- The gig economy is based on flexible or temporary jobs that allow for freelancing;
- Gig economy workers are not guaranteed the same benefits as employees, such as a minimum wage standard and access to unemployment benefits;
- States, including California, have already enacted laws addressing misclassification by requiring companies to follow an ABC test to determine whether to classify a worker as an independent contractor or an employee.
A gig economy is an economic activity that involves the use of temporary or freelance workers to perform jobs, typically in the service sector. The United States Bureau of Labor Statistics (BLS) reported in 2017 that the United States was home to 55 million gig workers, accounting for 34% of the country’s workforce. The BLS projected this percentage to increase to 43% by 2020. A 2000 national study from the U.S. Department of Labor found between 10-30% of audited employers misclassified workers.
Workers are attracted to gig economy jobs due to flexibility, allowing for freelancing. However, not being classified as traditional employees excludes workers from traditional labor law protections, and companies evade the appropriate taxes. Popular companies in the gig economy space include Uber, Lyft, DoorDash, Instacart, GrubHub, Etsy, Postmates, and Uber Eats.
The way gig economy workers should be classified is a question that has gained increasing popularity in recent years. States have wrestled over whether gig economy workers should be considered independent contractors or full-time employees. The general rule is that an individual is an independent contractor if the employer only has the right to control or direct the result of the work, but not what will be done and how it will be done. Legislation regarding gig economy worker classification has been introduced in states across the country.
Lawmakers in California passed Assembly Bill 5 in September 2019. The bill codified a 2018 California Supreme Court decision that presumes a worker is an employee unless a hiring entity satisfies a three-factor (ABC) test. Under the test, a worker is an employee if their job forms part of a company’s core business, if the bosses direct the way the work is done, or if the worker has not established an independent trade or business.
The decision in Dynamex Operations West, Inc v. Superior Court of Los Angeles recognized that if a worker should be classified as an employee, the hiring entity bears the responsibility of paying all applicable taxes (Social Security, payroll, unemployment, state employment, etc.), providing for worker’s compensation insurance, and complying with state and federal statutes and regulations which govern the wages, hours, and working conditions of the employees. If a worker is classified as an independent contractor, the hiring entity does not bear any of these responsibilities, and the worker does not have any of the various labor law benefits they would have if they were classified as employees.
The California Labor Federation supported the bill, arguing that labeling workers as independent contractors requires all of the risk-shifting from a company to an individual: workers must pay for and maintain their vehicle, workers must pay for transportation expenses and workers are not entitled to a safe workplace, protected from discrimination, or entitled to unemployment insurance. Meanwhile, the Southwest California Legislative Council argued in opposition to the bill that independent contractors help foster entrepreneurship and provide an income for approximately 4 million workers who have the flexibility to allow for multiple streams of income.
As COVID-19 spread throughout the country and upended the economy, some became concerned that the new law would cause further economic hardship for gig economy workers. Assembly Bill 2075 was introduced to address these concerns by prohibiting the application of the ABC test to determine the liability of a hiring entity for damages, injunctive relief, or civil penalties based upon the classification of workers as independent contractors and instead would require that employer liability to be based upon the multifactor test outlined in another court case (Borello).
Further, a California judge granted a preliminary injunction that blocked Uber and Lyft from classifying drivers as independent contractors and ordered the companies to reclassify their drivers as employees within ten days. Uber responded that if the judge’s ruling were to be upheld on an appeal, the company would have to shut down its operations in the state for over a year.
Massachusetts has had an ABC test similar to California since 2004. California’s three-part test states that an employer who wishes to classify a worker as an independent contractor instead of an employee has to show that the work:
- Is done without the direction and control of the employer;
- Is performed outside the usual course of the employer’s business; or
- Is done by someone who has an independent business or trade doing that kind of work.
The Attorney General of Massachusetts, Maura Healey, is pursuing a lawsuit against gig economy companies Uber and Lyft on similar grounds to California’s lawsuit.
H.1645 was introduced to amend the independent contractor law in Massachusetts. The bill states that an individual performing any service shall be considered an employee unless:
- The individual is free from control and direction in connection with the performance of the service, both under his contract for the performance of service and in fact;
- The service is performed outside the usual course of the business of the employer; or
- The individual is customarily engaged in an independently established trade, occupation, profession, or business of the same nature as that involved in the service performed.
In the 2019 legislative session, HB 2498 was introduced to address the determinations of independent contractor classification. The bill stated that an independent contractor means a person who provides services to another person for remuneration and who, in providing the services:
- Is free from direction and control over the means and manner of providing the services, subject only to the right of the other person to specify the desired results;
- Is customarily engaged in an independently established business;
- Is licensed if the person provides services for which a licensee is required;
- Is responsible for obtaining other licenses or certificates necessary to provide the services; and
- Does not provide services that are within the usual course of the other person’s business.
The bill also stated that a person is to be customarily engaged in an independently established business if the following requirements are met:
- The person maintains a business location that is:
- Separate from the business or work location of the other person (for whom the services are provided); or
- That is in a portion of the person’s residence, and that portion is primarily used for the business.
The Oregon AFL-CIO testified in support of HB 2498, arguing there exists a need to re-evaluate the current matrix or test that proves whether someone has been misclassified. The AFL-CIO argued that independent contractors have no protections against sexual harassment, does not have a guarantee of making the minimum wage, and do not have access to workers’ compensation. The AFL-CIO’s testimony references a Washington commissioned audit that found 62% of employers were found to have misclassified their workers, resulting in a cost of $2.51 million in unemployment payments that initially were unpaid, $25.4 million in workers compensation payments that went unpaid, and $29.7 million in unpaid state income taxes.
Meanwhile, the Bend Chamber of Commerce testified in opposition to HB 2498. The Chamber argued the bill discouraged entrepreneurship by limiting the earning potential of self-employed individuals. The Chamber also argued the independent contractor test presented in the bill threatened existing contracts and work opportunities for business which perform work like the business entity retaining their services. The Dalles Area Chamber of Commerce also opposed the bill, echoing concerns of the Bend Chamber while adding that the ability to contract services keeps businesses more efficient and able to maintain a margin of profit.
House Bill 2215 was introduced in the Pennsylvania General Assembly in October of 2019. The bill would classify application-based workers as employees, allowing them certain protections. Under the bill, a person providing labor or services to an application-based company should be considered an employee and not an independent contractor unless the following conditions are met:
- The person is free from the control and direction of the application-based company in connection with the performance of the work, both under the contract for the performance of the work and in fact;
- The person performs work that is outside the usual course of the application-based company’s business; and
- The person is customarily engaged in an independently established trade, occupation, or business of the same nature as that involved in the work performed.
A cosponsor memo was also sent out to House Members for a resolution urging Congress to help gig economy workers by adding unemployment benefits and protections for independent contractors and others who typically do not qualify for such benefits to any federal relief legislation.
The Pennsylvania Supreme Court has also weighed in on the issue of gig worker classification and whether or not they are eligible for unemployment benefits. In late July, the Pennsylvania Supreme Court decided that an Uber driver in Philadelphia was not self-employed and thus was eligible for unemployment compensation. However, the Court did not make any decision on how rideshare drivers and gig workers should be classified in the future. A federal judge in New York made a similar decision last month in ruling that drivers for both Uber and Lyft should be treated like other workers and should be able to receive unemployment compensation.
What does the future look like for the classification of gig workers? Could we see a compromise between labor groups and gig economy companies? Uber’s CEO, Dara Khosrowshahi, published an Op-Ed in the New York Times proposing that gig economy workers, rather than employers, be required to establish benefits funds, giving workers money they can use for the benefits they want to have, including health insurance and paid time-off. Khosrowshahi noted that if this were the law in all 50 states, Uber would have contributed $655 million to the benefits funds last year. Could we see laws stipulating changes like this moving forward? Time will tell.