The proposal by the U.S. Department of Labor drew immediate criticism from industry groups and caused stocks of companies that rely on gig workers, such as Uber and Lyft, to plummet due to fears that it will sharply increase their labor costs.
"This is going to take years of litigation," said Michael Lotito, a San Francisco-based attorney who represents employers and business groups. "The Supreme Court is all over this."
Workers who are "economically dependent" on a company, according to the proposal, should be classified as employees, entitled to the minimum wage, overtime pay, and other legal protections, rather than independent contractors.
Workers who operate their own businesses and are free to work for multiple companies can be considered contractors, according to the current worker classification rule, which was adopted during the Trump administration and is supported by business groups. Under that standard, far more workers can qualify as contractors, which can cost companies up to 30% less than employees, according to studies.
According to legal experts, the department's sharp departure from the Trump-era standard will likely be the focus of lawsuits challenging the new rule, which is expected to be finalized next year. Federal law requires agencies to provide adequate justification for their decision to withdraw and replace existing rules.
In a conference call with reporters on Tuesday, Labor Solicitor Seema Nanda said the Trump-era rule was inconsistent with the standards applied by federal courts for decades and increased the risk of worker misclassification.
According to Nanda, the new proposal makes it clear that employees are only considered independent contractors when they are truly in business for themselves rather than relying on a company for work.
However, Lotito and others have expressed concern that the department's decision to completely scrap the Trump administration rule, rather than identifying and addressing specific issues with it, may expose a new regulation to legal challenges.
Any lawsuit would almost certainly seek to prevent the rule from going into effect while challenges are resolved in appeals courts, which could take years.
Businesses and trade associations are also likely to criticize the new rule's substance once it is finalized, claiming that the way it defines employment is inconsistent with federal wage law and creates uncertainty about the legal status of many workers, according to Roger King, a veteran labor lawyer and senior counsel at the HR Policy Association, a business group.
Individual businesses, workers, and trade associations may also file limited legal challenges to the new rule. These lawsuits could claim that the rule cannot be applied to industries with their own set of regulations, such as trucking, or that it violates the constitutional rights of specific companies by targeting them.
California's strict worker classification test, enacted in 2019, has been challenged separately by gig economy firms, the trucking industry, and groups representing freelance writers and photographers. So far, those challenges have been unsuccessful.