By Levi Sumagaysay
Labor Department proposes new rule that could change the status of many workers from independent contractors to employees, sending shares in companies that built their business models on contractor workforce plunging
The Labor Department on Tuesday proposed a rule that could cut at the heart of the business models of Uber Technologies Inc., Lyft Inc., DoorDash Inc. and other companies that primarily rely on "gig workers," and could affect the classification of contract workers in many other industries.
The new rule would change who can be considered an independent contractor instead of an employee, and would return to a previous test to determine whether workers are truly independent. It would replace a rule enacted by the Trump administration that went into effect last year right before President Joe Biden took office.
"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," Secretary of Labor Marty Walsh said in a statement.
In-depth: There is no legal definition of 'gig work,' but that could change soon
Shares of Uber (UBER), Lyft (LYFT) and DoorDash (DASH) fell sharply Tuesday, with Uber and Lyft shares ending the day with declines of more than 10% and 12%, respectively. Lyft and DoorDash shares closed at all-time lows of $11.27 and $44.85, respectively, according to Dow Jones Market Data.
Ride-hailing giants Uber and Lyft issued optimistic statements about the new rule Tuesday, while DoorDash and Instacart referred MarketWatch to the Flex Association.
"Today's proposed rule takes a measured approach, essentially returning us to the Obama era, during which our industry grew exponentially," CR Wooters, head of federal affairs at Uber, said in an emailed statement. "We look forward to continued and constructive dialogue with the Administration and Secretary Walsh as this process progresses."
"Millions of app-based workers choose this work because of the flexibility it provides," the Flex Association said in an emailed statement. "We will ensure that the Department of Labor continues hearing the voices of these earners."
In a blog post, Lyft said the proposed rule does not change the classification of its drivers and does not force the company to change its business model. "There is no immediate or direct impact on the Lyft business at this time," the company said in its blog post. "This is just the first step in what is likely to be a longer process before any final rule or determination is made."
Tom White, an analyst for D.A. Davidson, agreed with that view.
"The magnitude of early selloff of Uber and Lyft feels overdone to us... This proposed rule makes no immediate changes to anything," he wrote in an email to MarketWatch, adding, "It's a proposal that in some ways can be viewed more like a conversation starter."
But analysts for Raymond James said in a note Tuesday that the rule "could substantially raise costs for leading gig economy names or force a shift in business models to comply with independent contractor classification."
According to the Labor Department's news release, its Wage and Hour Division considered feedback from stakeholders over the summer and is now asking for comment on the proposed rule. Starting Thursday, there will be a 45-day comment period that ends Nov. 28. If the proposed rule is finalized, it is expected to take effect early next year.
See also: FTC sends a warning to Uber, Lyft, DoorDash and other 'gig-work' companies
Patricia Campos-Medina, executive director of the Worker Institute at Cornell University, said the rule would "very clearly spell out who is an independent contractor -- and it should not be someone totally working for one employer. Or if you are not engaged in entrepreneurial work, companies should not be avoiding paying employment taxes."
Campos-Medina also said the proposed federal rule would solve the "mismatched rules" that differ by state. That consistency is something the gig companies themselves have requested, she said.
Uber, Lyft, DoorDash, Instacart and other providers of app-based platforms that use gig workers have over the years faced challenges in different states -- and countries -- over their treatment of their drivers and delivery workers as independent contractors instead of employees. In legislatures, before regulatory bodies, at the ballot box and in the courts, the companies have fought to keep workers as contractors.
On Monday, the city attorney of San Diego, Calif., announced that she had reached a $46.5 million settlement with Instacart, which she had sued for misclassifying its workers in 2019. A news release for Mara Elliott's office said the settlement covers 308,000 individuals who worked for the grocery app platform from September 2015 through December 2020.
In 2020, gig companies spent more than $200 million on Proposition 22, a California ballot initiative that voters approved and became law -- though it was later ruled unconstitutional, a decision the companies have appealed. Prop. 22 gives gig workers a guaranteed wage and some new benefits but keeps them as contractors. In Washington state earlier this year, Uber and Lyft won when legislation they backed, which is similar to Prop. 22, became law.
See: Uber, Lyft get their first legislative win in campaign to write new labor laws
William Gould, professor emeritus at Stanford Law School and former chairman of the National Labor Relations Board, told MarketWatch that if the Labor Department's proposed rule goes into effect, it would automatically preempt Prop. 22 and other similar state laws that affect wage and hour rules.
"But there will undoubtedly be disputes about the particulars of what this means," Gould added.
Veena Dubal, a law professor at UC Hastings whose research focuses on gig work, called the proposed rule "middle of the road" and said she is skeptical about the rule's effect on Prop. 22.
If the Labor Department decides to sue and argue that Prop. 22 is preempted by the Fair Labor Standards Act, "they may very will win -- but then it would be litigated up to the Supreme Court. And I'm very skeptical that the [Labor Department] would be willing to do that given the approach they have taken here," Dubal told MarketWatch.
The Labor Department did not immediately return a request for comment on the question of preemption.
Beyond the local and state developments, proposed federal action includes legislation introduced this year by U.S. Rep. Henry Cuellar, D-Texas. Backed by the gig companies, it would enshrine gig work into federal labor law, notably absent any wage and hour protections to which employees are entitled. And the Federal Trade Commission recently warned that it intends to crack down on companies that use and exploit gig workers.
Nicole Moore, president of Los Angeles-based Rideshare Drivers United, on Tuesday called the Labor Department's move an important first step for workers.
"It's really the first movement by the Biden administration to help the millions of app workers who are being completely underpaid with no safety net or rights," Moore said. "My hope is that it will inspire lawmakers to actually write the laws that we need to take the next steps."
The Labor Department said the rule could also affect workers in the following industries: home care, construction, janitorial, trucking, hospitality, restaurant and more.
(END) Dow Jones Newswires
October 12, 2022 08:17 ET (12:17 GMT)
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