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INSIGHT: The Labor Flexibility and Legal Flux of the Gig Economy

Oct. 5, 2018, 12:31 PM

Few sectors of the United States labor market have attracted as much media attention, venture capital, and commentary as the so-called “gig economy.” Transacting with temporary and semi-independent workers, such as drivers for ride-share companies and food-delivery services, has, for many people, gone from novelty to everyday occurrence. The use of such workers has generated praise and criticism in nearly equal measure. Known as “gig workers” or “giggers,” many of these workers seek out gig opportunities in order to enjoy more personal and economic freedom. Others may not be able to find full-time, traditional work. For businesses, gig workers can provide greater flexibility and savings on taxes and employee benefits. Engaging gig workers does not come without legal risk, however, and the idea that gig workers are some kind of inexpensive, inexhaustible panacea is illusory. Therefore, businesses that engage with gig workers, now or in the future, must become attuned to the myriad of issues that such an arrangement implicates.

Look Out for Employees in Gigger Clothing

Many companies assume that, if they engage with a worker on a specific project or task for a limited period of time, that worker is an independent contractor. But that is not always true. The distinction between employee and independent contractor can be vitally important: Employees must be paid minimum wage and overtime and covered by benefits. They are eligible for unemployment and workers’ compensation. Contractors generally are not entitled to any of these legal protections.

Even when a worker wants to be classified as an independent contractor, a range of factors dictate what classification is correct under the law. Further complicating matters, the legal tests can vary not only by jurisdiction, but also by which type of law is being analyzed (e.g., taxes, wages, benefits). Moreover, courts have just begun to analyze how the available tests should be applied to gig workers, with inconsistent and sometimes surprising results.

In February, a federal judge in California ruled that a driver for the food-delivery service Grubhub was properly classified as an independent contractor under California state wage-and-hour law in Lawson v. Grubhub, Inc. As then required in California, the court applied the “right to control” test, asking whether Grubhub controlled the means and manner in which Lawson did his deliveries, and found that Grubhub lacked sufficient control to be considered an employer. Just a few months later, however, in Dynamex Operations West, Inc. v. Superior Court of L.A. Cty. ex rel. Lee, the California Supreme Court announced that, going forward, the more restrictive “ABC” test would govern state wage-law classification questions. Unlike the test used in Lawson, the ABC test presumes that all workers are employees unless the purported employer can show that the worker (A) is free from its supervision, (B) performs work that is outside the usual course or place of business and (C) works in an independently established trade or occupation of the same nature as the work they do for the entity that is hiring them. Unsurprisingly, the gig workers at issue were found to be employees, not contractors, under this test. After Dynamex, the standard for state wage claims in California now differs from that applied in other recent gig-work cases decided by a New York state court and a federal court in Pennsylvania. Gig economy businesses are looking to the California legislature for a solution to the issue created by Dynamex.

The lack of clarity at the state court level is mirrored at the state agency level. For example, in July 2018, the New York Unemployment Insurance Appeal Board granted unemployment benefits to three former Uber drivers, signaling its belief that drivers for the ride-hailing company are employees and not independent contractors. Uber chose not to appeal the decision to the Appellate Division, possibly signaling that the company considered the ruling sufficiently limited to not disrupt its business model generally. Nevertheless, if challenged in court in the future, the agency’s reasoning will have to withstand review under the state’s more liberal test for what constitutes a contractor.

In this fluid environment, and in the face of a legal patchwork for determining contractor status, it is difficult to predict how future classification cases involving giggers will be decided. Until there is more clarity, any company that has or is considering an independent contractor relationship with an individual should educate itself on the tests applicable in the jurisdictions in which it operates, monitor future legal developments, and carefully review its existing relationships to ensure that it uses gig workers for the specific sort of engagements that generally are considered independent contractor tasks in most jurisdictions.

Whose Employees are Giggers?

When properly classified, an independent contractor works for the business named in his or her contract. When a gig worker is misclassified, however, he or she may be employed by the entity named in the applicable contract—and he or she may also be employed by another company simultaneously. Under the concept of joint employment, several entities can be considered the workers’ employer for purposes of wage-and-hour law, labor law, anti-discrimination statutes, and other important issues. In short, the company that contracts with another entity for services such as messaging or deliveries has a vested interest in its service provider properly classifying its gig workers.

As with independent contractor classification, the test for determining joint employment has been in flux recently. When the National Labor Relations Board was controlled by members appointed by President Barack Obama, it decided Browning-Ferris, holding that if an employer retains the right to control another employer’s employees, such as employees of a contractor it hires to supply labor at its worksite—regardless of whether it actually exercises that control—it has joint-employer relationship with those employees. In December 2017, with a change in composition of the Board as a result of the intervening presidential election, the Board reversed Browning-Ferris in Hy-Brand Industrial Contractors, Ltd., requiring proof that the alleged joint-employer entities have both actually exercised direct and immediate control over essential employment terms. Hy-Brand was vacated by the Board due to ethical concerns over the involvement of one of the Board members in the case, thereby restoring the Browning-Ferris standard. In response, the Board has recently announced its intention to reverse Browning-Ferris through administrative rule-making. In place of the case’s broad concept of joint employment, the Board seeks to impose the much stricter definition offered in Hy-Brand. If the Board goes forward as planned, the Hy-Brand approach is likely to go into effect early in 2019.

Companies that contract with entities using gig workers should stay apprised of these developments and take steps to ensure that their contractors maintain appropriate relationships with their workers, compensate them properly, and clearly assign the liability for the risks associated with misclassification and other employment-related claims in their contracts.

Helping Giggers Retire

Generally speaking, only employees are eligible for company-provided benefits such as health and retirement plan coverage. Company-provided benefits may have tax advantages over workers purchasing those benefits for themselves. But that paradigm may be changing.

In June 2018, Senator Mark Warner (D-Va.) introduced a bill that would direct the U.S. Treasury Department to examine tax issues for giggers, including those related to retirement and other benefits. This would help federal lawmakers make tax compliance easier and more effective in the gig economy. The bill would also use Department of Labor grants to experiment with the potential for portable benefits programs so that giggers and other independent contractors could transfer a specific package of benefits from job to job.

Additionally, Senator Mike Enzi (R-Wyo.) has proposed allowing independent contractors to join multi-employer retirement plans, and use a qualified professional to manage their investment. This would cut high individual costs and allow individuals working as giggers to receive the same sort of attention and advice employees often get as a company benefit. Notably, recent studies show that many new giggers are not so-called Millennials, workers born during the late 1980s and 1990s who are just starting their careers. Instead, many giggers are older workers seeking to supplement their income for retirement. Therefore, efforts to provide greater security and portability for gig workers are not likely to subside.

Proactive companies using gig workers will continue to monitor these developments. While some companies may consider ways to create retirement or other benefit options for gig workers, they should consider what impact such a benefit might have on worker classification.

Paying for Torts Committed Against and by Gig Workers

Companies may be reluctant to provide safety training to their independent contractors because providing such training can be a factor in determining whether those contractors are properly classified. Instead, many gigger agreements require the worker to maintain his or her own insurance against the risk of lawsuits for actions taken by the worker which harm other people or property, as well as harm that the worker could suffer. But news stories concerning injuries occurring to gig workers on the job have created pressure for companies that engage with giggers to consider alternative arrangements. Companies should also keep in mind that the workers’ compensation bar, which keeps employees from being able to sue their employers for their injuries, does not apply to properly classified independent contractors. As a result, independent contractors may be able to sue for their injuries in ways that employees cannot.

Absent any applicable contractual provisions, the general rule is that, in order for a contractor to impose liability on the company with whom he or she engages, he or she will have to show (1) a causal connection between the company’s actions or omissions and the injury and (2) that the company’s actions and omissions amounted to negligence. If the contractor is accused of wrongdoing, the company generally will not be held liable for the wrongdoing of a properly-categorized independent contractor, primarily because the company does not exercise supervision or direction over the independent contractor’s work.

Companies engaging with giggers should pay careful attention to the liability law of jurisdictions in which they operate. Furthermore, they should review their contracts with gig workers and proactively consider which party may be liable when a contractor commits a tort, or is the victim of one. Even if the company does not exercise control at a level which is likely to make it liable, it may be dragged into the litigation nonetheless, suggesting that companies may want to address liability and indemnification in their independent contractor agreements. If the possibility for litigation arising out of engagement with giggers is high, companies may also explore alternative ways of mitigating risk by carefully considering contractors’ qualifications and experience, providing training, or requiring that contractors be bonded, while still making efforts to avoid allegations of misclassifications.

The Law Will Continue to Develop

The rise of the gig economy is not unique to the U.S. Indeed, in Japan, the U.K., and several other countries with developed economies, the percentage of workers engaging in gig work is even higher than it is here. The national governments in those countries are responding proactively. For example, in the U.K., the government is considering a “worker by default, until proven otherwise” standard for classification of all gig workers.

In the U.S., the Department of Labor may be poised to act. It withdrew a 2015 guidance stating that the vast majority of workers should be classified as employees. Then, in July 2018, it issued a guidance regarding contractors (including gig workers) involved in the home health industry that took a much more pragmatic approach. The guidance instructs that, in at least some circumstances, conducting background screening, relaying communications between the client and prospective caregiver, and providing training are not necessarily indicative of an employment relationship. Moreover, the guidance states that no single factor should be dispositive in the DOL’s analysis. While the guidance is limited to the home health industry, the DOL’s expansive approach may be a harbinger of how the agency will approach other classification controversies.

In the absence of more comprehensive guidance, Congress and state and local governments are also at work. Recently, they have considered proposals to create a third classification for gig workers that would allow for the accumulation of benefits and employee-type protections without eliminating the flexibility that gig work affords for the worker and business with which they work. In several cities, including Seattle and New York City, ordinances and proposed regulations aimed at ride-sharing and other types of gig work offer additional glimpses into how governments may respond to increasing gig work in the future.

Part of the allure of gig work, for both the workers and for businesses, is its flexibility and fluidity. The legal framework in which gig work exists is similarly in a state of constant flux. Businesses that engage with gig workers, or have relationships with other companies that do, must be vigilant to the state of the law in each of the jurisdictions in which they operate. They should also consistently evaluate how best to create and maintain their relationships with gig workers as laws, court decisions, and regulations shift. Gig work may be advantageous for both parties if established and arranged carefully, but companies should not forget that it can also be dangerous from a legal perspective. Only by anticipating the risks can businesses best utilize the market for such work and be positioned for its continued growth.

Author Information

Ballard Spahr Partner Shannon D. Farmer and Associate Christopher T. Cognato, both based in the firm’s Philadelphia office, represent public and private employers in a broad range of labor and employment matters. Jessica G. Federico is an employment law associate in the firm’s Minneapolis office.

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