Labor Department’s Proposal Could Kill Gig Economy

For the platforms, it won’t be business as usual — not if the Labor Department shakes things up.

To that end, and as widely reported, on Tuesday (Oct. 11th), the Department has set forth a proposal that would shift how platform economy workers can be classified.

Read also: Labor Department Could Grant Gig Workers Employee Status

In a nutshell, by opening the door to those workers being classified as employees rather than as contractors, through new rules, the platforms’ operating structures would suddenly become significantly pressured.

With repercussions for the side hustle – the ancillary streams of income that some of vulnerable denizens of the paycheck to paycheck economy rely on.

As reported, the new rules proposed by the Labor Department dovetail a bit more closely with courts’ interpretation of the Fair Labor Standards Act (FLSA); and would go back to what the department said is the long-held interpretation of the economic reality factors. These factors would include how “integral” the work would be to the employers’ business. The implication is that the more closely tied the work is to the firm’s core business, the more likely it is that they’d be classified as employees.

The proposed rule is now open, until the end of November, for public comment, and is being published in the Federal Register this week. And the proposed rule may see significant alterations before being finalized. So it seems the Labor Department has significant sway over how the platforms’ business models may be impacted over the near and longer term.

No surprise, then, that Uber’s stock slipped almost 11%, and Lyft was down 12%, on Tuesday.

A Shift for the Platforms?

A shift – toward employee status rather than independent contractor – would mean that the employer, in this case the platform, would pay sick time, worker’s comp and other benefits.

Call it a form of shaping marketplaces by rule-making, or in this instance, via proposed rule-making. Marketplaces evolve, but in many cases, the agencies and regulators shape that evolution. One example rests with the restructuring of  taxi medallion debt  that is held by cabbies. The cab industry, of course, took a hit with the rise of Uber and Lyft. Though the move is somewhat localized (to the NY market), it speaks to the ways in which various agencies might be able to hobble new business models and prop up old ones that have proven resistant to change.

Worker classification has been a hotly contested issue, where labor groups have argued that employee status is warranted; in at least some cases the companies have argued that higher costs would be in the offing, which in turn might limit the flexibility they offer to workers.

And while companies like Lyft have come out to note that there is no change in the business model, the worries over margins are real, especially against a backdrop where the great reopening has spurred more demand for mobility (and thus for Uber and Lyft’s offerings).

For the gig workers themselves, the changes might be significant. In the past, PYMNTS has estimated that more than a third of gig workers were non-seasonal; and even before the pandemic, as many as 16% of gig workers were living paycheck to paycheck. If the platforms and other gig work firms start limiting at least some of the workers’ choice inherent in their models (to offset at least some operating costs). It is the paycheck-to-paycheck individuals, using the side hustle to bring money in that may be critical in these inflationary times, who will bear the brunt of this change.