FTC Commissioner Announces Intent to Use Competition Laws to Combat the Misclassification of Workers as Independent Contractors

The antitrust agencies have to date adopted a multifaceted approach to enforcement of the competition laws in labor markets: they have proposed new rules governing employment agreements and brought enforcement actions, including criminal cases, against employers accused of colluding with their competitors. Now another arrow has been added to the quiver: Federal Trade Commission (“FTC”) Commissioner Alvaro M. Bedoya recently pledged to use competition law to address the misclassification of workers as independent contractors. Specifically, Commissioner Bedoya advocated for “closely examin[ing] allegations of misclassification” as potential violations of Section 5 of the FTC Act^1, which prohibits unfair methods of competition. Commissioner Bedoya’s speech is another signal that the FTC views its authority under Section 5 capaciously and will continue to “use every tool in [its] toolbox” to address practices that have not historically been a focus of competition enforcers.

Independent contractor misclassification occurs when an individual is treated as an independent contractor despite being entitled to employee status under relevant law. The distinction can be significant for a variety of reasons, including compliance with the Fair Labor Standards Act² (“FLSA”) (governing hours of work, minimum wage, overtime, and the like) and the National Labor Relations Act (“NLRA”) (governing most private sector employees’ collective bargaining rights). Historically, the federal agencies most concerned with independent contractor misclassification have been the U.S. Department of Labor (“DOL”) and the National Labor Relations Board (“NLRB”), which are responsible for implementing the FLSA and NLRA (respectively). Both agencies have brought enforcement actions regarding independent contractor misclassification, and both have recently articulated revamped guidelines for determining whether a worker is an employee or independent contractor.⁴

In his speech, Commissioner Bedoya noted that the FTC’s efforts would be “complementary and not duplicative” of the DOL’s and the NLRB’s because the FTC has authority to reach “unfair methods of competition in their incipiency.” In other words, the FTC can stop practices “before harms to workers and other market actors are cemented.”

Commissioner Bedoya recognized that the proposed application of Section 5 to independent contractor misclassification would be novel; to his knowledge, antitrust lawsuits on this issue “are almost unheard of.”

But Commissioner Bedoya argued that independent contractor misclassification may satisfy the criteria in the FTC’s Policy Statement Regarding the Scope of Unfair Methods of Competition, which announced the FTC’s return to a more expansive view of its Section 5 enforcement authority. First, misclassification may be unfair, meaning that it goes beyond competition on the merits. Under the FTC’s policy statement, unfair conduct is coercive, exploitative, or abusive, and it “tend[s] to negatively affect competitive conditions.” Second, misclassification may be a method of competition. This refers to conduct in the marketplace that implicates competition but does not include “violations of generally applicable laws by themselves. . .that merely give an actor a cost advantage.”

Commissioner Bedoya laid out the case that independent contractor misclassification could satisfy both criteria.

First, Commissioner Bedoya cited the construction industry, where competitive bidding is common. He discussed a construction company in Florida that believed it had lost out on numerous government contractors because its competitors were “cheating” by misclassifying workers as independent contractors, thereby achieving an unfair cost advantage relative to “honest” bidders.

Second, Commissioner Bedoya argued that independent contractor misclassification can negatively impact competitive conditions in labor markets by “effectively tak[ing] [workers] off the playing field.” He cited an example of a shipping company that hired short-haul truckers as independent contractors. Originally, the truckers owned their own trucks and could work at other ports or for other shipping companies. Then, in 2010, the company began requiring the truckers to lease new trucks from the company and specifying their hours and routes, in a manner the government alleges makes them similar to employees. Bedoya characterized this development as “arguably independent market actors [being] effectively taken off of the playing field and turned into unclassified employees,” which “deeply almost certainly negatively affected” labor market conditions by reducing truckers’ pay and benefits.

This is not the first instance where a competition agency has argued independent contractor misclassification could harm competition. In 2021, the Department of Justice (“DOJ”) filed an amicus brief in a matter before the NLRB arguing that firms that misclassify workers as independent contractors “may gain an unfair competitive advantage over their rivals in cutting their costs,” thereby harming competition in the markets for the goods and services they produce. DOJ also noted that competition in labor markets may be harmed, such as by eroding workers’ ability to bargain for better terms.

The FTC and DOJ’s statements about independent contractor misclassification manifest the competition agencies’ multifaceted approach to, in their view, protect competition for workers. Last year, the FTC proposed a rule that would largely ban the use of noncompete agreements between workers and employers; that proposed rule is still pending. In the last four years, DOJ has brought its first-ever criminal labor market collusion case and first-ever criminal no-poach case. Commissioner Bedoya’s February 2 speech was the second in a planned three-speech series discussing labor-antitrust issues. In the first, Bedoya argued the statutory labor exemption, which provides antitrust immunity for certain activities of organized labor, should be interpreted as broadly as Congress intended. In the third, Commissioner Bedoya will focus on labor considerations in merger analysis.

As the FTC ramps up enforcement efforts against independent contractor misclassification and seeks to expand its authority under Section 5, O’Melveny stands ready to assist companies in this rapidly changing legal landscape.

¹ 15 U.S.C. § 45.
² 29 U.S.C. §§ 201 et seq.
³ 29 U.S.C. §§ 151 et seq.
⁴ U.S. Department of Labor (2024, January 9) Press release: New regulations for workplace safety, https://www.dol.gov/newsroom/releases/whd/whd20240109-1; National Labor Relations Board (2023, June 13) Press release: Board Modifies Independent Contractor Standard under National Labor Relations Act, https://www.nlrb.gov/news-outreach/news-story/board-modifies-independent-contractor-standard-under-national-labor.

This memorandum is a summary for general information and discussion only and may be considered an advertisement for certain purposes. It is not a full analysis of the matters presented, may not be relied upon as legal advice, and does not purport to represent the views of our clients or the Firm. Julia Schiller, an O’Melveny partner licensed to practice law in the District of Columbia, New Jersey, and New York; Anna T. Pletcher, an O’Melveny partner licensed to practice law in California; Adam P. KohSweeney, an O’Melveny partner licensed to practice law in California and New York; Susannah K. Howard, an O’Melveny partner licensed to practice law in California and New York; Patrick J. Jones, an O’Melveny counsel licensed to practice law in the District of Columbia and New York; and Raeshondra Dike, an O’Melveny law clerk, contributed to the content of this newsletter. The views expressed in this newsletter are the views of the authors except as otherwise noted.

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