The Gig Economy Class(ification) In Session
May 17, 2017 by Lincoln Derr
The internet continues to change the workplace landscape – most recently, in the form of more non-traditional career opportunities or a gig economy. What is this gig economy, you ask? The term “gig economy” refers to the growing business practice of hiring independent contractors and short term-workers to do small, part-time jobs, which are often done remotely. Think project-based, demand-dependent, no frills/no benefits gigs. The rapid development of this new economic sector has been fueled largely by the increasing availability of workers to fill these short-term engagements.
It sounds easy enough, but this push toward more freelance, gig-based work has not come without its share of problems – the biggest being the classification – or rather, misclassification of workers. The proper classification of workers as either employees or independent contractors determines whether an employer is responsible for paying payroll taxes, providing workers’ compensation insurance, and complying with state and federal statutes governing wages, hours, and working conditions.
Two recent court decisions should have gig employers scratching their heads about what sort of risks they may be facing in an independent contractor business model.
A group of Pennsylvania workers driving for UberBLACK as independent contractors sued the company, alleging they were misclassified and asking to collect minimum wages and overtime pay under both state and federal wage laws. UberBLACK provides luxury and limousine-type transportation options to users of the standard Uber app. However, the Eastern District of Pennsylvania ruled in mid-April that Pennsylvania Uber drivers, just like California and Florida Uber drivers, are properly classified as independent contractors.
The federal court looked to several factors in making its determination: Uber might have “some” control over drivers in matters involving safety and on-the-job standards, but the company did not have the “right to control” the drivers (i.e., – drivers could also drive for competitors); drivers were able to affect their profit and loss opportunities depending on their own managerial skill; drivers invested in their own equipment and materials in order to drive for Uber; and the fact that drivers can work as much or as little as they want, meaning the relationship was not permanent.
Just two weeks later, the California Supreme Court shocked the legal community by adopting a new legal standard regarding the classification of independent contractors. Dynamex, a nationwide same-day courier and delivery service, previously classified its California drivers as independent contractors as a cost-savings measure. The plaintiff, Charles Lee, filed suit alleging the misclassification of drivers violated both labor laws and transportation industry orders regulating wages, hours, and working conditions. The court certified a class action and took up the issue as to whether the workers were independent contractors or employees.
In reviewing the standard for determining employee or contractor status in the wage order context, the Court rejected previous precedent and instead held that a worker in California is an employee if any one of the following apply:
- The employer exercises control over the worker’s hours, wages, or working conditions.
- The employer “suffers,” or permits, the worker to work.
- The employer engages the worker, thereby creating a common law employment relationship.
The Court then went a step further. In clarifying the term “suffer or permit to work”, the Court adopted the “ABC test” which presume California workers to be employees unless the employer can establish all three of the following:
- That the worker is free from the control and direction of the company in connection with the performance of the work, both under the contract for the performance of the work and in the actual performance of the work.
- That the worker performs work that is outside the usual course of the company’s business.
- That the worker is customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed for the employer.
What do these two cases mean for employers outside of Pennsylvania and California? While no immediate actions may be necessary, employers who engage workers as independent contractors should review their business relationships/agreements to determine whether the workers should be reclassified as employees.
Most employers are familiar with the basic rules – contractors set their own hours, provide their own equipment, and determine how and when the work is completed (unless set forth in a contract) – but forget about some of the trickier issues. Do the independent contractors work in roles similar to those of employees? Are the independent contractors former employees performing the same work they did as employees? Are the tasks or deliverables expected from the independent contractor outlined clearly in a written contract?
Misclassification of employees as independent contractors can be a very expensive, time-consuming mistake. Luckily, employers can still find workers to fill the gigs and avoid potential classification mistakes with thoughtful hiring and retention policies.