Federal Trade Commission Likely to Expand Labor Enforcement to Worker-Misclassification Issues

Alert

21 February 2024

10 min read

In a February 2, 2024 keynote speech to antitrust enforcers and practitioners, Commissioner Alvaro M. Bedoya argued that the U.S. Federal Trade Commission ("FTC") should challenge worker misclassification as a violation of the FTC Act's ban on "unfair methods of competition." According to Commissioner Bedoya, misclassifying workers, such as independent contractors, takes "billions from working people" and enables companies acting improperly to outperform their competitors—a practice that he said should be stopped at its "incipiency" under Section 5 of the FTC Act. In this alert, we address:

the FTC's increasing focus on competition in labor markets, including worker-misclassification issues;
the recent speech by FTC Commissioner Bedoya arguing for FTC scrutiny and enforcement under Section 5 of the FTC Act when employers misclassify workers;
the uncertain route that Section 5 of the FTC Act provides for such enforcement; and
the key considerations for companies seeking to minimize legal risks in this area.

I. FTC Has Increasingly Focused on Competition in Labor Markets, Including Worker-Misclassification Issues

In the last several years, U.S. antitrust enforcers have ramped up efforts to challenge allegedly improper business practices that harm workers and competition in labor markets, including a proposed ban on non-compete agreements, criminal enforcement concerning no-poach and wage-fixing agreements, and scrutiny of labor practices under the agencies' recently published merger guidelines. Building on this trend, worker-misclassification issues are poised to be the next labor-related target for FTC enforcement.

In July 2022, the FTC entered into a memorandum of understanding with the National Labor Relations Board ("NLRB") to "better root out practices that harm workers in the ‘gig economy' and other labor markets," including allegedly improper "classification and treatment of workers."¹ A few months later, in September 2022, the FTC "announced enforcement priorities to fight for consumers who work in jobs that are part of the gig economy."² In that September 2022 policy statement, the Commission identified several issues facing gig workers, including "deception about pay and hours" and "unfair contract terms," and the Commission vowed to "use its full authority" to protect these workers from unfair, deceptive, and anticompetitive practices.³

A year later, in September 2023, the FTC entered into a memorandum of understanding with the Department of Labor ("DOL"), further seeking to bolster efforts to protect workers "that are at risk of being harmed as a result of unfair methods of competition and unfair or deceptive acts or practices."⁴ The memorandum identifies worker misclassification as a mutual area of interest for the two agencies and as part of a broader FTC initiative to, again, use the agency's "full authority," including enforcement actions and potential rulemaking, to protect workers.⁵

II. Commissioner Bedoya Emphasizes the Need to Target Worker Misclassification

In a February 2, 2024 speech, Commissioner Bedoya emphasized that the FTC should challenge worker misclassification as a violation of Section 5 of the FTC Act while working in tandem with the NLRB and DOL to combat such practices.

According to Commissioner Bedoya, many employers improperly seek to reduce their costs when misclassifying workers as independent contractors, resulting in the denial of minimum wage and other benefits, such as overtime, social security, Medicare, workers compensation, unemployment insurance, healthcare, and retirement.⁶ Citing a 2023 article by the Economic Policy Institute, Commissioner Bedoya suggested that misclassified workers may lose anywhere from $6,000 to $18,000 in pay or benefits each year,⁷ and noted that misclassification is a problem in multiple industries, including agriculture, construction, trucking, in-home healthcare, in-home cleaning, and janitorial services.⁸

Commissioner Bedoya explained that enforcement by the FTC in tandem with the NLRB and DOL is not duplicative because, in his view, Section 5 of the FTC Act—banning "unfair methods of competition in or affecting competition"—allows the FTC to stop unfair practices in their "incipiency" before harm to workers and other market actors might materialize.⁹

III. Section 5 Enforcement Provides an Uncertain Route to Challenge Worker Misclassification

Despite Commissioner Bedoya's reliance on Section 5 of the FTC Act, the use of this statutory authority faces an uncertain path forward when challenging worker-classification issues. Specifically, Section 5 of the FTC Act does not define specific acts or practices that constitute "unfair methods of competition," which has led to a longstanding debate about the scope of the FTC's enforcement authority. While the FTC had previously brought some standalone Section 5 cases that did not necessarily involve antitrust violations, the FTC faced a series of litigation losses in the 1980s, which largely led the FTC to limit Section 5 enforcement to alleged antitrust violations (and not a broader array of so-called "unfair" conduct).¹⁰

In 2015, a bipartisan majority of the Commission—consisting of then-Commissioners Ramirez, Brill, Wright, and McSweeny—issued a policy statement formally committing to use Section 5 in a way that is "aligned with the other antitrust laws, which have evolved over time and are guided by the goal of promoting consumer welfare and informed by economic analysis."¹¹ The Commissioners sought to "rely on the accumulated knowledge and experience embedded within the ‘rule of reason' framework developed under the antitrust laws over the past 125 years—a framework well understood by courts, competition agencies, the business community, and practitioners."¹²

By 2021, shortly after the election of President Biden, a new slate of Commissioners began laying the groundwork for a more expansive application of Section 5. In July 2021, the Commission voted 3-2 along party lines to rescind the 2015 policy statement.¹³ Chair Lina Khan, along with two other Democrat-appointed Commissioners (including Commissioner Bedoya), issued a statement calling the 2015 policy "shortsighted" and vowing to "follow the congressional mandate to condemn ‘unfair methods of competition,'" which they explained "is crucial to bringing the FTC back in line with its statutory obligations."¹⁴ The two Republican-appointed Commissioners at the time, Christine Wilson and Noah Phillips, voted against the policy change. Among other criticisms, the dissenting Commissioners focused on the lack of transparency, clarity, and legal support for how Section 5 might be broadly enforced beyond established antitrust laws.¹⁵

By November 2022, the FTC issued another policy statement, again divided along party lines, announcing that the FTC intends to use Section 5's ban on "unfair methods of competition" to police conduct beyond the focus of federal antitrust laws. The statement takes the new position that the FTC need not demonstrate actual anticompetitive harm or market power under Section 5, as required under the antitrust laws, and broadly targets conduct that is "coercive, exploitative, collusive, abusive, deceptive, predatory, or involve[s] the use of economic power of a similar nature," and that "tend[s] to negatively affect competition."¹⁶ The policy statement further identifies what it views as "historical examples of unfair competition," including contractual arrangements involving "incipient violation of the antitrust laws," such as "loyalty rebates, tying, bundling, and exclusive dealing arrangements that have the tendency to ripen into violations of the antitrust laws by virtue of industry conditions and the respondent's position within the industry."¹⁷

In a dissenting statement, then-Commissioner Wilson criticized the new policy as departing from the demands of due process in which "the lines between lawful and unlawful conduct [can] be drawn clearly," particularly "when the enforcer at issue promises a new era of aggressive action."¹⁸ The dissent focuses on the lack of "meaningful guidance for businesses" and implications arising from the Commission's "I know it when I see it" approach in which "the Commission has the authority summarily to condemn essentially any business conduct it finds distasteful."¹⁹

Many organizations and scholars have raised similar concerns, including in connection with the FTC's proposed ban on non-compete agreements.²⁰ And the U.S. Chamber of Commerce recently criticized the FTC as lacking expertise on these issues and overreaching into a heavily regulated area where Congress has already "passed numerous laws to deal with classification questions and assigned specific agencies to hold businesses accountable where needed."²¹

IV. Key Considerations for Companies Seeking to Minimize Legal Risks

Despite the uncertain path ahead for the FTC under Section 5 of the FTC Act, companies should expect the FTC to begin challenging worker-misclassification practices. The FTC may provide further commentary or issue a policy statement on these issues as it has done with other labor issues, but the Commission could also begin investigating such practices (if it has not started already) and could soon after bring enforcement actions.

The independent-contractor examples of misclassification mentioned in Commissioner Bedoya's speech along with certain industries that he identified—agriculture, construction, trucking, in-home healthcare, in-home cleaning, and janitorial services—are not necessarily exhaustive but are likely candidates for FTC action.

Best practices for companies seeking to minimize legal risks in this area include:

seeking legal guidance from employment counsel on classification issues, particularly where "grey" areas might exist;
ensuring internal mechanisms are in place for reviewing employee-classification practices and ongoing decision-making;
documenting the basis for classification decisions;
monitoring for any further guidance from the FTC, DOL, and NLRB; and
contacting antitrust counsel if the FTC issues a Civil Investigative Demand ("CID") or otherwise requests information formally or informally about any issue.

Ultimately, it remains to be seen how the FTC's Section 5 authority will hold up to legal challenges or how such issues will potentially be challenged by the FTC in light of an already established NLRB and DOL regulatory scheme. Even so, companies should use this recent warning from the FTC to assess legal risks in this area and take proactive steps to minimize those risks.

Ryan Duff (Law Clerk, White & Case, New York) co-authored this publication.

_{White & Case means the international legal practice comprising White & Case LLP, a New York State registered limited liability partnership, White & Case LLP, a limited liability partnership incorporated under English law and all other affiliated partnerships, companies and entities.}

_{This article is prepared for the general information of interested persons. It is not, and does not attempt to be, comprehensive in nature. Due to the general nature of its content, it should not be regarded as legal advice.}