Biden's proposed gig worker rule could deal a major blow to small businesses

New gig worker rule could cause company's operational costs to skyrocket

The Biden administration has proposed a new rule that could re-classify millions of gig workers as employees, a move that could deal a significant blow to small businesses across the country.

The Labor Department on Tuesday unveiled a new proposal that would make it more difficult for companies to classify their workers as independent contractors — a change that could have major consequences for ride-hailing, delivery and other industries that depend heavily on gig workers.

Companies are required to provide certain benefits and legal protections to employees but not contractors, making employment of those types of workers more expensive. That includes minimum wage, overtime, Social Security and Medicare payroll taxes, unemployment insurance and workers' compensation insurance.

In determining whether a worker qualifies as an independent contractor or not, the Labor Department said it would take into consideration the worker'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.

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small buisness

A sign outside a store on March 21, 2021, in New York City. (Noam Galai/Getty Images / Getty Images)

The final rule is expected to come next year.

While the proposal could give millions of workers employee status, it could also have potentially catastrophic consequences for small businesses already struggling with the hottest inflation in four decades and a persistent labor shortage.

"This is a rule that's only going to make it more challenging for small businesses to operate in today’s already difficult economy," Beth Milito, executive director of the National Federal of Independent Business' legal center, told FOX Business.

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Businesses say their operating costs could surge if they are required to classify gig workers as employees, and as a result, employers could be forced to cut payroll or freeze hiring in order to keep their bottom line strong. They have also noted that some employees like the flexibility that gig work provides, including the option to work for different companies if they choose to do so.

President Biden

President Joe Biden delivers remarks before signing the Inflation Reduction Act into law at the White House on Aug. 16, 2022. (Demetrius Freeman/The Washington Post via Getty Images / Getty Images)

Milito noted the new rule comes as businesses are already grappling with a labor shortage that has forced them to raise wages exponentially as they compete with other companies for a limited pool of workers. According to recent Labor Department data, there are still roughly 1.7 jobs available for every person looking for one.

"It’s just all not good for small businesses," she said. "It's more expensive and a lot more uncertainty. … This rule is only going to make it more challenging for businesses to get the help they need to run their business."

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Gig companies like Uber and Lyft have spoken out about the proposed change and warned that having to treat their drivers like employees could force them to modify their business practices. Some estimates show that the ride-sharing companies save up to 20% to 30% on labor costs by classifying their employees as independent contractors rather than employees.

Uber driver

Johan Nijman, a for-hire driver who runs his own service and also drives for Uber on the side, drives through New York City on Aug. 8, 2018. (Drew Angerer/Getty Images / Getty Images)

On Tuesday, the acting head of the Labor Department's Wage and Hour Division told reporters that the rule is unlikely to result in large worker classification changes.

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"What we anticipate is that this will really help provide guidance to both avoid and prevent misclassification," Jessica Looman said during a press call, according to Bloomberg News. "But this is a framework that has been used and has been well recognized and understood."