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Uber, Lyft stock decimated as US aims to classify gig workers as staff

About to get a lot trickier to justify contractor status for app-hired folks

The US Department of Labor today signaled it hopes to make it much harder for companies to argue that gig workers and laborers, among others, are individual contractors rather than employees.

As detailed in a Notice of Proposed Rulemaking [PDF], the Biden administration intends to adjust the criteria used to determine how workers are classified under American labor law.

Though employees enjoy various mandated benefits, independent contractors do not. It's no surprise then that Big Tech prefers to classify its armies of gig workers – those who pick up paid-for work from apps – as non-employees.

News of the proposal sent the stock prices of Uber and Lyft, which rely on gig workers, down 10 or so percent. The changes put forward by the Dept of Labor, which won't go any further until a public comment period is over, affect laws relevant to the Dept of Labor, such as federal minimum wage.

"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," said Secretary of Labor Marty Walsh in a statement.

"Misclassification deprives workers of their federal labor protections, including their right to be paid their full, legally earned wages."

Misclassification deprives workers of their federal labor protections

The current rules specify two core criteria to determine how a worker should be classified: the company's control over the worker; and the worker's opportunity to profit, or not, as a result of individual initiative.

The proposal this week is more involved than the ABC test adopted by California and Massachusetts: is the work under the company's control; is the work central to the company's business; and is the person working in the same trade as the company?

Instead, the Dept of Labor's update calls for "a totality-of-the circumstances analysis of the economic reality test in which the factors do not have a predetermined weight and are considered in view of the economic reality of the whole activity." And it would look at investment as a standalone factor, at worker control, and the extent to which the worker's activity is integral to the company's business.

With more factors to consider, it's more likely that a gig worker would be classified as an employee under the proposed rules, particularly with the US Federal Trade Commission signaling it intends to pay closer attention to worker classification.

The DOL is saying that on its own, having multiple 'gig jobs' should not be used as a factor that the worker is in a contractor relationship

"First, this new rule retracts the 2021 Independent Contractor rule, which was more favorable to the independent contractor status," said Liya Palagashvili, senior research fellow at George Mason University's Mercatus Center, in an email to The Register.

"However, in addition to retracting that rule, the DOL provides additional regulations that would make it difficult for workers to be classified as independent contractors, specifically gig economy workers.

"For example, in the six factor test that the DOL uses to assess whether a worker is an independent contractor, they will now consider 'additional aspects of control,' such as 'relying on a technology to supervise a workforce,' meaning that when companies track a workers’ location and even generate automated reminders, this can mean the worker is being 'supervised,' and thus may look more like an employee."

"Additionally, under the control factor, the DOL has added that if a worker holds multiple lower-paying jobs for which they are dependent for work in order to earn a living, then this would be one indication of an employment relationship," Palagashvili added. "Therefore, the DOL is saying that on its own, having multiple 'gig jobs' (as is often the case for many workers) should not be used as a factor that the worker is in a contractor relationship."

In conjunction with the Department of Labor rule proposal, Uber's stock was down about 10 percent on Tuesday while Lyft's stock was down about 12 percent. Meanwhile, the DJIA, the S&P 500, and the NASDAQ composite were all up or flat.

Companies like Uber and Lyft have built substantial businesses by insisting that drivers interacting with their software for passenger acquisition, routing, and payment are independent contractors rather than employees. As a result, gig economy firms have lower labor costs, because they don't have to pay for employee benefits and taxes.

Uber, Postmates, and two drivers for the companies are currently trying to get the US Ninth Circuit Court of Appeals to undo California's labor classification rules (Lydia Olson, et al v. State of California, et al).

Business-oriented groups predictably side with businesses that rely on gig workers and resist efforts to redefine employment status.

"Forcing gig workers who prefer flexibility to become employees would trigger a serious loss of work and income for millions of Americans,” said Chamber of Progress CEO Adam Kovacevich, in a statement.

The Chamber of Progress, a trade group, published a study predicting that adoption of tighter rules would mean 3.2 million of 4.44 million reclassified contractors would lose their part-time or full-time jobs, with a net earnings loss of $35.2 billion.

A study published in June by the Economic Policy Institute, a progressive think tank, found, "about 1 in 7 gig workers (14 percent) earned less than the federal minimum wage on an hourly basis and more than a quarter (29 percent) earned less than the state minimum wage."

Palagashvili argues that most independent contractors will not benefit from the proposed rule because they supplement full-time employment with independent work. She cites a 2019 research paper [PDF] that says, "The largest share of workers with IC income are those in the top quartile of earnings who primarily receive wage income."

From a workers' rights perspective, as well as having clarity in the workplace, this seems like a very positive move

Wendy Musell, managing partner of law offices of Wendy Musell and counsel for employment-law specialists Levy Vinick Burrell Hyams LLP, told The Register in a phone interview that she welcomes the change back to the "totality-of-the circumstances" test because it's "more in keeping with the realities of the workplace."

The prior rule, she said, only focused on certain factors and posed problems in labor litigation because it diverged from decades of precedent in prior court decisions that relied on the more nuanced analysis of worker classification.

"From a workers' rights perspective, as well as having clarity in the workplace, this seems like a very positive move," she said.

Musell added that workers' rights advocates have been critical of the previous administration's rules because they allowed more workers to be misclassified. When that happens, she said, it's taxpayers who end up paying for the benefits like healthcare that employers aren't providing.

Palagashvili said that the new rule doesn't address healthcare and suggested that perhaps it should. "One thing that would be beneficial for independent contractors is if the DOL said that companies COULD give health care to their independent contractors without risk of those individuals being considered employees," she said. ®

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