Uber Technologies (NYSE:UBER) and LYFT (NASDAQ:LYFT) shares plunged about 15% on Tuesday after the Biden administration proposed to tweak rules that determine if workers are classified as employees or independent contractors. Similarly, shares of DoorDash (NYSE:DASH), another company that classifies its workers as contractors rather than employees, are down over 8%.
The proposed rule change would make it more difficult for companies to classify their workers as contractors, instead paving the way for them to be classified as employees. The proposed rule is actually a test that the Department of Labour (DoL) will use to decide whether workers are employees or contractors.
In 2020, California adopted a law that requires companies to reclassify their workers as employees. However, voters decided to exempt app-based ride-sharing and delivery drivers from the law in November 2020 via the so-called "Prop 22."
The current legislation focuses on two factors to decide who is an employee and who is a gig worker: what is the degree of control a business has over the worker, and to what extent can a worker increase personal income by offering more services?
If the rule change is approved, millions of workers would be reclassified and enjoy more benefits as employees, such as being entitled to a minimum wage, overtime compensation, and contributions to unemployment insurance.
Proposed changes don't come as a surprise given that many activity groups pressured the Biden administration to force companies in the gig economy to classify drivers as employees rather than contractors. During the election campaign in 2020, Joe Biden openly advocated for forcing companies to treat their workers as employees rather than gig workers.
Biden's website said:
"Currently, more than half of all states have in place these so-called "right to work" laws, which, in fact, deprive workers of their rights. These laws exist only to deprive unions of the financial support they need to fight for higher wages and better benefits. As president, Biden will repeal the Taft-Hartley provisions that allow states to impose 'right-to-work' laws."
According to a survey conducted by the freelance platform Upwork, over a third of working Americans did some kind of freelance work in 2021.
How is the Proposed Rule Change Affecting Lyft and Uber?
The proposed rule change would also force companies that rely on gig workers to completely restructure their business model. Companies that offer ride-sharing services, or delivery, have gig workers as the centerpiece of their business model. U.S. Labor Secretary Marty Walsh said in a statement:
"While independent contractors have an important role in our economy, we have seen in many cases that employers misclassify their employees as independent contractors.
Misclassification deprives workers of their federal labor protections, including their right to be paid their full, legally earned wages."
If the proposed rule change is adopted, it will replace the regulation installed by the Trump administration that treats millions of workers as contractors. Among other proposed changes, the new rules broaden the definition of who can be considered to be an employee.
This stance was contested by some business organizations, including the U.S. Chamber of Commerce, which lobbied for a narrow definition of what can be considered to be an employee. This way, these associations said, workers who don't want to be classified as employees would remain independent and more flexible.
Hence, shares of Uber and Lyft are trading sharply lower on Tuesday, given that the reclassification of gig workers would yield a substantial increase in their operating costs. Some analysts have projected that employees can cost companies up to 30% more than gig workers. Similarly, executives from Uber and Lyft estimate that their labor costs would rise by 20 to 30%.
Both companies indicated in filings with the U.S. Securities and Exchange Commission (SEC) that they would be compelled to change how their business works if they start treating their drivers as employees.
In a blog post on Tuesday, Lyft said there is "no immediate or direct impact on the Lyft business at this time." The company added:
"Any new rule that addresses independent contractor status should be informed by those it impacts most: the workers. App-based work, in particular, is fundamentally different from traditional 9-to-5 work."
The new proposal will be officially published on Thursday, therefore starting a 45-day public comment period.
Summary
Shares of Uber, Lyft, DoorDash, and some other publicly-traded companies that have grown as a result of the boom in the gig economy are trading sharply lower on Tuesday after the Biden administration proposed a rule change that would make it easier for workers to be classified as employees, rather than independent contractors.