Developments for Gig Economy Workers
Updated: Nov 13, 2019
Under US law persons doing work are either independent contractors or employees. If they do not meet the test to be an independent contractor, they are presumed employees. In some states, workers are presumed employees unless proved otherwise.
Sharing or “gig” economy companies are being sued by workers across the country. The results vary from state to state largely both because there are different tests being used to decide whether a worker is an independent contractor and the pertinent independent contractor standards were developed long before there was a sharing economy. New are coming to resolve how these workers should be classified. For now, the old laws are being applied to these workers.
The gig economy is a system where assets or services are shared between private individuals, free or for a fee by means of the Internet, through a host company. You can rent out your car, your home, your bike or your Wi-Fi network. The biggest change is on-demand transportation. You can pick up an electric scooter or you can get a car and driver.
An employee is a person who performs work where the employer has the right to control and direct the employee in how the work is done. The employee works for a specific wage under a contract. Some states include other factors in a balancing test to decide status. Most workers are employees.
An independent contractor is a worker who contracts with companies to provide services on a project basis. This individual is free from direction on the performance of work and the individual is normally engaged in an independent trade, occupation, profession, or business. The IRS uses a 20-factor test to decide whether a person is an independent contractor for federal tax purposes.
Independent contractors are outside laws that apply to an employer-employee relationship. They do not have access to benefits and protections employees are entitled to like the minimum wage, overtime pay, paid leave and employer-paid insurances. True independent contractors injured on the job are responsible for medical expenses and income losses.
For the company hiring an independent contractor has significant benefits. Misclassifying a person as an independent contractor can be a costly mistake. Employers can owe back wages with penalties and interest, be subject to tax assessments and penalties and civil fines. A company which misclassifies a group of employees can face a class-action lawsuit multiplying these costs into a terminal event.
There is no single national test for deciding whether a person is an independent contractor or employee. The U.S. Supreme Court has even said that there is no single test for determining whether an individual is an independent contractor or employee under the Fair Labor Standards Act. That is only one of many laws that require distinguishing between independent contractors and employees. An individual can be an employee for some purposes but not others. But, most courts agree the most important factor is the right to control.
Some factors may indicate the worker is an employee while others indicate the worker is an independent contractor. No one factor stands alone. Factors that are relevant in one situation may not be relevant in another. This array of legal tests makes deciding whether a worker is an independent contractor or an employee challenging for everyone involved; worker, company and the courts.
Independent contractor status for shared economy workers has been challenged nationwide. Case law varies on this issue Many misclassification cases have been diverted to arbitration, without the court resolving the question of whether shared economy workers are employees or independent contractors. The shared economy’s hosting companies benefit from arbitration provisions because if they lose, the rulings are not precedent. Hosting companies tend to settle these disputes before reaching a final verdict. Uber told the SEC it reached agreements to resolve the classification claims of a large majority of 60,000 U.S. drivers. Uber set aside $146 million to $170 million for settlement payouts. Uber also reserved $132 million for misclassification settlements in December 2018 and listed classification suits as a risk factor in its filing. Lyft has also paid out multiple settlements for misclassification lawsuits, including a $27 million settlement in 2017 and a $12.5 million settlement in 2016. These tactics have resulted in a limited body of case law on this subject.
Government agencies are issuing opinion letters. In April 2019, the US Department of Labor said certain workers in the shared economy are independent contractors for FLSA purposes. The DOL arrived at this conclusion using an economic reality test from back in the 1940’s. The NLRB has found that drivers providing personal transportation services for Uber are independent contractors. The NLRB arrived at this conclusion using the common-law agency test set from a 2019 opinion. The two agencies used different tests but arrived at the same conclusion that shared economy workers are independent contractors. While the facts of every working relationship are different, a shared economy worker bringing a misclassification claim before these agencies is not likely to win.
Some states are moving toward classifying these workers as employees. Oregon put Uber on notice that drivers would be classified as employees in an advisory opinion in 2015. California has passed legislation that would classify most of these workers as employees and uses a test similar to Oregon’s. These states and about seven others are now using the ABC Test. To properly hire an independent contractor the business must prove that the worker: (a) is free from the company’s control; (b) is doing work that isn’t central to the company’s business; and (c) has an independent business in that industry. If a single element is not met, the worker must be classified as an employee.
Shared economy workers have some characteristics of independent contractors. Unlike a typical independent contractor where the contractor has a specialized skill, shared economy workers are frequently lower-educated, unskilled workers in a substantially subservient economic position to the hosting company. This imbalance of power is what has some jurisdictions favoring more protections.
Other countries like Canada, Spain, and Germany already have an intermediate classification called “dependent contractor” for freelancers who work mostly for one business. They get some protections but not as many as full-time employees. To qualify as a dependent contractor, the worker must earn a minimum percentage from a single source (Canada: 80 percent; Spain: 75 percent; Germany: 50 percent). The worker is entitled to some minimum protections that vary by country but generally exclude wage-and-hour protections and provide unemployment and workplace injury protections.
The future for shared economy workers is uncertain. While some states are leaning toward an employee-employer relationship, the federal government seems to be holding firm on the independent contractor status. Without national legislation, whether these workers are employees or independent contractors depends heavily on where they are in and where they file a claim.
Some shared economy workers are slowly gaining narrowly tailored protections. Ride-hailing companies in New York City are required to pay drivers a guaranteed minimum pay rate. Seattle is considering pay and labor protections and giving drivers the right to bargain with companies collectively.