The Big Story: Startups to face hiring challenges following independent contractor rule
This week, the U.S. Department of Labor issued a final rule compelling companies to treat certain workers as employees rather than independent contractors, a move that's expected to limit flexible options for workers and increase costs for industries that frequently rely on contract labor, like early-stage startups. Independent contractors play a critical role in the startup ecosystem, bringing expertise to and creating flexibility for startups who often don’t have enough work or resources to justify or afford a full-time hire. The rule will create new uncertainty for startups looking to hire independent contractors.
The Biden administration regulation replaces a rule from the previous administration which allowed companies to weigh two core factors, giving companies, including startups, more clarity when classifying workers. The new rule, by contrast, includes six unweighted factors for employers to consider whether workers are “economically dependent” on a business, likely resulting in more independent contractors being classified as employees. Under the new rule, set to go into effect March 11, startups may face uncertainty and limitations when making hiring decisions. They may be forced to decide between hiring employees they cannot yet afford and don’t have work for, risking misclassification and resulting penalties by hiring contract labor, or foregoing growth.
Independent contractors fill a critical role in the startup ecosystem—one study found that 79% of startups have hired at least one independent contractor. Startups often rely on contract labor to meet their needs as they grow, including for one-off projects that don’t necessitate hiring full time employees. As Laura Good of Startup Sac told us, regulations that limit a startup’s ability to hire “can make it impossible for early-stage startups to get off the ground.” Given the significant impact this policy change could have on the innovation ecosystem, lawmakers should immediately take steps to limit the negative implications for startups.
Policy Roundup:
Courts keep stopping age-gating laws, states keep introducing them. This week, the tech industry group NetChoice won a temporary restraining order against an Ohio law that would de facto require age verification of all social media users. NetChoice is also suing over similar laws in California and Arkansas, which courts have likewise stopped from being enforced. Despite inviting litigation and several courts finding likely constitutional problems, states continue to introduce laws that either explicitly or implicitly require age verification. Florida lawmakers, for example, have introduced several measures restricting the services minors can access online. In addition to the constitutional problems, for startups, these laws pose practical problems as verifying the age of all of their users requires additional data collection, the costly integration of new systems, and longer user onboarding processes that diminish user conversion rates.
Broadband subsidy program to run out of money without Congressional action. On Thursday, the Federal Communications Commission began steps to end the Affordable Connectivity Program (ACP), a broadband subsidy program that helps millions of households pay their Internet bills. The ACP was created as part of the Bipartisan Infrastructure law but faces dwindling funds that are expected to run out by April. Congress urgently needs to pass legislation directing additional funds to save the program and continue enabling individuals to access the resources they need to participate in the modern economy.
New Jersey adds to the privacy patchwork. On Monday, New Jersey passed a consumer data privacy bill, adding to the more than dozen states that have their own varying data privacy laws. The bill, now awaiting consideration by New Jersey Governor Phil Murphy, contains several distinctions that will create new compliance questions for companies. Those differences add to a complex patchwork of state privacy laws that creates confusion and duplicate costs for startups, leading them to advocate for a uniform, comprehensive federal privacy law that creates certainty and ends the patchwork.
Senate committee looks to upend copyright framework, stymie AI innovation. A Senate Judiciary subcommittee held a hearing this week on AI and journalism, where several committee members called for changes to copyright law to narrow fair use and impose new liability on AI developers. One witness pushed back, underscoring that copyright law allows journalists to use and repurpose facts from each other and urging lawmakers to avoid undermining Internet openness through mandatory licensing. As Engine has long underscored, the current copyright framework works well for startups, and should be affirmed to ensure startups can compete and innovate in AI.
Non-compete reform bill in New York vetoed, new legislation likely ahead in 2024. New York State Senator Sean Ray signaled plans to introduce a modified non-compete ban bill after New York Governor Kathy Hochul vetoed legislation that would have broadly banned non-compete agreements for employees across New York at the end of last year. Engine, alongside a dozen other entities urged Governor Hochul to sign the ban passed last session, which could have supported workforce mobility and helped to ensure the availability of skilled individuals, including for startups. Post-employment non-competes often restrict workers from founding new, competing companies and from lending their skills to other businesses, hampering innovation.
