Shares in the largest gig economy companies in the US tumbled after the Biden administration proposed a new rule that would make it more likely that gig workers will be classified as employees instead of independent contractors.

Ride-hailing app Uber fell as much as 16.7 per cent, while shares in rival Lyft and food delivery service DoorDash hit record lows during trading in New York on Tuesday as investors worried the US labour department’s proposal would dramatically raise wage costs.

The proposal would establish a “test” that the labour department could use to determine if workers are employees or independent contractors based on how much control they have over their hours and their job responsibilities. It lowers the bar to employee status from the rule written under former president Donald Trump’s administration.

Because these companies, and some other businesses, classify their workers as contractors, they are not legally required to provide them with some job benefits due to employees, such as a minimum wage, overtime pay and contributions to unemployment insurance and Social Security. Adding these benefits would “throw the business model upside down”, Wedbush Securities analysts Daniel Ives and John Katsingris wrote in a research note.

Uber shares closed down 10.4 per cent on Tuesday and Lyft dropped 12 per cent. DoorDash recovered some ground to close 6 per cent lower.

About 9 per cent of US adults had earned money through an online gig platform in the past 12 months, according to a 2021 Pew Research Center report, and could receive new job benefits under the proposed rule. Cleaners, construction workers and home health workers could also gain employee status.

But the probability of the Biden administration forcing gig companies to reclassify their workers is “low”, according to RBC analyst Brad Erickson, because it could force ride-hailing companies to lay off 3mn to 4mn part-time drivers and substantially raise prices for their services.

Uber’s head of federal affairs, CR Wooters, said in a statement the company’s drivers prefer the flexibility of the current arrangement and that the proposed rule is “essentially returning us to the Obama era, during which our industry grew exponentially”.

Lyft said the proposal poses “no immediate or direct impact” on its business because drivers worked as contractors under a similar Obama-era rule. DoorDash said it believes its workers are already properly classified and that it does not expect the proposed rule to change their status as independent contractors.

Still, the proposal is “a clear blow to the gig economy and a near-term concern for the likes of Uber and Lyft”, Ives and Katsingris wrote. “While for now this is an interpretive rule, this will cast some uncertainty over the likes of Uber and Lyft as [Wall] Street worries about the potential ripple impacts from [these] latest Beltway changes,” they added, referring to the federal government.

Drivers have long campaigned to be classified as employees in hopes of improved pay and benefits. Being classified as independent contractors makes it impossible to consistently earn a living wage, worker advocates say.

“While independent contractors have an important role in our economy, we have seen in many cases that employers misclassify their employees as independent contractors,” labour secretary Marty Walsh said in a statement. “Misclassification deprives workers of their federal labour protections, including their right to be paid their full, legally earned wages.”

The labour department said it will give the public 45 days to comment on the proposal before proceeding with the rulemaking process.

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