The Labor Department on Tuesday unveiled a much anticipated proposal that could reclassify millions of independent contractors as employees. And the news took a heavy toll on shares of Uber stock, along with those of Lyft and DoorDash.
In the proposal's wake, Uber stock plunged 10.4%, closing at 24.66 on the stock market today. Lyft stock tumbled 12% to 11.27. Meanwhile, DoorDash fell 6% to 44.85.
So-called gig drivers for Uber and Lyft — as well as food delivery workers for DoorDash and others — perform income-earning activities outside of the traditional, long-term relationship between employers and employees.
In addition, instead of a traditional full-time job with a single company, gig workers typically work as short-term, temporary, or independent contractors for one or a variety of employers. The definition of gig workers can include construction workers, janitors and home-care workers. Others include freelancers and project-based workers.
"While there is a lot of uncertainty around how federal and States will handle this latest proposal, it's a clear blow to the gig economy and a near-term concern for the likes of Uber and Lyft," Wedbush analyst Dan Ives said in a note to clients.
Uber Stock: Facing Legal Battles Over Benefits
Gig workers have become popular since the rise of Uber and Lyft, creating legal battles that could force workers to pay overtime, payroll taxes and Social Security benefits. The Labor Department proposal could change that.
Companies are required to provide certain benefits and protections to employees but not to contractors.
"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 written statement. "Misclassification deprives workers of their federal labor protections, including their right to be paid their full, legally earned wages."
Wedbush's Ives said: "With ride-sharing and other gig economy players depending on the contractor business model, a classification to employees would essentially throw the business model upside down and cause some major structural changes."
Is Labor Proposal Being Overblown?
The Labor Department proposal currently does not have the legal force of a regulation specifically authorized by Congress. As a result, it applies only to laws that the department enforces, such as the federal minimum wage.
"While for now this is an interpretive rule, this will cast some uncertainty over the likes of Uber and Lyft as the Street worries about the potential ripple impacts from this latest Beltway changes," Ives wrote.
But RBC Capital Markets analyst Brad Erickson thinks the Labor Department ruling is being overblown.
"We think this is to some degree, much ado about (largely) nothing given the ruling seems more directly aimed at industries like health care, construction and food services," Erickson wrote in his note to clients. "Bigger picture, we'd view the long-term risk and probability of this coming to pass as low."
Uber stock is down 40% this year.
Please follow Brian Deagon on Twitter at @IBD_BDeagon for more on tech stocks, analysis and financial markets.
