Best's Review


The Gig Is Not Up

With the rise of the gig economy, the debate over whether workers are employees or independent contractors intensifies. Do we need a new worker classification?
  • Lori Chordas
  • April 2017
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A semiretired sax player driving for Lyft sees his "gig" as an opportunity to work when he wants, while planning an upcoming vacation. The driver told one of his passengers recently that he likes the independence of working when he wants and does not feel put upon as an on-demand worker.

Those views, which he shared one day in February with his passenger Rebecca Bernhard, a partner with Minneapolis-based law firm Dorsey & Whitney LLP, reflect part of the debate over whether the people working in today's new gig economy should be considered independent contractors or employees.

The traditional workforce model is being "turned on its head like never before" by the explosive growth of on-demand workers who have moved outside the confines of cubicles and office buildings to work for themselves on platforms such as Uber, TaskRabbit, Thumbtack and Airbnb, Bernhard said.

Between 20% and 30% of workers today, or about 162 million individuals in the United States and Europe, are engaged in some form of independent, nontraditional work, according to McKinsey & Company. By 2021, almost half of the private workforce will have spent time as independent workers at some point in their lives, according to MBO Partners, a provider of independent contractor engagement solutions. Many gigsters relish flexible hours, being their own boss and working multiple jobs as independent contractors, Bernhard said. They like the flexibility, control and autonomy that come from pushing a button on an app rather than punching a time clock, she said.

But that comes at a price. Independent contractors typically don't receive the employer-paid benefits and legal protections, such as health insurance, workers' compensation, family and medical leave, paid overtime and civil rights protections, afforded to employees, Bernhard said.

Lawyers, special interest groups and advocates are calling for changes to the employment status of gigsters.

Insurers also are paying close attention to the issue--given the financial burden of legal costs that comes from the possible misclassification of independent contractors, said Lynne Anne Anderson, a partner with the law firm Drinker Biddle & Reath.

Legal Limbo

Various studies suggest up to 30% of employers misclassify--most unintentionally--their employees as independent contractors.

Workers aren't the only ones with something to lose when it comes to that misclassification. Federal and state governments suffer substantial losses in the form of lower tax revenues and state unemployment insurance and workers' compensation funds. Employers are subject to back taxes and fines--as much as 100% of the employment tax due, depending on the level of culpability, according to experts.

Delivery service Postmates Inc., for instance, was reportedly ordered in October by the Washington state Department of Labor & Industries to retroactively pay workers' comp premiums to more than 3,000 couriers that Postmates considered to be independent contractors.

A class action lawsuit involving Uber Technologies, meanwhile, has been closely watched in the debate over worker classification.

Uber last year attempted to settle a class action lawsuit with the plaintiffs who claimed that Uber should classify them as employees and as such they deserved mileage and tip reimbursement. The proposed settlement, valued at up to $100 million, would have affected roughly 385,000 current and former drivers in California and Massachusetts. It would have kept drivers classified as independent contractors.

A U.S. judge in August, however, rejected the settlement saying it was not fair, adequate and reasonable. The 9th U.S. Circuit Court of Appeals in September ruled in favor of Uber by upholding the company's arbitration agreements.

In late February, a California court quietly granted Uber a significant victory in the ongoing misclassification battle, according to Richard Meneghello, co-chair of the gig economy practice group in the Portland, Oregon office of Fisher & Phillips LLP, a national labor and employment law firm.

In an article posted on the firm's website, Meneghello said that even though the ruling received scant attention, its significance cannot be overstated. The arbitrator ruled in Uber's favor concluding that Uber drivers were properly classified as independent contractors.

In a separate case, an appellate court in Florida in February found that Uber did not maintain the type of control to which a traditional employee is subject and therefore found that Uber drivers are not entitled to benefits under Florida's unemployment insurance statute.

"Drivers supply their own vehicles--the most essential equipment for the work--and control whether, when, where, with whom, and how to accept and perform trip requests," according to the opinion. "Drivers are permitted to work at their own discretion, and Uber provides no direct supervision. Further, Uber does not prohibit drivers from working for its direct competitors," it said.

This level of free agency, the court said, is incompatible with the control to which a traditional employee is subject.

Some states, such as Arizona, meanwhile, have passed laws that say individuals who work through online platforms are independent contractors. Also, many of the more than two dozen states that have legalized ride-hailing services have provisions that say drivers offering those services are independent contractors.

"Many of the pending cases will likely reach court-approved settlements, and while that's good for those parties, the rest of us still don't have definitive answers as to whether these individuals are properly or improperly classified," Bernhard said.

Employers, too, are being left to their own devices. "Companies are tightening up independent contractor and vendor agreements while also actively vetting potential contractors to confirm that the contractor is operating his or her own business and will not be economically dependent on the company before they retain the contractor," Drinker Biddle's Anderson said.

Costs of Misclassification

The debate over how to decide whether someone is an employee or an independent contractor can have significant financial implications for insurers as well as insureds.

Misclassification, said Jim Quiggle, director of communications at the Coalition Against Insurance Fraud, is a "big word for dishonest employers who illegally dodge state-required workers' compensation coverage by hiding [workers] in shell companies and lying they're independent contractors." The end result? Billions of dollars a year in "stolen" workers' comp premiums, taxes and other lost money to insurers, workers and tax payers, he said.

Insureds are also being forced to dig even deeper into their pockets to cover legal fees and costs associated with the debate. Workers who believe they have been misclassified, for instance, can file a Fair Labor Standards Act lawsuit to collect unpaid overtime and other compensation.

"Most EPLI [employment practices liability insurance] policies don't have coverage for FLSA claims, leaving insureds on the hook for back wages, liquidated damages, defense fees and costs resulting from class action suits," said Christian Antkowiak, a labor and employment shareholder with Buchanan Ingersoll & Rooney PC.

"I've heard some carriers are starting to create coverage plans for wage and hour FLSA claims, but I haven't had any clients yet who have used one.

"That said, insurers may still have a role to play in these cases," he said. "Over the years, we've represented companies whose principal directors and officers have been named in suits. While D&O policies don't pick up the underlying liability those individuals might have, carriers are typically required to pay the officers' and directors' attorneys' fees in defense of the claim. It's nothing to have, over the life of a case, anywhere from $400,000 to $500,000 in legal fees and costs."

But with challenges come opportunities, Meneghello said. Reclassifying gigsters to employees would open the door for more group benefits sales--health insurance, long-term care, life and disability, to name a few, he said.

"Depending on how this all shakes out, there could someday also be a push for more portable-type benefits," said Robert Whitman, a partner at Seyfarth Shaw LLP. An Uber driver, for instance, could have an account with his or her name on it that the ride-hailing service would contribute to, even though the worker would not be considered an employee of that operation. "The account would belong to the worker. It would be fully vested, portable and help alleviate some concern that these individuals are falling through the cracks when it comes to benefits."

New York legislators have proposed similar options to allow online platforms to pay into a benefit fund for workers who use their app or website.

In February, Washington state Rep. Jessyn Farrell proposed a bill that would require companies and people acting as brokers for independent contractors to put money toward contract workers' benefits.

Finding a Solution

While advocates on both sides of the aisle have their own stance on how gig economy workers should be classified, there's one thing they seem to agree on: It's time for change, Meneghello said.

"What we have are 20th century laws for a 21st century workforce," he said. "This brand new class of workers that people weren't anticipating has really thrown the entire framework out the window."

The U.S. Department of Labor has been candid about its efforts to restrict or limit the definition of independent contractor status, along with imposing joint liability on companies and the staffing agencies, to insure that there will be "deep pockets" to cover any overtime, workers' compensation or other liabilities that may result from misclassification, Drinker Biddle's Anderson said.

In July 2015, the DOL issued guidance on the classification of independent contractors, warning that most workers qualify as employees. Then, in January 2016, the DOL issued further guidance expanding the scope of joint employer liability for wage claims by workers supplied by staffing agencies, Anderson said.

In spite of these efforts, "it seems like with every couple of steps forward we take a few steps back," Meneghello said. "We might be inching toward progress but it's happening at a fairly slow pace. That's difficult because the modern economy isn't waiting around for regs and laws to catch up. They're plowing ahead because this is now."

There's been some buzz about the creation of a third worker classification that straddles the classification of independent contractors and employees.

The Hamilton Project, an economic policy initiative at the Brookings Institution, recently proposed a new legal category, which it calls "independent workers," that would qualify workers, regardless of whether they work through an online or offline intermediary, for many of the benefits and protections that employees receive, including tax withholdings, civil rights protections and employer contributions for payroll taxes.

Workers, however, wouldn't qualify for hours-based requirements, including overtime or minimum wage requirements, or unemployment insurance benefits.

Intermediaries, though, would be permitted to pool independent workers to purchase and provide insurance and other benefits at lower costs and higher quality "without the risk that their relationship will be transformed into an employment relationship."

New York is one of a handful of states already leaning in that direction, said Margaret Santen Hanrahan, a shareholder with Ogletree, Deakins, Nash, Smoak & Stewart PC. "Efforts like that provide some much-needed clarity to this difficult area of worker classification, where gig economy workers do not clearly fit in either category, instead of trying to fit a square peg into a round hole. Otherwise, courts are left to continue grappling with this gray area."

Attention is now focused on how the new administration under President Donald Trump will address the worker classification debate.

While Dorsey & Whitney's Bernhard expects the president to be "friendlier to the business side of the aisle" and issue fewer regulations on the topic, Meneghello offers a different take.

"Last summer the Republican Party was the first national party platform to talk about the gig economy, stating how this new era requires a new framework to free up companies' abilities to work with workers on a more independent basis. So the future looks bright if the administration is able to push forward some of its thoughts," he said.

"We'll continue to watch if the DOL pulls back on its 2015 guidance," Anderson said. For example, President Trump signed an executive order on Feb. 24 that requires all agency heads, including the DOL, to create a regulatory reform officer and a regulatory reform task force to recommend regulations that should be repealed, replaced or modified, she said.

The 2015 DOL guidance on independent contractors, and the 2016 guidance on joint liability could be identified for repeal or reform by the task force, Anderson said.

"However, for now, there hasn't been substantial discussion about giving us a new definition that works for the gig economy, leaving companies with the challenge of having to operate with regulations and court decisions that have not kept pace with the gig economy business model."

State agencies and courts are also adopting "limited, narrow definitions, and generally determine that most workers should be classified as employees," she said. "I don't think we'll see an expansion of the definition of independent contractor in the near future. States are incentivized by the additional tax revenue if workers are defined as employees."

As for gig companies themselves, there's concern whether platforms such as Uber and Lyft could remain as profitable if forced to have employees rather than independent contractors, Antkowiak said.

"Out-of-date regulations tend to stifle innovation. Companies are frustrated that new ways of doing business could leave them exposed to litigation. They need legislative and/or regulatory reform to be more progressive, whether it comes in the form of a new type of employment classification or recognition by courts that antiquated tests and standards deserve a second look."

Several startups have taken it upon themselves to resolve the debate.

Honor, an online service that connects in-home caregivers, seniors and their families; courier services startup Shyp and meal-delivery service Sprig have, according to reports, reclassified their workers as employees and are offering them benefits, training and promotions.

By Lori Chordas, senior associate editor, Best's Review:

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