The administration has launched a war on business.
The administration has launched a war on business.
W ill President Biden and labor secretary–nominee Marty Walsh (Boston mayor and former president of Laborers’ Union Local 223) favor the special interests of Democratic constituencies over the welfare of American workers? If three early actions to overturn deregulatory reforms at the Labor Department are indicative, the answer is yes. The Biden administration appears poised to expand radically the regulatory state that is especially burdensome for small businesses. Indeed, war on business at the Biden Labor Department has already begun.
Let’s look at each of the changes in turn.
The Independent Contractor Rule
In three cases decided between 1944 and 1947, the U.S. Supreme Court held that a worker’s status under the Fair Labor Standards Act (FLSA) as either an employee or an independent contractor should be based on economic reality. Over the years, differing interpretations on how to apply the economic-reality principle have created uncertainty and deterred the hiring of independent contractors.
Union leaders prefer classifying workers as employees rather than independent contractors, because employees can organize and bargain with their employers. Employees enjoy benefits such as employer-sponsored health insurance. Union leaders claim that employers are intentionally misclassifying workers as independent contractors to avoid the cost of employer-sponsored health insurance.
Most workers classified as independent contractors, such as Uber drivers who control their own schedules, are happy with their status. Independent contractors, many of whom have child-care or elder-care responsibilities, enjoy the flexibility that contract work allows. And health-insurance coverage is only slightly lower for independent contractors (79 percent) than employees (88 percent). In other words, it is not so much about benefiting abused workers as recruiting new members for the labor unions that reliably cut big checks to Democrats.
The debate over worker classification has intensified as the “gig economy” has boosted the number of independent contractors up to roughly 22 million. Responding to union demands, California enacted AB5 in 2019. AB5 imposed a more stringent standard (known as the ABC test) than the federal standard for classifying workers as independent contractors and reclassified workers at Lyft and Uber as employees. After California’s stringent standard proved unworkable, the state enacted numerous exemptions on September 4, 2020. Then on November 3, 2020, California voters enacted Proposition 22, returning workers at Lyft and Uber to independent-contractor status.
On January 7, 2021, the Labor Department issued a final rule to clarify the status of workers under the FSLA. Affirming the economic-reality principle, the rule would have provided two core tests to determine a worker’s status: 1) the nature and degree of control over the work, and 2) the worker’s opportunity for profit or loss based on initiative and/or investment.
In “The Biden Plan for Strengthening Worker Organizing, Collective Bargaining, and Unions,” then-candidate Biden promised to “work with Congress to establish a federal standard modeled on the ABC test.” On January 20, 2021, President Biden froze the independent-contractor final rule, which had not become effective. The Biden administration sided with union leaders rather than workers and moved federal policy in line with a California law that was too liberal even for California voters.
The ESG Rule
In order to press financial institutions and investors to fund green energy instead of fossil fuels, environmental activists advocate environmental, social, and governance (ESG) investing, which excludes investments inconsistent with their political preferences. Environmental activists want private employer-sponsored retirement, health, and other welfare plans that contain more than $11 trillion in assets and cover 154 million U.S. workers, retirees, and their beneficiaries to incorporate ESG investing.
However, excluding profitable investments for political reasons necessarily increases portfolio risk and/or reduces portfolio returns. Thus, ESG investing may harm workers, retirees, and their beneficiaries over time. Which would you rather invest in, a firm that maximizes shareholder value, or one that is subservient to the social-justice flavors of the day?
The Employee Retirement Income Security Act (ERISA), which governs private employer-sponsored retirement, health, and other welfare plans, imposes a fiduciary duty on plan managers to act solely in the interests of plan participants and beneficiaries. On October 30, 2020, the Labor Department issued a final rule clarifying these fiduciary duties. Plan managers must make investment decisions based solely on economic factors (i.e., factors that may materially affect the risk and/or return of investments based on an appropriate investment horizon consistent with a plan’s objectives and funding policy). The final rule protects retirement, health, and other welfare benefits from plan managers that would indulge their policy preferences at the expense of workers, retirees, and their beneficiaries.
How did the Biden administration resolve this conflict between environmental activists and workers? On January 20, 2021, President Biden ordered a review of the ESG final rule and 99 other rules opposed by environmental activists, opening the way for a new rule favoring ESG investing in employer-sponsored retirement, health, and other welfare plans. Clearly, the plan is to take pensions for a ride.
The Association Health Plans (AHPs) Rule
The Affordable Care Act (ACA) imposes costly mandates and inflexible pricing on health insurance sold in the individual market and the small-group market (employers with fewer than 50/100 employees depending on the state). On top of that, ERISA limits state regulation in the large-group market. With a lower regulatory burden, the per-employee cost of employer-sponsored health insurance with similar benefits is 8 percent to 18 percent less for large employers than for small employers.
Before 2018, a small number of employer associations that met a strict “commonality of interest” test could allow small employers to enjoy the lower costs of the large-group market through Association Health Plans (AHPs). In some sense, the rule allowed cost savings in numbers. On June 19, 2018, the Labor Department issued a final rule to relax the commonality-of-interest requirement and expand the availability of AHPs by 1) allowing geographically based employer associations to offer AHPs in a locality, state, or a multi-state metropolitan area, and 2) allowing self-employed association members to purchase AHPs. A study found this rule would have caused between 2.4 million and 4.3 million individuals to move from the individual and small-group markets to AHPs, saving between $9.3 billion and $25.1 billion in premiums by 2022.
Despite the rule’s expansion of access to affordable health insurance, union leaders and health-care advocates opposed it, fearing the final rule would undermine the sanctified ACA, and a coalition of 12 Democratic attorneys general sued to overturn it. On March 28, 2019, a district court found large parts of the final rule to be unlawful. The department appealed this decision. On November 14, 2020, the appeals court heard oral arguments but has not rendered a decision.
The AHP final rule conflicts with Biden’s campaign promise to strengthen the ACA. The Biden administration seems poised to overturn the rule by dropping the appeal or issuing a new rule. In either case, President Biden will side with union leaders, health advocates, and Democratic attorneys general over the self-employed and workers at small employers who would have benefited from lower health-insurance costs.
By undoing these actions, the Biden administration has put the naked political ambition of politicians funded by Big Labor over the welfare of American workers. Consequently, there will be fewer opportunities to work as an independent contractor, less retirement security for private-sector workers, and higher health-insurance costs for the self-employed and workers at small employers.