Biden Proposal Could Lead to Employee Status for Gig Workers

The Labor Department on Tuesday unveiled a proposal that would make it more likely for millions of janitors, home-care and construction workers and gig drivers to be classified as employees rather than independent contractors.

Companies are required to provide certain benefits and protections to employees but not to contractors, such as paying a minimum wage, overtime, a portion of a worker’s Social Security taxes and contributions to unemployment insurance.

The proposed rule is essentially a test that the Labor Department will apply to determine whether workers are contractors or employees for companies. The test considers factors such as how much control workers have over how they do their jobs and how much opportunity they have to increase their earnings by doing things like offering new services. Workers who have little of either are often considered employees.

The new version of the test lowers the bar for that employee classification from the current test, which the Trump administration’s Labor Department created.

The proposal would apply only to laws that the department enforced, such as the federal minimum wage. States and other federal agencies, like the Internal Revenue Service, set their own criteria for employment status.

But many employers and regulators in other jurisdictions are likely to consider the department’s interpretation when making decisions about worker classification, and many judges are likely to use it as a guide.

As a result, the proposal is a potential blow to gig companies and other service providers that argue their workers are contractors, though it would not immediately affect the status of those workers.

Uber and Lyft have said in federal filings that having to treat drivers as employees could force them to alter their business models, and some gig economy officials have estimated that their labor costs would rise 20 to 30 percent. The companies have repeatedly fought similar efforts by regulators and legislatures in states across the country.

Share prices for both companies dropped more than 10 percent Tuesday.

In a statement, Uber sounded optimistic that the proposal would not endanger the gig-economy model, at least if the administration heeded additional input.

“Today’s proposed rule takes a measured approach, essentially returning us to the Obama era, during which our industry grew exponentially,” said CR Wooters, the company’s head of federal affairs. “In a time of deep economic uncertainty, it’s 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.”

Lyft likewise noted that the proposal would restore the approach under President Barack Obama, when drivers were generally classified as contractors, and emphasized that it would not force the company to alter its business model. The company said the proposal was merely the beginning of a longer process.

Companies, unions, workers and other members of the public will have a month and a half to formally comment on the proposal before the department incorporates feedback into a final rule. After that, the department will have considerable discretion over whether or not to enforce the rule at particular companies.

“While independent contractors have an important role in our economy, we have seen in many cases that employers misclassify their employees as independent contractors,” Labor Secretary Martin J. Walsh said in a statement. “Misclassification deprives workers of their federal labor protections, including their right to be paid their full, legally earned wages.”

David Weil, who oversaw the Obama Labor Department’s approach to classifying workers, cautioned that just because the department didn’t bring an enforcement action against Uber and Lyft didn’t mean it couldn’t have. He noted that the Obama rule had been adopted late in that administration.

“I think it is true that there are lots of gray areas in the platform world, but with the caveats that you always have to go deep into the facts, Uber and Lyft do not strike me as that difficult,” Mr. Weil said in an interview, adding: “There is a lot about the relationship that looks like one of employees.”

The proposal helps defuse growing pressure from activists supporting gig workers, who complained that the administration had been too slow to intervene to protect ride-hail drivers and other app-based workers.

Lorena Gonzalez Fletcher, a former leader on workers’ issues in the California Assembly who is now head of the state’s labor federation, said in an interview that the action demonstrated the Biden administration’s strong pro-worker stance but that the effect of the new rule would come down to how aggressively the administration enforced it.

“Companies just continue to break labor law,” Ms. Gonzalez Fletcher said. “They break it at the local level, the state level and federally, and there are no consequences. Everything is about enforcement.”

The Biden Labor Department delayed and then scrapped the Trump rule on worker classification before a federal judge reinstated it. The new proposal would formally rescind and replace the Trump rule when made final in the coming months.

Opponents could ask a federal judge to block the new rule temporarily or strike it down, but administration officials expressed confidence that it would withstand judicial scrutiny. They said they were merely returning to a standard that federal courts had repeatedly upheld over the decades.

Under President Donald J. Trump, the department argued that two factors should predominate in determinations of whether a worker is an employee or a contractor, even if other factors are relevant: the degree of control a company has over the worker, and the extent to which a worker can increase his or her income by taking entrepreneurial initiative, like marketing his or her services.

The Trump Labor Department suggested that gig workers like Uber drivers would probably be considered contractors under these criteria. Proponents argued that the Trump approach was necessary so enforcement didn’t snuff out new ways of doing business, such as the gig economy.

But in an interview, Seema Nanda, the Biden Labor Department’s top lawyer, said the Trump rule “threatens to actually increase rather than decrease misclassification.”

The proposal by the Biden Labor Department argues that several factors must be weighed when assessing whether a worker is a contractor or an employee, and that none of them are necessarily more important than the others. Among the additional factors are whether the work being performed is central to a company’s business, and what kind of investments workers make to do their jobs, such as buying equipment.

Administration officials cautioned that determining whether or not gig workers like Uber drivers are employees would hinge on applying the test laid out in the proposal to individual cases and that they were not prejudging the outcome of any one of them. They also emphasized that the proposal did not target a particular industry.

“We make a determination based on the specific facts in any case that we look at,” Ms. Nanda said. “Misclassification harms workers across a wide range of industries.”

Gig companies like Uber and Lyft have sought for years to influence laws and regulations on worker classification. After the California Legislature passed a bill proposed by Ms. Gonzalez Fletcher that effectively classified gig drivers as employees in 2019, gig companies spent roughly $200 million helping to pass a ballot measure that would exempt their workers from employee status while granting them limited benefits.

A state judge later ruled that the measure was unconstitutional. The decision is being appealed.

Gig companies have tried and failed to enact similar measures in other liberal states, like New York and Massachusetts, but did help pass a contractor measure in Washington State.

Uber and Lyft have often argued that drivers prefer the flexibility that independent contractor status affords them, such as the ability to work when, where and however long they choose to. They have cited polling data that appears to affirm this.

Legal scholars point out that there is nothing inherent about employment status that would forbid companies to grant workers similar flexibility.

Mr. Walsh, the labor secretary, has sometimes appeared open to the idea that gig workers could be classified as independent contractors.

But when asked in an interview this summer whether he thought drivers would prefer to be independent contractors or employees if the trade-offs were made clear, he argued that “95 percent of people would say yes” to being classified as employees.