Enacted toward the end of the Great Depression in 1938, the Fair Labor Standards Act (FLSA) created the concept of minimum wage and time-and-a-half overtime pay over forty hours a week. Eighty four years later, as the gig economy nears a half-trillion dollars in gross volumes and the great resignation reorganizes labor markets across industries to flex work, the Department of Labor (DoL) is deliberating the classification of gig workers. A century-old law is not designed to account for the fact that entire businesses and industries can run almost entirely on a flex workforce. No clear answers are forthcoming.

The FLSA has been the beacon for worker classification. Multiple factors in an economic reality test are used to determine whether a worker is an exempt employee (think white collar), non-exempt employee (think hourly wage) or independent contractor (think freelancer). Employers have statutory responsibilities including paying the employee’s taxes, providing mandatory benefits and tracking of overtime when workers are classified as non-exempt employees. There is no such obligation for independent contractors.

In January 2021, soon after California’s AB5 law came into effect, the DoL published a rule that made it easier for gig workers to be classified as independent contractors. It said that the DoL “believes that a clear articulation will lead to increased precision and predictability in the economic reality test's application, which will in turn benefit workers and businesses and encourage innovation and flexibility in the economy.” The rule distilled several overlapping factors of the economic reality test with subjective weighting of five distinct factors — nature and degree of the individual’s control over the work, opportunity for profit or loss, skill required, permanence of working relationship, integrated unit — the first two being core and “more probative of the question of economic dependence.”

And then again, in October 2022, the DoL proposed rescinding the 2021 ruling because it “does not fully comport with the FLSA's text and purpose as interpreted by courts, and departs from decades of case law applying the economic reality test.” The proposal lets go of the core factors, returns to the totality-of-the-circumstances analysis, and lays emphasis on the integral factor, “which considers whether the work is integral to the employer's business.” In essence, the new ruling wants to reset the debate to be more worker friendly, versus business friendly.

The on-demand economy has a history of getting labor regulators super pumped. After Uber (founded in 2009) unlocked the sharing economy, Postmates (founded in 2011), Instacart (founded in 2012) and DoorDash (founded in 2013) applied it to groceries and food, the two largest retail categories. This opened the floodgates to what we now know as the on-demand economy, altering business practices in products and services, for both consumers and commercial businesses.

The on-demand economy is powered by a gig workforce, which at its start, was seen as part of the sharing economy, where citizens could rent their time, skills and assets to make supplemental  income. A decade later, it has evolved to become the gig economy where more workers rely on flex work platforms for primary income.

A simple analysis of the five factors mentioned previously shows that gig workers have a high degree of control over their work, and retain the entrepreneurial opportunity to make a profit or loss, thus working for themselves. However, it is also true that these businesses depend on gig workers for their integrated unit of production, and many workers depend substantially on these businesses for their primary income.

The FLSA fails to comprehend that there might be a class of workers who, as a matter of economic reality, may be in business for themselves and yet be economically dependent on the potential employer for work. To resolve this cognitive dissonance of the law of the land, labor laws are being challenged to evolve to fit the new normal.

If regulation sways too business friendly, workers who rely on gig work as their primary income are  exposed.

Certain businesses that hire workers as non-exempt employees might use it as an opportunity to shift them to independent contractors, meaning workers will need to take care of their own taxes and benefits. On the other hand, if regulation sways too worker friendly the additional overheads will render jobs unviable, or reduce net payouts to workers. Certain workers who enjoyed the flexibility of independent contracts might lose their incomes. It is important to evaluate the longer-term implications of this new and growing commerce.

The common ground that businesses, gig workers and regulators stand on is that, for the economy at large, we need to grow income opportunities for the nation’s workforce while ensuring fair treatment of workers. The gig work phenomenon has gone well beyond ridesharing and consumer deliveries, to services in mainstream industries — retail, hospitality, construction, home services, financial services, energy, real estate, small-medium businesses and more.

Old regulations find themselves obsolete in the face of this new economy. New regulations must get it right because the economic impact will be far-reaching. It might take a few iterations for the regulators, elected officials and citizens to come up with a workable solution. It is worth spending the time to do so, because the gig economy has come of age.

Kashyap Deorah is co-founder and CEO of HyperTrack