(Reuters) — The U.S. Labor Department proposed a rule on Tuesday that would make it harder for companies to treat workers as independent contractors, a change expected to shake up the business models of ride-sharing, delivery and other industries that rely on gig workers.
Shares in Uber and Lyft traded sharply lower on Tuesday morning.
The proposal would require workers to be considered employees of a company, entitled to more benefits and legal protections than contractors, when they are “economically dependent” on the company.
The Labor Ministry said it will consider, among other things, workers’ potential for profit or loss, the duration of their jobs and the degree of control a company exercises over a worker.
Most federal and state labor laws, such as those requiring a minimum wage and overtime pay, apply only to a company̵7;s employees. This means that employees can cost companies up to 30% more than independent contractors that many industries have come to rely on, according to some studies.
US Labor Secretary Marty Walsh said in a statement that companies often misclassify vulnerable workers as independent contractors.
“Misclassification deprives workers of their federal job protections, including their right to be paid full, legally earned wages,” Walsh said.
The rule, which will take at least several months to finalize, would replace a Trump administration regulation that says workers who own their own businesses or have the ability to work for competing companies, such as a driver who works for Uber and Lyft, can be treated as contractors.
The new proposal adopts a broader definition of who counts as an employee, mirroring legal guidance issued by the Obama administration that was withdrawn by the Labor Department under former President Donald Trump.
More than a third of American workers, or nearly 60 million people, did some form of freelance work in the past 12 months, a December 2021 survey from freelance marketplace Upwork found.
Groups representing businesses, including the US Chamber of Commerce, the National Association of Home Builders, the National Retail Federation and the Associated Builders and Contractors had met with White House officials to lobby for a more business-friendly standard.
Those groups have said any broad rule would hurt workers who want to remain independent and have flexibility.
But many labor groups have said companies are increasingly misclassifying employees as independent contractors, depriving workers of fair wages and benefits to pad their profits.
The proposal will be formally released Thursday, opening a 45-day public comment period.