A recent rule on worker classification has the potential to create upheaval in the gig economy of the United States.

App-based ride-sharing services like Uber (UBER) and Lyft (LYFT) gained recognition as “disruptors” for revolutionizing the traditional taxi industry. Now, they face the challenge of warding off potential disruption from a new federal labor rule.

A recent regulation on worker classification, currently facing legal challenges, poses a threat to the business models of gig economy companies. This rule, released by the Department of Labor, sets standards for determining whether a worker is an employee or an independent contractor, influencing entitlements such as overtime pay and unemployment insurance. Predicted to go into effect in March, the rule has sparked legal action from freelancers and is likely to face resistance from gig economy giants like Uber, Lyft, and Doordash.

The Department of Labor’s regulation has raised concerns among business groups, with the U.S. Chamber of Commerce considering legal action. Critics argue that reclassifying workers as employees could diminish flexibility and opportunity for independent contractors, impacting the gig economy’s estimated 22.1 million American workers.

Despite statements from Uber and the Flex Association downplaying the rule’s immediate impact, experts predict potential reclassification of gig workers. This shift could challenge the cost-effective nature of gig economy business models, where contract workers are more economical than traditional employees.

The rule evaluates factors such as profit or loss opportunity, investments by the worker and the employer, the permanence of the work relationship, the degree of control, the work’s integral nature to the employer’s business, and skill and initiative. Legal experts anticipate that such criteria, when applied to gig workers, may lead to reclassification as employees.

Misclassification issues are widespread, with the construction industry cited as an example where up to 19% of the workforce may be misclassified. The economic implications include reduced compensation for independent contractors compared to employees in terms of income and benefits.

While gig workers value independence and flexibility, legal experts argue that offering these benefits alongside employee status is a feasible option. Critics argue against the false dichotomy between flexibility and permanent employment, suggesting that both can coexist within the legal framework.

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