Regulating worker misclassification under Section 5 of the FTC Act – implications for employers, antitrust enforcement, and beyond

FTC Commissioner Alvaro Bedoya proposed expanding the agency's power under Section 5 of the FTC Act to situations where employers improperly classify workers as independent contractors.[1] Section 5 of the FTC Act broadly authorizes the Federal Trade Commission ("FTC") to prohibit "unfair methods of competition."[2] The FTC under Biden has interpreted this mandate liberally to investigate and enforce against a wide range of conduct that it determines, in its sole discretion, is coercive, exploitative, or collusive, or otherwise can be said to violate the "spirit" of the antitrust laws.[3] The Commissioner's remarks suggest a striking expansion of the agency's authority and raise the specter of FTC enforcement against employers who misclassify workers as a type of "unfair competition." Such an approach could also open the floodgates for enterprising plaintiffs' attorneys to bring antitrust class actions under a similar theory.

Bedoya's formulation comports with the Biden Administration's whole-of-government approach to enforcing competition law,[4] and it comes on the heels of two memoranda of understanding ("MOUs") between (1) the FTC and the National Labor Relations Board (NLRB)[5] and (2) the Department of Labor (DOL)[6] wherein the agencies agreed to cooperate more fulsomely in their investigations, training, and communications. Bedoya's idea also is consistent with the FTC's increasing interest in the intersection between labor/employment and antitrust. Prosecuting employee misclassification as a method of unfair competition would be "complementary and not duplicative" of other agencies' work, Bedoya said.[7]

How exactly the FTC proposes to regulate in this space is of course not clear. But Bedoya wants the FTC to use "every tool in our toolbox to fight" misclassification of employees, a practice that he estimates accounts for billions of dollars in loss.[8] Bedoya's expansive use of Section 5 in this context draws on Supreme Court precedent, which he argues concluded that Congress intended Section 5 to apply broadly because it deliberately enacted the statute without specifying a finite list of prohibited practices. As Bedoya sees it, "Congress wanted to stop practices that violated the spirit, not just the letter of antitrust laws."[9] The agency of course hopes this is what the courts will conclude, too, when its expansive approach to Section 5, in the context of its soon-to-be-released final regulations banning employee non-competition covenants under the same purported authority, is litigated shortly thereafter.[10]

Bedoya flagged heightened concern for worker misclassification in the construction and port trucking industries. In the construction industry, misclassifying employees as independent contractors may qualify as a "method of competition that lets law-breaking employers win business from honest ones" that may eventually harm competition by "taking honest employers off the playing field."[11] In the port trucking industry, Bedoya highlighted vertical constraints stemming from misclassifications of truckers where "independent market actors were effectively taken off of the playing field and turned into unclassified employees."[12]

Although Bedoya highlighted construction and port trucking, it is clear that the FTC will be looking at any industry where it perceives widespread employee misclassification.

Takeaways and Remaining Questions

We do not yet know what these remarks will mean in practice. Bedoya pointed to "strong rules that will help combat misclassification" recently issued by DOL[13] and NLRB,[14] agencies that historically have dominated regulation, investigations, and enforcement related to employee misclassification. It would likely make the most sense if the FTC relied on the DOL and NLRB to first find employee misclassification before bringing its own investigation on the grounds of unfair competition. Indeed, Bedoya implied that the FTC could take investigation referrals directly from DOL and NLRB in order to act fast. Specifically, Bedoya emphasized that the FTC's "authority allows us to stop unfair practices in their incipiency, before harms to workers and other market actors are cemented."[15] Would that mean the FTC would hire a team of auditors to duplicate the work of the DOL and NLRB in particularly egregious circumstances? Would that mean the FTC would simply work closely with the DOL and NLRB to investigate matters in particular industries? In the present moment, the FTC does not have the competency to handle such investigations or audits, but whether it invests in the personnel and systems to do so remains to be seen.

Bedoya's statement has important implications. First, now more than ever, employers need to carefully evaluate how they are classifying independent contractors versus employees, including coming into compliance with the NLRB and DOL's recent rules which are set to take effect soon.[16] Second, if you are in an industry where you feel competitors are improperly classifying employees to gain a competitive advantage, you will have an audience at the FTC.

As the FTC attempts to expand its regulatory authority into the workplace, we will continue to monitor these efforts and provide guidance. In the meantime, employers: buckle up. There's potentially a new enforcement agency in town.