Biden’s New Gig Worker Rule Could Squeeze Small Businesses, Setting Up a Legal Fight

Protesters block an intersection near Uber's corporate headquarters in San Francisco, Calif., on May 8, 2019. Josh Edelson/AFP via Getty Images

The Biden administration announced a new rule that would reclassify millions of gig workers across the country as employees, a move that could squeeze small businesses.

The Labor Department’s proposal, released on Oct. 11, will make it more difficult for companies to label workers independent contractors, with consequences for ride and delivery services, along with other industries that rely on employees in that work category.

Share prices of the largest U.S. gig companies, such as Lyft, Uber, and Doordash, tumbled after the announcement of the proposed change.

Millions of Americans are currently working at gig jobs, a category that has become essential to many companies in the transportation, restaurant, construction, health care, and services sectors.

About 60 million people performed some gig work over the past 12 months, a December 2021 survey by Upwork revealed, according to Reuters.

Household incomes and job flexibility for many gig workers would be affected by the changes.

The reclassification of gig workers has been tried in states like California, with the consequence of hurting the livelihoods of many part-time workers and businesses.

Executives at Uber and Lyft have been critical of these changes in the past, and warned that having to classify their drivers as employees would hurt their business models to the detriment of riders.

Uber said that the company’s drivers prefer the flexibility of their current terms and that the proposed rule is “essentially returning us to the Obama era, during which our industry grew exponentially,” said C.R. Wooters, Uber’s head of federal affairs, in a statement to the Financial Times.

Lyft responded by dismissing the changes as posing “no immediate or direct impact” to its business, since drivers already worked as contractors under a similar rule from the Obama administration.

Ride-sharing companies currently save up to 20–30 percent on labor costs by employing their drivers as independent contractors rather than as regular workers.

However, some drivers have campaigned to be classified as employees in hopes of improved pay and benefits, saying that their work status makes it impossible to consistently earn a living wage and prefer more employee protection due to the changes.

Other gig employees prefer the flexibility that the part-time work provides, by allowing them to choose to work for different companies for better financial opportunities.

Independent truckers, for example, depend on gig worker status to make a living.

Businesses and the Gig Economy

The U.S. Chamber of Commerce, the National Retail Federation, and the Associated Builders and Contractors were highly critical of the proposal, claiming that it hurt millions of gig workers who prefer to remain independent and keep their flexibility, calling the rule unnecessary.

Companies are normally required to provide certain benefits and legal protections to employees, but not to contractors, according to most federal and state labor laws, since they are “economically dependent” on a company.

These benefits include minimum wage, overtime, Social Security and Medicare payroll taxes, unemployment insurance, and workers’ compensation insurance, making employment of non-contractor workers more expensive.

Regular employees usually cost companies up to 30 percent more than independent contractors, according to Reuters.

The proposal would establish a “test” that would take into consideration an employee’s “opportunity for profit or loss, investment, permanency, the degree of control by the employer over the worker, [and] whether the work is an integral part of the employer’s business,” among other factors, to determine whether they qualify as an independent contractor.

Many small businesses said they are already struggling with the worst inflation since 1981, the aftermath of the pandemic, and a labor shortage.

Businesses warn that their operating costs would surge if they were required to classify gig workers as employees, with costs being passed onto customers already dealing with inflation.

Thousands of companies may be forced to slash their payrolls or freeze hiring in order to keep afloat.

Meanwhile, organized labor praised the White House’s proposed changes.

The rule would give the government more power to protect workers from the “escalating problem of misclassification,” Liz Shuler, president of the AFL-CIO, told Reuters.

Labor Rulings and Presidential Politics

The Labor Department’s move will reverse one of the Trump administration’s rules, which stated that workers who owned their own businesses or worked for competing companies, such ride-share drivers, should be treated as contractors.

“Misclassification deprives workers of their federal labor protections, including their right to be paid their full, legally earned wages,” said Labor Secretary Marty Walsh, claiming that businesses often misclassify vulnerable workers.

“While independent contractors have an important role in our economy, we have seen. in many cases. that employers misclassify their employees as independent contractors.”

Jessica Looman, the acting head of the Labor Department’s Wage and Hour Division, assured companies during a press conference on Oct. 11 that the new rules would not result in major changes in worker status.

“What we anticipate is that this will really help provide guidance to both avoid and prevent misclassification,” Looman told reporters, according to Bloomberg News. “But this is a framework that has been used and has been well recognized and understood.”

The Biden administration first attempted to block the Trump administration’s rule in May 2021.

However, a U.S. district court in Texas blocked the White House’s move in March 2022 and ordered the previous administration’s rule to take effect, which the Justice Department appealed.

The Labor Department, in May 2022, said it would come up with a new rule to determine employee or independent contractor status.

Following the initial sell-off, shares of Uber, Lyft, and DoorDash recovered slightly from the double-digit loss to a decline of 4–8 percent by midday, reported Financial Times.

The final rule is expected to come into effect next year, after a 45-day public comment period that starts on Oct. 13.

Reuters contributed to this report.