top reasons for starting their business: 63% wanted to be their own boss, 46% wanted more flexibility and control of their time, and 21% wanted to supplement their current income.

In terms of startup policy priorities, they are very much in line with reforms that established small businesses owners need. They are not asking the Biden Administration to vastly change or reorganize independent contractor rules. They want to work for themselves. They do not want to be a full-time employee. Instead, they want the Biden Administration to focus on tax simplification and lower taxes, address high inflation, work to lower interest rates, more access to capital, fixing supply chain glitches, affordable health coverage, and less regulation. The changes proposed in the DOL’s rulemaking would make the business ecosystem more rigid, more costly, less flexible and more concentrated. That means it would disproportionately impact the small startups, freelancers and small businesses who drive local economies and add to the competitiveness and vibrancy of the national economy.

In his Economic Blueprint released in September 2022, President Biden stated that he is working to advance policies that will make the economy “more competitive, less concentrated and more resilient,” yet the proposed independent contractor rule will do the exact opposite. It will lead to fewer businesses, less business creation, higher business concentration, and vast uncertainty, which undermines business and economic resiliency.

As I noted above, the startup boost via new business applications over the past three years is a result of lower barriers to entry, transformational opportunity, and the desire for more flexibility. This boom in entrepreneurial intention, which crosses all sectors and industries, began during the pandemic and has continued into 2022, albeit at a slower pace. According to the Census Bureau, 5.4 million people filed new business applications in 2021, an increase of 53% from 2019 and the most of any year on record. The pandemic startups that launched their businesses during this difficult period are a bright spot for our economy, U.S. innovation and job creation. After all, new businesses are sorely needed to replenish the untold thousands that closed for good due to COVID government restrictions and shutdowns.

Not surprisingly, women started more businesses than men during the pandemic. This difficult period for our economy disproportionately impacted women in terms of their exodus from the workplace, but many have found flexibility, financial success and opportunity through self-employment and freelancing. For many women, flexibility through business ownership is a godsend, given the cost of childcare and other responsibilities such as, for example, the need to care for an elder family member.

The proposed DOL rule, if enacted, would be a massive step backwards for women and all self-employed freelancing Americans. The proposal revives an outdated approach that works against flexibility and regulatory certainty. The proposed rule – with its multitude of equally weighted economic reality factors – is much too broad, unwieldy, arbitrary and confusing, which means it will drag countless numbers of independent contractors and freelancing individuals into a “misclassified” pit, if enacted.

The DOL itself estimated that 6.5 million small businesses or small entities could be affected by this rulemaking, along with 22.1 million independent contractors.

 Disrupting even a small percentage of this affected pool could bring chaos and confusion across key sectors of our economy and aggravate economic weaknesses that many businesses are still working to rebound from. In comparison to the current rule finalized in March 2021 -which centered on simplifying two core elements – control of the work, and opportunity for profit and loss – and weighted to a lesser extent permanency of the relationship, skills required, and the degree of work integration in production, the DOL has put forward a multi-factor economic reality test that analyzes the totality-of-the-circumstances in a business, where each of the following would be given full consideration:

1.) The opportunity for profit or loss depending on managerial skill.

2.) The investments by the worker and the employer.

3.) The degree of permanence of the work relationship.

4.) The nature and degree of employer control.

5.) The extent to which the work performed is an integral part of the employer’s business.

6.) The worker’s use of skill and initiative.

7.) Additional factors may be considered if they are relevant to the ultimate question of whether the workers are economically dependent on the employer for work or in business for themselves.

There is one certain reality to the DOL’s proposed economic reality test – small businesses, independent contractors and freelancers would find it cumbersome, costly, if not impossible to understand and comply with the proposed 7-point test.

SBE Council believes it is vitally important that the DOL fully understand the consequences of moving forward with the proposed rulemaking. We do not believe that is the case, or that the DOL has adequately quantified or considered the cost of the proposed rule to small businesses and small entities.

The DOL’s Initial Regulatory Flexibility Analysis estimated the proposed rule’s cost at $25 per year per business, which includes reading and comprehending the 200-page rule (and $5 per year cost for an independent contractor to do the same.) That’s it.

The economic analysis does not include the cost to a small business or small entity if an independent contractor is determined to be “misclassified,” or if a small business or small entity loses business revenue due to the loss of human capital, or the cost to comply with the new rule, or if an independent contractor loses business due to potential or actual misclassification. Not only has the DOL not conducted a thorough and realistic cost analysis of the proposed rule, the agency has not made a rational case for tossing out the March 2021 rule, which provides more clarity and certainty for small businesses and independent contractors.

In conclusion, SBE Council urges the DOL to withdraw the independent contractor proposal and allow the March 2021 rule to stand.

Respectfully submitted,

Karen Kerrigan, President & CEO

 

 

 

 

 

 

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