The US Department of Labor recently proposed a major rule change that could hurt gig economy stocks. This update will make it more difficult for gig employers to treat their workers as independent contractors. In many cases, these companies will be forced to classify some of their workers as employees.
There is a reason for this rule change. The Biden administration believes that many companies have avoided the benefits normally accorded to employees (and some benefits to which employees are legally entitled) by simply referring to full-time employees as “independent contractors.” Companies argue that flexibility in contractor schedules and other perks offset the benefits they don’t receive.
For these gig economy stocks, however, it’s clear that these rule changes are likely to have a negative impact. The new rules are likely to have a negative impact on the finances of these companies.
As such, it could be a good time to sell these gig economy stocks as the rule change is likely to take effect next year.
Talk Room (TALK)
Source: Ben__Stevens / Shutterstock.com
A virtual mental health provider, conversation room (NASDAQ:TALK) is a company that many didn’t initially believe could be caught in the crosshairs of the rule change.
However, like many healthcare providers, Talkspace relies heavily on contract labor. The upcoming labor law changes could be the last thing TALK stock owners want to see. That’s because this company is already burning a significant amount of cash relative to its sales. As a result, this pandemic darling has recently slipped into penny stock status.
By merging with a SPAC, Talkspace raised $250 million during the previous bubble, only to see its valuation drop more than 90%. TALK stock, now trading at less than $1 a share, is at risk of being delisted. Accordingly, it’s likely to do some sort of reverse stock split in the near term.
Given the company’s deteriorating fundamentals and the resulting risks posed by TALK stock, I don’t think anyone should consider buying or holding it now that the proposed rule change will make Talkspace one of the gig economy stocks power to be avoided.
About (VIA)
Source: Proxima Studio / Shutterstock.com
undoubtedly, Above (NYSE:ABOVE) is one of the companies that will be most affected by the upcoming change in labor regulations.
In fact, Uber is perhaps one of the most well-known gig economy stocks, considering it has thousands of employees in many countries around the world, most of whom are independent contractors.
This model has enabled Uber to grow rapidly. It’s clear that Uber’s success has been aided by its ability to treat its drivers as independent contractors.
This ridesharing giant has a firm grip on the sector, so its operating costs are likely to rise once the rule is changed. That’s because Uber’s model uses the concept of a “utilized hour” instead of traditional working hours. The company claims that average driver earnings per hour used has increased.
The lack of key driver benefits, however, does not go down well with the Biden administration. As such, it’s likely that Uber’s cost structure will change significantly when this change goes into effect.
Given Uber’s size, the company’s lobbying efforts are likely to increase in the future. Uber has already said it is strongly opposed to the rule change. And investors need to consider the risk the new rule poses for UBER stock.
Elevator (LIFT)
Source: Roman Tiraspolsky / Shutterstock.com
Another top car service company, lyft (NASDAQ:LYFT) is also behind the proverbial 8-Ball due to the rule change. Accordingly, Lyft seems to be going on the offensive, trying to focus on moving laws in its favor. To be honest, it’s hard not to admire this company for doing whatever it takes to gain a competitive edge.
The company supports Prop 30 in California. This proposal aims to reduce air pollution by increasing taxes on those earning more than $2 million and using the funds to further encourage EV ownership and deployment of more EV chargers support financially. So this proposal really isn’t that controversial and advances many of the goals of California Gov. Gavin Newsom’s administration.
Lyft could potentially benefit from passing this proposal, as EV credit and more charging stations could attract more drivers to work for the company. Therefore, the company’s efforts to strengthen its position in the Californian market are positive. It’s just a market, however, and Biden’s newly proposed rewrite of the independent contractor rule could have a bigger impact on the company in the long run.
For those looking to avoid companies overly exposed to the impending rule, Lyft is one of the companies most exposed to it right now.
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At the time of publication, Chris MacDonald held no position (neither directly nor indirectly) in the securities mentioned in this article. The opinions expressed in this article are those of the author and are subject to InvestorPlace.com’s publicity guidelines.
Chris MacDonald’s love of investing led him to earn an MBA in finance and has held a number of leadership positions in corporate finance and venture capital over the past 15 years. His past experience as a financial analyst coupled with his eagerness to find undervalued growth opportunities contribute to his conservative, long-term investment perspective.
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