Classification of Gig Economy Workers: Not Music to Companies’ Ears

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Short for the word “engagement,” in the past, the term “gig” was more often used to describe the temporary work of a musician.  However, today, the term “gig economy” is commonly used to describe the new free market system where companies use independent workers for temporary, project-based, and freelance work, for example, with app-based companies like Uber, Lyft, and Postmates.

The gig economy is not only here to stay, but is growing.  Part time gig work now accounts for approximately 25% of the American workforce and is expected to grow to 40% by next year.  While some take on gigs as a means to supplement the income they might earn from their main job, recent reports indicate that about a third of workers now engage in freelance and short-term gigs as their main source of income.  Due to the growth of this free market system, the gig economy has been in the spotlight for how companies classify its workers.  Recent trends in this area may not be music to employers’ ears.  Here is why:

Companies’ Classification of Gig Economy Workers as Independent Contractors is Striking the Wrong Chord

Over the past years, many companies, like Uber, have structured their companies in a way that allows their workers (classified as independent contractors) to enjoy the benefits of working more flexible hours while receiving higher pay to either supplement or be their main source of income.  The draw of contracting with these app-based businesses is the ability for workers to have multiple jobs, if they wish, and the freedom to select the hours during which they will work, as they have the time.  Meanwhile, this business model allows businesses to provide a service that is more accessible and affordable to its customers.

The objection is that these independent contractors are not offered benefits (health, vacation, sick time, unemployment), provided the ability to engage in unionization and collective bargaining, or entitled to the same laws governing harassment and wage and hour as are employees.

Laws and Legal Rulings Setting the Tempo

Last year, the California Supreme Court issued a landmark decision involving courier company, Dynamex Operations West, Inc., which holds that classifications of independent contractors are only proper when they follow the newly adopted “ABC test” –most notably, requiring that the worker perform work that is outside the usual course of the hiring entity’s business.  This ruling sent shockwaves throughout businesses trying to assess whether or not they needed to reclassify their entire workforces to avoid the onslaught of litigation currently being filed challenging just that—proper classification, payment of overtime, etc.

Meanwhile, gig economy employers like Uber, Lyft and Postmates are entrenched in legal battles challenging the classification of their workers.  However, requiring a switch in the classification of their workers to employees would likely require an entirely new business model, which would potentially radically change service offerings, increase legal spend, and increase costs of overhead between 20 and 30% –increases which would ultimately be passed along to consumers. In Epic Systems Corp. v. Lewis, the U.S. Supreme Court ruled that workers can waive their rights to class actions when signing an arbitration agreement.  It was due, in part, to this ruling that Uber was more recently able to obtain a decertification of a federal class action suit brought against them as workers had signed arbitration agreements. It is important to note that these classification decisions and issues are not unique to these app-based businesses.

Nationwide, law makers are taking a closer look at the gig economy, and at the end of 2018, New York City took legal strides instituting a minimum wage for gig-economy drivers, while legislation has been proposed in Oregon and Washington that echoes the parameters of California’s Dynamex ruling.

As the Courts and Law Makers Continue to “Fine Tune” This Area of Law, What Should Employers Do?  

In light of Dynamex, classifying employees as independent contractors in the gig economy has now become even more difficult.  Missteps in this area, as they may implicate the classification of an entire workforce, can lead to significant financial implications for a business.  It is now more important than ever that businesses stay tuned-in to new legal decisions and rulings whether they be at the local, state or federal level.

While there are no bright line rules to guarantee compliance, it is critical that companies review their job positions and requirements in conjunction with Dynamex’s “ABC test” when making classification decisions.  Special attention should be given to classification decisions when a worker performs duties that are directly in-line with the usual course of the company’s business, as an independent contractor classification in this instance is likely to be problematic.  If after assessment, there are any grey areas, the best course of action is to contact legal counsel to assure the company takes the steps necessary to do everything possible to avoid costly litigation.

As legal rulings continue to come down and state legislatures are ever more focused on the crescendo of issues surrounding the growing gig economy, we can only hope that the encore of next legal issuances brings some harmony to how employers and their gig economy workers partner.

Lindsay A. Ayers is a partner at the California law firm of Carothers, DiSante & Freudenberger LLP, and an avid music fan who provides California employers with guidance as they navigate the concert of ever-changing California employment laws.  

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