Uber Technologies Inc (NYSE:UBER) and Lyft Inc (NASDAQ:LYFT) saw their shares drop on Tuesday after US President Joe Biden's administration unveiled proposals for a new rule that could put more gig workers on company payrolls.
The rule would scrap a Donald Trump administration rule from 2021 that made it easier for firms to classify workers as independent contractors.
The proposal would affect millions of workers across a range of industries, including healthcare, restaurants, construction and ride-share transportation, the US Labor Department said.
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Most prominently, it could lead to a push to classify drivers for ride-share or food delivery companies such as Uber and Lyft as employees rather than gig workers. The companies have opposed similar efforts in the past.
The rule would put in place a more stringent test to determine when companies can count workers as contractors rather than employees. Under labor law, employees are eligible for protections such as the minimum wage, medical leave or overtime pay that do not apply to independent contractors.
The Labor Department said it will take public comment on the rule for 45 days, and the Biden administration is unlikely to finalize the rule until next year.
An Uber representative told the Wall Street Journal (WSJ) that drivers overwhelmingly prefer the flexibility that comes with being an independent contractor.
“In a time of deep economic uncertainty, it is 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,” Uber’s head of federal affairs, CR Wooters said, as quoted by the newspaper.
The WSJ also noted that Lyft, in a blog post, said the proposal is the first step in what is likely to be a longer process before any final rule or determination is made.
“Lyft will continue to advocate for laws such as the one in Washington state which gives workers what they want: independence plus benefits and protections,” the post said.
In a note to clients, Wedbush Securities analyst Dan Ives commented that, in a worst-case scenario, the federal-rule change could increase labor costs by 15% to 30% for gig-economy players such as Uber and Lyft.
“It would be a major albatross that would turn their business models upside down,” he said, adding that the severity of the proposal was unexpected.
Shares of Uber closed down 10% and Lyft shares shed 12% on Tuesday.
Contact the author at jon.hopkins@proactiveinvestors.com