The Big Story: Proposed independent contractor rule could make hiring harder for startups
This week the Department of Labor (DoL) issued a proposed rule that is likely to impact how early-stage startups build their teams. The DoL’s proposed rule on worker classification would limit who can be considered an independent contractor and comes shortly after the Federal Trade Commission (FTC) announced similar enforcement priorities for the gig economy. As we shared in a recent blog post, the rule could limit startup flexibility in their hiring decisions, which could particularly impact growing companies with lean budgets.
Startups’ unique needs and resource constraints lead them to rely on independent contractors before they need full-time employees, unlike established, large companies that have the budgets and workloads to merit a full-time staff. For startups, hiring talent can be a costly endeavor, and independent contractors fill in the gaps startups need to grow, especially when founders are trying to get established and often only have project-by-project work. As Grant Leah, the co-founder of Woodland-based startup Nytch, explained to Engine, “The reality is that startups are so small and so lean that we can’t really hire employees. Founders are the ones who typically don’t take a salary. Without the ability to hire independent contractors to fill these voids, most startup ideas would never get off the ground.”
The Biden administration’s rule reclassifying workers is the latest addition to conversations surrounding independent contractors and gig workers, following California’s codification of the ABC test and Congress’ Protecting the Right to Organize (PRO) Act. Each of these policy developments threaten startups’ ability to hire independent contractors on an as-needed basis, if in different ways. The proposed rule has an upcoming comment period that gives startups the opportunity to relay their own experiences and provide feedback. As conversations on the proposed rule continue, Engine urges policymakers to recognize the significant impact that this policy change could have on the innovation ecosystem and technological advancement in the U.S.
Policy Roundup:
One step closer for EU-U.S. data flows. Last Friday, President Biden signed an executive order on transatlantic data flows in an attempt to restore an EU-U.S. agreement that let U.S. companies process and store EU users data in the U.S. The executive order comes more than two years after the invalidation of Privacy Shield in 2020 over European concerns about U.S. spying and is a key step to implementing the long-awaited EU-U.S. Data Privacy Framework. While the new program won’t be active until an adequacy determination by the EU—a process that will take around six months—the new framework is designed with continuity in mind for companies that participated in the earlier Privacy Shield program. As a result, companies should not have to make substantive changes to their processes, which is especially beneficial for startups.
Supreme Court to hear several Section 230 cases. Last Monday, the Supreme Court agreed to hear two challenges involving Section 230, a law that enables companies of all sizes to host and moderate user-generated content—such as events, user reviews, messaging, documents, and more. The cases, Gonzalez v. Google and Twitter v. Taamneh could impact whether companies are liable for algorithmically recommended content. Such a finding would upend how most companies, including startups, organize information on their services. The Supreme Court is also likely to hear appeals of state content moderation laws soon, especially since the 11th Circuit and Fifth Circuit reached different conclusions about the constitutionality of similar Florida and Texas laws. The intermediary liability protections granted by Section 230 enable startups to grow and thrive online without the threat of costly and ruinous litigation.
Appeals court decisions impact Dreamers, immigrant students. Immigration has taken center-stage in recent court cases regarding the future of student visa holders, DACA recipients, and their ability to remain in the U.S. The U.S. Court of Appeals for the D.C. Circuit on Tuesday upheld the federal government's decades-old provision of allowing student visa holders to remain in the U.S. and work for up to three years after graduation. Last week, an appeals court declared DACA illegal, preventing new applicants from gaining DACA status indefinitely. A new ruling today provides existing DACA recipients with continuing protections and lets them renew their status, but new applicants are barred. As Engine has long-stated, immigrants, including Dreamers, are overwhelmingly entrepreneurial, and are critical to the startup ecosystem—both by becoming founders and by filling gaps in the STEM talent pool. Congress should swiftly act to ensure all Dreamers can lawfully live and work in the U.S. without fear of deportation and pursue immigration reforms to attract and keep foreign-born talent.
Patent advisory committee must include members who represent the public’s interest. The U.S. Patent and Trademark Office (USPTO) is gearing up to choose three new voting members for its Patent Public Advisory Committee (PPAC). As Engine’s IP counsel explained in a recent op-ed, “this is a pivotal time for the agency to remember that its stakeholders include diverse swaths of entrepreneurs and the broader public.” Instead of looking only to patent attorneys and patent owners for advice, the USPTO should also bring new and different voices to the PPAC—for example, startups who have been wrongfully accused of infringing invalid patents and end-users who have had trouble affording important emerging technologies. These are people that experience the patent system in various ways that the USPTO might not always see, but they are critical stakeholders that should get a say in how the patent system works.
Biden administration releases Artificial Intelligence blueprint. Last week, the Biden administration released their Blueprint for an AI Bill of Rights, outlining five principles that the administration called for immediate incorporation into AI systems. While the principles are voluntary at the moment, some in the technology industry are concerned they will lead to varying rules in state and local jurisdictions around the country that will hamper AI development. As federal agencies move forward to take action, and the Biden administration continues to map out a plan for these systems, policymakers should consider the benefits of AI and the impact on entrepreneurs and AI innovation.
Startup Roundup:
Join us for our Startup Policy Seminar. It is essential that founders be well informed and up-to-date on policy developments, government resources, and the importance of startup advocacy in the capital formation space. On Oct. 24 at 4 p.m., join Engine—and panelists from across the startup ecosystem and the federal government—for a discussion exploring the challenges startups face accessing funding, and how policymakers can open up better avenues for raising capital. Register today.
