By Daniel Wiessner, Nandita Bose and David Shepardson
WASHINGTON (Reuters) -The U.S. Department of Labor proposed a rule on Tuesday that would make it more difficult for companies to treat workers as independent contractors, a change that is expected to shake up ride-hailing, delivery and other industries that rely on gig workers.
Gig company stocks were hammered on the news, with Uber (NYSE:), Lyft (NASDAQ:) and DoorDash all falling at least 10%.
The proposal would require that workers be considered a company’s employees, entitled to more benefits and legal protections than contractors, when they are “economically dependent” on the company. It could have wide-ranging impacts on company profits and hiring, and household incomes and worker quality of life.
The Labor Department could restrict independent contracting and said it will consider workers’ opportunity for profit or loss, the permanency of their jobs, and the degree of control a company exercises over a worker, among other factors.
The final rule is expected next year.
Most federal and state labor laws, such as those requiring a minimum wage and overtime pay, only apply to a company’s employees. Employees can cost companies up to 30% more than independent contractors, studies suggest.
Millions of Americans are working “gig” jobs and this labor has become vital to some transportation, restaurant, construction, health care and other business models.
U.S. Labor Secretary Marty Walsh in a statement said businesses often misclassify vulnerable workers as independent contractors.
“Misclassification deprives workers of their federal labor protections, including their right to be paid their full, legally earned wages,” Walsh said.
The rule is the latest move in a politically charged battle that has pitched Republicans and companies against Democrats and worker groups. It would replace a Trump administration regulation that says workers who own their own businesses or have the ability to work for competing companies, such as a driver who works for Uber and Lyft, can be treated as contractors.
Solicitor of Labor Seema Nanda, the department’s top legal official, said on Tuesday that the Trump-era rule, which was favored by business groups, was out of step with decades of federal court decisions.
The new proposal mirrors legal guidance issued by the Obama administration, which was withdrawn by the Labor Department under former President Donald Trump.
More than one-third of U.S. workers, or nearly 60 million people, performed some sort of freelance work in the past 12 months, a December 2021 survey by freelancing marketplace Upwork (NASDAQ:) showed.
Groups representing businesses including the U.S. Chamber of Commerce, which is the largest U.S. business lobbying group, the National Association of Home Builders, the National Retail Federation and Associated Builders and Contractors had met with White House officials to lobby for a more business-friendly standard.
Those groups have said that any broad rule would hurt workers who want to remain independent and have flexibility.
Worker advocacy groups have said that companies are increasingly misclassifying employees as independent contractors, depriving workers of fair pay and benefits to pad their profits. Most worker benefits in the United States, including health insurance, sick pay, workers’ compensation and unemployment insurance are attached to an employment relationship.
Wedbush analyst Dan Ives said in a research note that the proposal is “a clear blow to the gig economy and a near-term concern for the likes of Uber and Lyft.”
“With ride-sharing and other gig economy players depending on the contractor business model, a classification to employees would essentially throw the business model upside down and cause some major structural changes if this holds,” Ives said.
The proposal will be formally published on Thursday, kicking off a 45-day public comment period.