Proposed independent contractor policy change could impact startup talent
By Jennifer Weinhart, Policy Manager, Engine Advocacy & Foundation
A recent policy change could make it harder for startups to hire the workers they need as they launch and scale. In the last few years, policymakers have increasingly sought to limit companies’ use of “independent contractors,” and a new rule change at the Department of Labor (DoL) could make it more difficult for startups to use these employees, including for things like product development, design and marketing services, legal services and accounting support.
Hiring talent is a significant step — and expense — for many startups. And startups with lean budgets may fill their talent gaps with different types of labor to meet their growing needs, including with independent contractors. Many startups rely on project-by-project work, particularly in their initial stages, using contract labor to fill a need until they’ve grown enough to hire a full time workforce. And research bears out the critical role independent contractors play in the startup ecosystem, with one study finding that 57% of startups indicated “that the use of contractor labor is an essential part of their business models.” The same study found that 79% of startups have hired at least one independent contractor.
But the Biden administration’s rule, published this week in the federal register, could limit the ability of startups to hire the talent they need, requiring businesses to classify workers as employees if they are “economically dependent” on a company. This is determined by six factors, including the degree to which the work performed by an employee is central to a company’s business. The proposed rule resembles guidance from the Obama administration and could compel companies to classify more workers as employees.
The new proposed rule marks a distinct change in direction from a previous DoL effort to clarify who could serve as an independent contractor thus enabling startups to better understand what workers were able to fit within the model. That rulemaking identified just two factors — the nature and the degree of control an individual has over their work and an individual’s opportunity for profit or loss — in determining a worker’s classification. The Biden administration subsequently delayed, then withdrew the rule, which was later reinstated by a Texas court following a challenge by the Coalition for Workforce Innovation.
The Biden administration’s rule reclassifying workers has long been expected, with the administration indicating support for proposals to restrict who could be classified as an independent contractor, looking to California’s ABC test and the Protecting the Right to Organize (PRO) Act. The DoL’s new proposed rule, which follows an economic reality test to determine worker status, could upend the ability of many companies, including startups, to hire talent as needed and force them to hire full time employees instead. As we’ve stated in the past, while established, large companies are well suited to handle the expense associated with employing a full time workforce, many startups operating on razor-thin budgets rely on contract labor for needs like web design or accounting services to fulfill temporary and one-off needs. As Grant Leah, the co-founder of Woodland-based startup Nytch, explained to Engine, “The reality is that startups are so small and so lean that we can’t really hire employees. . .Founders are the ones who typically don’t take a salary. Without the ability to hire independent contractors to fill these voids, most startup ideas would never get off the ground.”
The proposed rule has a 45-day notice and comment period, and startups have the opportunity to provide feedback to the Department of Labor on the rule’s potential impact. It is critical that the administration hears from startups who may be affected. Without policy change, a final rule will likely go into effect next year.
Engine is a non-profit technology policy, research, and advocacy organization that bridges the gap between policymakers and startups. Engine works with government and a community of thousands of high-technology, growth-oriented startups across the nation to support the development of technology entrepreneurship through economic research, policy analysis, and advocacy on local and national issues.
