The news rocked the stocks of ride-hailing companies, with Uber, Lyft, and DoorDash all falling by at least 10%.
When workers are "economically dependent" on a company, they are considered employees and are entitled to more benefits and legal protections than contractors, according to the proposal. It could have far-reaching consequences for corporate profits and hiring, household income, and worker well-being.
The final rule is expected to be released next year, following a 45-day public comment period that begins on Thursday.
According to the Labor Department, among other things, it will consider the worker's "opportunity for profit or loss, investment, permanency, the degree of control by the employer over the worker, (and) whether the work is an integral part of the employer's business."
According to studies, most federal and state labor laws, such as those requiring a minimum wage and overtime pay, only apply to a company's employees, who can cost up to 30% more than independent contractors.
Millions of Americans work "gig" jobs, and this labor has become critical to some industries such as transportation, restaurants, construction, health care, and others.
In a statement, US Labor Secretary Marty Walsh stated that businesses frequently misclassify vulnerable workers. "Misclassification robs workers of federal labor protections, including the right to be paid their full, legally earned wages," Walsh explained.
The proposal, according to Liz Shuler, president of the American Federation of Labor and Congress of Industrial Organizations (AFL-CIO), gives the government the tools it needs to protect workers from the "escalating problem of misclassification."
BIDEN V. TRUMP
The proposed rule is the latest development in a politically charged battle that has pitted Republicans, corporations, and labor unions against each other over the last decade. It would replace a Trump administration regulation that states workers who own their own businesses or have the ability to work for competing companies, such as an Uber and Lyft driver, can be treated as contractors.
Seema Nanda, the Labor Department's top legal official, said on Tuesday that the Trump-era rule was inconsistent with decades of federal court decisions.
The new proposal is modeled after legal guidance issued by the Obama administration but withdrawn by former President Donald Trump.
It also incorporates elements of stringent tests used in U.S. states such as California, which require businesses to treat the majority of workers as employees under state wage laws.
According to a December 2021 survey by freelancing marketplace Upwork, more than one-third of US workers, or nearly 60 million people, did some freelance work in the previous year.
President Joe Biden's former top labor adviser, Seth Harris, stated that the rule will have no direct impact on how courts determine whether workers are employees or independent contractors. Instead, it will influence the Labor Department's "own enforcement activities and litigation position," he said, allowing the department to argue in court for a much broader definition of employees under the Fair Labor Standards Act.
REACTIONS OF BUSINESSES AND WORKER GROUPS
Employer groups were critical of the announcement, while worker advocacy groups welcomed it.
Nicole Moore, the president of the group Rideshare Drivers United and a part-time Lyft driver, said it was a "really important step to clarify rules at the federal level," which she hoped would "inspire lawmakers to change laws and clarify and codify against misclassification."
Christina Brown, an Uber and Lyft driver in Arizona, said she earns $25 to $60 per hour but considers her pay to be "minimum wage." Expenses such as gas, insurance, and car payments reduce Gig workers' pay.
Brown, on the other hand, believes that the "government should stay out of how the middle class makes money."
The US Chamber of Commerce, the largest business lobbying group in the United States, and the Associated Builders and Contractors argue that any broad rule would harm workers who want to be independent and flexible.
The National Retail Federation said on Tuesday that it "vehemently opposes a change" and that the rule is unnecessary. Lyft stated that it would have "no immediate or direct impact" on the company's operations at this time. Uber requested that the administration listen to its employees.
Employee reclassification "would essentially throw the business model upside down and cause some major structural changes if this holds," Wedbush analyst Dan Ives wrote in a research note on Uber and Lyft.