Freelancers are taking their fight to the courtroom.

A recently adopted new final rule from the U.S. Department of Labor that could result in certain independent contractors in the promotional products market and many other industries having to be reclassified as employees under the Fair Labor Standards Act (FLSA) is being challenged in federal court in Georgia.

Freelance writers Karon Warren, Deborah Kaplan, Kimberly Kavin and Jennifer Singer have sued the Labor Department, asking a judge to place a preliminary injunction on the regulation that would immediately prevent its enforcement. The government plans to begin enforcement March 11.

The writers, who are the co-founders of Fight For Freelancers USA, a nonpartisan grassroots group that advocates to protect the choice of self-employment, ultimately want the court to declare the Labor Department’s rule unlawful and thus void.

‘Clear-as-Mud-Rule’

The plaintiffs say the department’s new regulation on freelancers is extremely vague and confusing, making it impossible for freelancers/independent contractors and businesses that work with them to comply. The result is that freelancers/independent contractors could lose their livelihoods, and companies will be deprived of their valuable work.

“This rule doesn’t actually protect freelance writers and editors like us, or any of the independent contractors in hundreds of professions ranging from trucking to financial services,” the plaintiffs wrote in an opinion article published by The Hill.

They continued: “Instead, this clear-as-mud rule gives the department carte blanche to impose regulatory wrath on any of our clients as it sees fit. Our clients then can face serious fines and penalties for working with us as independent contractors, and our freelance businesses go poof. Even if we’re registered as limited liability companies. Even if we negotiate mutually agreeable contracts. Even if we, as small-business owners, have no desire to be anyone’s employees.”

Please read and share. Hundreds of professions and more than 70 million independent contractors livelihoods are at risk! https://t.co/JhnjLYRvKL @Freelancers_USA

— MicheleWojciechowski (@TheMicheleWojo) February 1, 2024

The suing freelancers pointed to a recent study from the Mercatus Center, which found that similar state-level legislation on independent contractors in California failed to create unionizable jobs and decreased overall employment by 4.4% and self-employment by 10%. Mercatus asserted that this happened even though California exempted more than 100 professions. The Labor Department rule currently has no exemptions.

“We hope the court will invalidate the Labor rule and protect our careers,” the writers say, adding that they have their fingers crossed that there will be bipartisan support in Congress for use of the Congressional Review Act to block the Labor Department rule from taking effect March 11.

Beyond the lawsuit from the freelance writers, the Labor Department’s independent contractor rule is facing at least one other legal challenge.

A coalition of business groups is trying to have lifted a court-ordered stay on a ruling that would have temporarily reinstated a regulation on independent contractors that was implemented under President Donald Trump. Some businesses and independent contractors favor that Trump-era rule, saying it doesn’t get in the way of organizations and freelancers working together.

Criticism & Praise From Promo

The Labor Department passed the new regulation in early January. The department says the rule aims to clarify who should be an employee and who should be an independent contractor under FLSA, and to help workers currently classified as independent contractors when they should be employees, which generally enjoy greater protections under the law.

“Misclassifying employees as independent contractors is a serious issue that deprives workers of basic rights and protections,” says Acting U.S. Secretary of Labor Julie Su.

Some in the #promoproducts market say this just-approved Labor Department rule could lead to job loss and higher labor expenses in the promo industry, but others say it will protect sales reps who've been exploited. See where things stand.https://t.co/JuMCwu1YJa

— Chris Ruvo (@ChrisR_ASI) January 9, 2024

While perhaps well-intentioned, the regulation could have negative practical effects in promo, according to some industry executives.

They say the regulation will trigger job loss, heavier bureaucracy for industry businesses and greater labor expenses. A key concern is that distributorships may break off relationships with independent contractor salespeople, rather than risk potentially violating the regulations or incurring the added expense that would come with making the worker an employee.

“While the Labor Department believes the new rule will merely result in the independent contractor becoming an employee, insignificant consideration is given to the other alternative: Namely, that the employer could opt to end the position,” attorney Chuck Machion, senior vice president and senior counsel at ASI, has said.

On the flipside, some proponents in promo think the new rule could help industry salespeople who are working as independent contractors currently, but who want to be classified as employees, achieve the employee status they believe they fairly deserve.

“The rule from the government readjusts business practices that harmed the workforce,” a promotional products sales rep who has worked as an independent contractor told ASI Media in January.

The Rule & Enforcement

Most broadly, the new Labor Department regulation says that a worker is not an independent contractor if they’re economically dependent on an employer for work. From there, the rule establishes six nonexclusive factors that must be analyzed to determine if a worker is an employee or independent contractor under FLSA.

The factors are the degree to which the worker has the opportunity for profit or loss depending on managerial skill; the financial stake and nature of any resources a worker has invested in the work; the degree of permanence in the work relationship; how much control the employer has over the work; the skill and initiative required of the worker; and the extent to which work performed is an integral part of the employer’s business.

“No factor or set of factors among this list of six has a predetermined weight, and additional factors may be relevant if such factors in some way indicate whether the worker is in business for themself (i.e., an independent contractor), as opposed to being economically dependent on the employer for work,” the Labor Department says.

The Labor Department’s Wage & Hour Division (WHD) will enforce the rule. Violations can lead to civil money penalties. Companies that misclassify workers as independent contractors when they should be employees could also have to pay back wages and back taxes.

The Wage & Hour Division often conducts an investigation into a potential violation following a complaint, meaning a promo independent contractor that feels they should be an employee has the power to potentially prompt an investigation. WHD could also simply select a business for investigation. In selecting investigations, WHD tends to focus on low-wage industries because of what the agency says is high rates of violations or egregious violations.

The Labor Department’s final rule only applies to employee/independent contractor considerations under FLSA. It’s not applicable to other laws – federal, state or local – that use different standards for employee classification.