Published in Texas Employment Law Letter January 2016
by Jacob M. Monty
Thanks to technology, the “gig economy” has expanded beyond musicians. Companies such as ride service Uber, lodging connector Airbnb, and errand service TaskRabbit form the modern gig economy. Companies in the gig economy provide a business platform—generally a mobile app—to connect potential workers with customers. The companies rely on workers who choose to earn money working gigs—a series of brief contract jobs. Workers check their smartphones for an opportunity to pick up a passenger or run someone’s errands when it is convenient for them and with no repercussions for declining.
The gig economy provides valuable services to customers while giving work to the unemployed and workers who simply want to earn extra cash. However, the classification of gig workers is a nightmare for businesses. Determining whether a worker is an independent contractor or employee has always been a highly subjective analysis involving many different factors, including work instructions, training, set work hours, and the furnishing of equipment. Many jobs have factors that point to both independent contractor and employee status. Gig workers are even more difficult to classify. In a case involving Lyft, a ridesharing service, a federal judge stated, “The jury in this case will be handed a square peg and asked to choose between two round holes.”
The flexibility that is integral to the gig economy’s success is responsible for some of the difficulty in analyzing gig workers’ status. For instance, an Uber driver might work a traditional full-time office job during the week and pick up a few passengers on weekends to earn extra cash. By contrast, another Uber driver could spend 40 hours per week picking up passengers and rely solely on the gig for income. Uber has no control over the drivers’ choices, but the choices could affect a court or agency’s determination of whether the drivers are independent contractors or employees.
The government and plaintiffs’ attorneys attack
On February 15, 2015, the U.S. Department of Labor’s (DOL) Wage and Hour Division (WHD) entered into a memorandum of understanding with the Texas Workforce Commission (TWC) to combat worker misclassification. Under the agreement, the WHD and the TWC share information and coordinate enforcement efforts. That means an investigation by one agency may lead to an investigation by the other agency. The TWC and the WHD also share information with the IRS. If the TWC finds that a company misclassified workers and requires it to pay unemployment insurance taxes (generally a relatively small penalty), the agency could pass that information to the IRS, which could assess a larger penalty.
Texas businesses take note: The TWC is being more aggressive than ever before. Tax examiners and hearing officers are analyzing the status of workers the TWC previously deemed independent contractors.
Plaintiffs’ attorneys are also joining the action. In addition to receiving a boost from the DOL, which launched a Web-based portal in September 2014 that allows workers to fill out intake forms that are sent to local attorneys, plaintiffs’ lawyers are filing lawsuits on their own. Uber drivers have filed a class action lawsuit in California requesting reimbursement for gas and vehicle maintenance. DoorDash, which provides on-demand food-delivery services, has been sued by its drivers for alleged misclassification.
Ideas on how to resolve the uncertainty abound. Alan Krueger, former chief economist to President Barack Obama, and Seth Harris, former deputy labor secretary, support the creation of a new intermediate worker category. A California bill would allow independent contractors who depend on a business platform to collectively bargain with the company that operates the app without an official union and without being classified as contractors.
What should companies do?
First, evaluate your goals. Do you want to have control over your workers? Do you need to be able to assess their performance and make decisions accordingly? Will an independent contractor salesperson be effective without using your company’s business cards and e-mail system? Instacart, a grocery-delivery service, recently reclassified its workers as employees. The change has reduced turnover, improved service quality, and lowered costs because Instacart can require employees to stay at a grocery store rather than paying independent contractors to drive to a store for each trip. However, the additional costs of hiring employees (e.g., healthcare benefits, workers’ compensation insurance, and overtime) will not work for every business model.
Second, consult an employment attorney to ensure you are minimizing liability by treating your contractors like contractors, not employees. For example, to protect workers’ independent contractor classification, do not provide them business cards or e-mail addresses. Do not pay for their training or business expenses, and do not stop them from working for competitors. Enter into independent contractor agreements, and require contractors to carry their own liability insurance. Do not require full-time work. If those restraints do not align with your goals for your contractors, go back to step one and reevaluate.
Finally, be aware of your options. If the tide is turning against your industry or the workers you classify as independent contractors, consult an employment attorney to see how you can minimize your liability. For instance, the IRS’s Voluntary Classification Settlement Program allows employers to voluntarily treat contractors as employees for future tax periods. In return, employers pay only 10 percent of the employment taxes for the most recent tax year and no interest or penalties. That’s an enormous reduction in the amount that would be due if the IRS acted first. To successfully combat the government and plaintiffs’ attorneys on this hot-button issue, you must be prepared.
Jacob M. Monty is the managing partner of Monty & Ramirez, LLP and an editor of Texas Employment Law Letter. He can be reached at email@example.com.