The Big Story: Rule takes effect restricting startups’ ability to hire contract labor
This week, a U.S. Department of Labor rule on independent contractors entered force which will make it harder for startups to access the flexible talent they need, especially in their earliest stages. The updated regulation revises the determination of employee or independent contractor status under the Fair Labor Standards Act relying on a six factor economic realities test. It replaces a 2021 rule which gave weight to two core factors and will be more challenging for startups to navigate.
Independent contractors play a significant role in the startup ecosystem. Studies show that 57 percent of startups find them to be essential to their businesses and 79 percent of startups have hired at least one independent contractor. Founders rely on contract labor, particularly in their startups’ early stages in part due to funding constraints, but more commonly to address one-off projects that don’t necessitate hiring full-time talent. One study indicated that 69 percent of startup respondents hired contract labor because of one-off projects or because “they needed specialized talent they could not hire full time.” “Without the ability to hire independent contractors to fill these voids,” Grant Leah, co-founder of Woodland, California-based startup, Nytch, told us, “most startup ideas would never get off the ground.”
Engine, as well as 28 members of the startup ecosystem, expressed concerns about the final rule to the Department of Labor in 2022, arguing “[e]fforts to restrict the ability of startups to hire talent, including independent contractors as needed, would stagnate the development of the startup ecosystem, adding yet another barrier founders must face on the risky path to startup growth.” The rule, which requires employers to use a “totality of circumstances” analysis, is convoluted and may force founders to choose between hiring employees they are not yet ready for and cannot afford and foregoing growth, for fear of running afoul of the regulation.
The final rule, which took effect March 11, faces several legal challenges, challenging its validity and underscoring the negative impacts it will have on both businesses and workers. The rule has also received criticism from lawmakers and faces a Congressional Review Act resolution, which, if successful, would result in its repeal. Startups should remain mindful as legal challenges continue to navigate their way through the courts. And policymakers should continue to pursue efforts to enable startups to hire the flexible talent they need as they need it, so that U.S. innovation continues to thrive.
Policy Roundup:
Congress considers capital access challenges faced by startups, underrepresented founders. This week, a House Small Business subcommittee held a hearing examining alternative pathways to investing in small businesses. Witnesses included a startup founder and discussed challenges in accessing government support, the limitations imposed by the current accredited investor definition, and the role of acquisitions in the startup ecosystem. Also this week, House Democrats, including Financial Services Committee Ranking Member Maxine Waters, held a roundtable that featured Arian Simone, CEO of Fearless Fund, who outlined how litigation is being used to undermine diversity efforts. Women founders and founders of color face significant barriers, particularly with respect to capital access, in the startup ecosystem. Policymakers must take steps to ensure founders, especially underrepresented founders, can access the capital they need to participate in the startup ecosystem.
Engine supports software innovation in copyright case brief. This week, Engine joined a number of industry and civil society organizations to file an amicus brief to the 9th Circuit in Oracle v. Rimini, which highlighted the implications of the case for software development and innovation. The brief pushes back on a lower court improperly extending copyright protection to a software program as a derivative work, even though the program was not substantially similar and did not include copyright-protected expression. Instead, the court should adhere to precedents that indicate “a work is not derivative unless it is substantially similar to a preexisting work in both ideas and expression.” Those long-settled precedents enable innovators to build tools that interact with preexisting works without fear that rightsholders have automatic copyright claims to their innovations.
The Corporate Transparency Act and what it means for startups. This week, the Justice Department filed a notice of appeal following an Alabama federal district court ruling that found the Corporate Transparency Act (CTA) unconstitutional. Beginning this year, under the CTA most private companies, including startups, are required to submit reports to the U.S. Department of the Treasury’s Financial Crimes Enforcement Network regarding their companies and their beneficial owners. As Engine explains in a new blog post, many startups are unaware of their obligations to submit the information and they often struggle to comply with shifting regulatory burdens. While companies formed before 2024 have until the end of the year to submit their first report, startups should pay attention as the case makes its way through the legal system so they can plan accordingly.
Engine urges agency to consider impact of privacy rule changes on startups. On Monday, Engine filed comments as part of the Federal Trade Commission’s effort to update the Children’s Online Privacy Protection Rule, highlighting the experiences of startups and the ways that the proposed changes may impact them. In particular, we highlight the need for clear, bright-line rules that are practical for startups and we underscore the comparatively fewer resources that startups have to respond to rules changes. The Commission’s rulemaking comes amid many state and federal efforts to change the legal landscape for young Internet users.
California joins bevy of states considering harmful digital taxes. This week, a California Senate Committee held a hearing to discuss implementing a digital advertising tax amidst the decline in community newspapers, purportedly due to the rise of e-commerce. The move comes amidst other states' attempts to raise revenue by taxing digital advertising, most notably in Maryland, where a similar tax continues to wind its way through the legal system on First Amendment grounds. While digital ad taxes typically target large tech firms, startups rely on digital services—including advertisements—provided by these companies and could be significantly impacted by subsequent price increases as a result of the taxes.
Startup Roundup:
#StartupsEverywhere: Pittsburgh, Pennsylvania. Ellie Gordon is a serial entrepreneur whose passion for improving people’s lives through technology led her to Behaivior. Leveraging AI-based technologies, Behaivior seeks to save lives through the use of wearable technology for crisis aversion. We had the opportunity to have Ellie walk us through her story, aspirations for Behaivior, and the policy landscape she faces.
