A new policy proposal unveiled by the Biden administration on Tuesday could throw major companies that rely on gig workers into disarray and fundamentally change the current business landscape, analysts say.
The rule would make it more difficult for companies to classify their workers as independent contractors, leading to significant cost increases as those companies are forced to pay for things like minimum wage, overtime, payroll taxes, unemployment insurance, workers’ compensation, and sick days.
That particularly affects gig economy leaders like Uber and Lyft which save up to 20% to 30% on labor costs by classifying their workers as independent contractors, according to some estimates. Shares of Uber, Lyft, and Doordash, all dropped over 10% after the news of the Biden Administration’s proposal broke on Tuesday morning, but the stocks have since pared some of their losses.
Wedbush tech analyst Dan Ives said in a Tuesday research note that the proposed gig worker rule change could put companies that rely on the savings they get from employing independent contractors into a difficult situation.
“While there is a lot of uncertainty around how the Federal government and States will handle this latest proposal, it’s a clear blow to the gig economy and a near-term concern for the likes of Uber and Lyft,” Ives wrote. “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.”
The end of an Uber era?
The Labor Department’s proposal amounts to a reworking of the “test” that determines whether a worker is an independent contractor or an employee that was developed under the Trump administration.
The new test will now be based on things like job responsibilities, a company’s control over workers’ hours, workers’ opportunity for profit or loss, the permanency of jobs, and a handful of other factors.
“This remains a fluid situation but the initial knee-jerk reaction is clearly negative with more questions than answers around this latest proposal in the eyes of the Street,” Ives wrote.
Uber and Lyft were quick to comment on the Labor Department’s new proposal on Tuesday, portraying it as a return to the policies of the Obama administration.
In a blog post, Lyft said that the rule doesn’t reclassify its drivers as employees, and won’t force a change to its business model as of now.
“This is just the first step in what is likely to be a longer process before any final rule or determination is made,” the company wrote, noting that there is a 45-day period for public comments on the rule change before it is adopted.
Lyft added that it was expecting this new rule when the Biden administration came to power, and said that it only represents a return to the “approach the Obama Administration used to determine employee status.”
“This approach previously applied to Lyft and app-based companies and did not result in reclassification of drivers,” Lyft wrote, arguing that its workers shouldn’t be classified as employees because 95% work less than 20 hours per week, and 96% are students or have other jobs.
Uber’s communications team echoed Lyft’s comments in a statement, saying that the proposed rule “takes a measured approach, essentially returning us to the Obama era.”
“In a time of deep economic uncertainty, it’s crucial that the Biden administration continues to hear from the more than 50 million people who have found an earning opportunity with companies like ours,” they added.
Some 16% of U.S. adults earned money through the gig economy in 2021, and 31% said it was their main job, according to a Pew Research study.
Despite the new proposal, most Americans are still supportive of independent contractor work in the gig economy. More than 60% of U.S. adults believe ride-hailing drivers should be considered independent contractors, according to Pew Research published last year, while just 35% believe they should be employees.
Still, many advocacy groups and gig workers argue that they’re chronically underpaid, bereft of benefits, and have to work over 50 hours a week to make ends meet.
“‘Flexibility’ and ‘independence’ sound nice, but here’s the truth: When you have to work over 50 hours a week to make ends meet, when you have to weigh every hour that you don’t work against the lost income, when you are one accident or illness away from financial ruin, flexibility and independence mean nothing,” Mike Robinson, who has been a full-time Lyft driver since 2017, wrote in a recent Fortune op-ed.
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