App-based ride-sharing services such as Uber (UBER) and Lyft (LYFT) gained notoriety as "disruptors" for reshaping the traditional cab industry. However, these companies are now grappling with potential disruption from a new federal labor rule.

A recent regulation on worker classification, released this month, is already facing legal challenges and is expected to encounter resistance from gig economy companies whose business models it jeopardizes. This new law has the potential to significantly impact the estimated 22.1 million Americans working as independent contractors, leading to substantial changes in their employment status.

The Department of Labor unveiled details on a rule setting standards for distinguishing between employees and independent contractors, granting the former overtime pay, unemployment insurance, and various other benefits under the law. Initially proposed in 2022, the rule is scheduled to take effect in March.

This week, a group of freelancers, including three New Jersey-based writers, filed a lawsuit against the Department of Labor to overturn the new rule. Additionally, a major business lobbying group is contemplating legal action.

Granting "employee" status to workers currently classified as contractors could pose a threat to the business models of companies like Uber, Lyft, and Doordash (DASH), whose contract workers cost significantly less than traditional employees.

Both Uber and the Flex Association, a trade group representing gig economy companies, released statements asserting that the rule would have no immediate impact on their businesses.

Erin Hatton, a sociology professor at the University at Buffalo, predicts that when the new rule takes effect, Uber and Lyft drivers, along with millions of other gig workers, could potentially be reclassified as employees. This shift could pose a substantial challenge to the employment model of these companies.

The U.S. Chamber of Commerce is considering legal action to stop the rule, expressing concerns about the bias in redefining independent contractors as employees. The vice president of workplace policy at the chamber, Marc Freedman, emphasized potential negative impacts on flexibility, opportunity, and the economy.

The rule addresses a critical distinction concerning gig-based companies that provide various services, including rides, dog-walking, and food delivery—when is a worker an employee versus a contractor? This distinction is crucial as it determines the obligations employers have towards their workers under labor laws at federal, state, and local levels.

The new regulation, similar to an older Obama-era rule, outlines six factors to evaluate worker classification, including the opportunity for profit or loss, investments by the worker and potential employer, permanence of the work relationship, degree of control, the work's integral part in the employer's business, and skill and initiative.

The application of these standards to individual workers will be determined by judges in court cases. Misclassification, a cost-cutting measure for businesses, is prevalent in industries like construction, leading to lower compensation for independent contractors compared to employees.

Despite drawbacks, many contractors prefer not to be considered employees and resist worker classification rules. A 2023 survey by Indeed found that independent contractors value independence and flexible hours but legal experts argue that flexible work arrangements can coexist with the benefits of employee status.

The new federal labor rule has sparked legal challenges and opposition from gig economy companies, signaling potential upheavals in the classification of millions of American workers. The outcome remains uncertain as various stakeholders navigate the implications of this regulatory change.