Labor Department Issues New Rule That May Affect Ride-Sharing Apps, Other Contractors

According to some estimates, Uber and Lyft save 20 to 30% on labor costs by classifying their drivers as contractors instead of employees.

The Biden administration issued new standards for how companies should classify their workers on Tuesday. The change has the potential to affect millions of workers, especially in the so-called “gig economy” where workers who are essential to the business are often classified as independent contractors.

The new Department of Labor rule would scrap a Trump-era rule that lessened the standards that allowed companies to classify their workers as contractors instead of employees. Contractors do not benefit from the same protections employees do, including minimum wage requirements and benefits like health insurance and sick days.

After the news broke, Uber and Lyft saw their stock prices drop by 10% and 12%, respectively, despite both companies downplaying the effect the new rule will have on their business. In a statement on the matter, CR Wooters, the head of internal affairs at Uber, said that the new rule “takes a measured approach, essentially returning us to the Obama era, during which our industry grew exponentially.”

The new standard is not a new law and does not reclassify any employees or directly name any companies or industries. Instead, it gives an interpretation of the 1938 Fair Labor Standards Act that companies should follow. It says employers should look at six standards to determine if a worker can be classified as a contractor instead of an employee. They must consider if the workers are essential to the business, the degree of control the company has over the worker, if the work requires special skills, the degree and permanence of the relationship, and if the worker has to make an investment into the job, such as a car payment.

The Trump-era rule didn’t ask companies to consider if workers are essential to the business and instead required them to consider if the employee was part of integrated production, and gave more weight to other considerations like the worker’s ability to make a profit. The new rule weighs all considerations equally.

In addition to drivers for app-based companies like Uber and DoorDash, the Labor Department says the new rule could affect port workers, custodians, truck drivers, waiters, construction workers, and more. The Biden administration argues that the new rules should prevent the pitfalls of contractor work, including a lack of benefits and stolen wages.

It is unclear how much effect the new rule will have, however. It is unlikely to end the debate of what constitutes a contractor and what is an employee; companies could argue that workers fall into one of the six categories and determine whether they should be classified as contractors based on that.

Additionally, workers are split on the benefits of employment versus contract work. In 2020, port truck drivers shut down the port of Oakland in protest to preserve their independent contractor status, while other truck drivers have fought to force their companies to recognize them as employees, according to the Associated Press.

In a statement, Secretary of Labor Marty Walsh said that “While independent contractors have an important role in our economy, we have seen in many cases that employers misclassify their employees as independent contractors, particularly among our nation’s most vulnerable workers.”

The rule is subject to a 45-day comment period. Following that, it may take months to implement.