The Biden Administration published a new proposal Tuesday regarding how workers should be classified, saying that thousands of people have been incorrectly labelled as contractors rather than employees, potentially curtailing access to benefits and protections they rightfully deserve.

The new US Department of Labor regulations would replace a Trump-era rule that lowered the bar for classifying employees as contractors, workers who are not covered by federal minimum wage laws and are not entitled to benefits including health insurance and paid sick days.

The reaction in markets for major gig companies was immediate. Shares of the ride-hailing companies Lyft and Uber tumbled about 8 per cent, although both companies dismissed the significance of the new proposal and its potential to affect their business.

Misclassifying workers as independent contractors denies those workers protections under federal labour standards, promotes wage theft, allows certain employers to gain an unfair advantage over businesses, and hurts the economy, said the Labor Department.

“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 labour Marty Walsh in a prepared statement.

The Labor Department argued that the Trump Administration rule did not comport with the 1938 Fair Labor Standards Act and decades of case law applying it.

One key change that could affect app-based companies is a requirement that employers consider whether the employee’s work is an integral part of their business. The Trump-era rule had narrowed that criteria to whether the work is part of an integrated unit of production, and gave more weight to two other considerations: the degree of control by the employer over the worker and the worker’s opportunity make a profit profit or loss.

The new rule directs employers to consider the totality of five criteria traditionally used to determine whether a worker is an independent contractor, without predetermining whether one outweighs the other. Those criteria also include the degree of permanence of the relationship between a worker and the employer and the amount of skill required for the job.

Wedbush analyst Dan Ives said the proposal would constitute a major change for workers and employers from previous years.

“A classification to employees would essentially throw the business model upside down and cause some major structural changes if this holds,” Ives wrote.

But both Uber and Lyft dismissed the potential impact of the new rule, saying that they could thrive in either scenario.

“Today’s proposed rule takes a measured approach, essentially returning us to the Obama era, during which our industry grew exponentially” CR Wooters, head of federal affairs at Uber, said in a statement.

In blog post, Lyft said the company had expected this change since the start of the Biden Administration.

“Importantly this rule: Does not reclassify Lyft drivers as employees. Does not force Lyft to change our business model,” the company said.

Both companies had applauded the Trump Administration rule, arguing that the Depression-era Fair Labor Standards Act law was outdated and did not provide the flexibility demanded by the digital era.

Gig economy giants have weathered past attempts in the US to require their drivers to be classified as employees.

In 2020, California voters overwhelmingly approved a proposition to exempt drivers for app-based companies from a state law requiring them to be designated as employees. Uber, Lyft and other companies had spent $200 million campaigning in favour of the proposition. However, a judge struck down the ballot measure as unconstitutional last year, setting up a legal fight that could end up in the California Supreme Court.

The proposed Labor Department rule will likely not take effect for months, including a 45-day period ending November 28 during which stakeholders can submit comments. Once it does take affect, it does not carry the same weigh as a law passed by Congress or state legislators but rather offers an interpretation of how the Fair Labor Standards Act should be applied.

Still, it has the potential to change the circumstances of workers beyond those employed by app-based companies. Misclassification has negatively affected delivery workers, custodians, truck drivers, waiters, construction workers and others more, according to the Labor Department.

“This is a long-awaited determination that will empower essential workers to assert their basic wage and hour, health and safety, and compensation rights,” said Patricia Campos-Medina, executive director of the Worker Institute at Cornell University’s School of Industrial and Labor Relations. “All workers are entitled to these rights, but employers easily avoid them by making arbitrary decisions on independent contractor rules.”