The Biden Department of Labor (DOL) proposed a new rule Tuesday that would force millions of independent contractors to reclassify as W-2 employees. This proposed rule comes at the worst possible time as American families struggle with generation-high inflation and a Biden-induced economic downturn.
If implemented, the rule would break the gig economy model and raise taxes on millions of American workers. The proposed rule also ignores the fact that independent contractors overwhelmingly prefer to work as independent contractors. The DOL should withdraw the proposed rule.
Under current law, there are two ways an individual can have a relationship with someone that is paying him or her. The first is an employee, where a person that is paying the individual has total control over how, when, and where the work is being done.
The second is as an independent contractor, or freelancer, where an individual goes and performs a task and presents the result to the person that is paying them. Freelancing means that a worker can earn a living without needing to report to a boss.
The DOL proposed rule would force independent contractors to reclassify as W-2 employees if the worker is “economically dependent” on the company. This would drive a stake through the gig economy model, where gig workers are free to dictate their own schedules by virtue of their independent contractor status.
This rule ignores the fact that modern technology has enabled millions of Americans to carve out a viable and flexible career for themselves by being their own bosses. Think of a single mom selling homemade soap on Etsy, a graphic designer building up a client base, or an Uber driver putting the extra cash he earns towards starting a business of his own. These are real Americans pursuing their passions without anyone telling them what to do.
The Biden Administration dislikes the independent contractor classification because they cannot force freelancers into a union, one of the biggest drivers of campaign cash to Democratic Party coffers. Organized labor spent $1.8 billion on politics and lobbying in 2020, $1.4 billion of which came directly from worker dues. Nearly 90 percent of the $260 million that labor unions spent on federal elections in 2020 went to Democrats.
The DOL rule would raise taxes on millions of Americans. A recent study from the Tholos Foundation and the Beacon Hill Institute showed that forced reclassification of independent contractors would lead to 7,749,443 workers paying more in tax as W-2 employees than independent contractors:
“[President Biden] promised in his campaign to raise taxes only on those making more than $400,000. BHI found that 56% of the independent contractors most likely to be reclassified would pay more tax as employees, which we estimate to be about 7.7 million taxpayers.”
The rule would break Biden’s tax pledge not to raise taxes on workers making less than $400,000:
“We estimate that 96%, or 7.5 million, of those reclassified taxpayers who would pay more tax, make less than $400,000…Clearly, millions of independent contractors will pay more tax if forced to become employees, and almost 100% of them make less than $400,000, thus breaching President Biden’s pledge.”
The study uses the best available data from 2016 to reach these conclusions. Due to the rising popularity of the gig economy and workers turning to side hustles to make ends meet during the COVID-19 pandemic, the real number is likely much higher:
“We used 2016 data, which most likely does not include new ICs created by the growth of the “gig” economy since 2016, and certainly does not include growth due to the COVID–19 pandemic. The latest available IRS data on Schedule C filings (2018) shows about 26 million, which is about the same as 2016.21 More recently, Freelance Forward conducted an online survey to estimate the number of freelance workers in the U.S. They estimate 59 million, which, if accurate, is a dramatic increase. Using our results this would imply that about 33 million taxpayers would pay more tax if reclassified. However, their survey was limited to only 6,001 people. It is also quite possible that many survey respondents are not issued a form 1099-MISC, because they earned less than $600, and do not report their income.”
Finally, the rule ignores that the majority of gig workers prefer the freedom of freelancing to the rigidity of traditional employment. Democratic-leaning Benenson Strategy Group and Republican-leaning GS Strategy Group conducted a survey which found that 77 percent of drivers say flexibility is more important than receiving benefits. In other words, drivers prefer flexibility over the benefits of employment by a margin of more than 3-to-1, and nearly 70% of drivers would quit if they had to take on a traditional employment role with Uber.
The DOL proposed rule would stifle the gig economy, raise taxes on millions of American workers, and ignores what gig workers want. The DOL should immediately withdraw the rule.