The Independent Contractor Dilemma

Gig economy companies classifying their workers as independent
contractors continue to face lawsuits, state action, and federal
agency enforcement



For much of the last decade, a legal and regulatory storm at the state
and federal levels has surrounded the classification of workers as
“independent contractors” or “employees.” The dramatic growth of the
gig economy, especially app-based services such as Uber, Lyft, Door
Dash, Instacart, etc. has contributed to the upheaval. Uber and Lyft
have faced lawsuits across the country contending they misclassified
their drivers as independent contractors rather than employees in
violation of the Fair Labor Standards Act (FLSA) and similar, state
wage and hour laws.

One lawsuit involving almost 400,000 Uber drivers in California and
Massachusetts was settled for approximately $100 million prior to
trial. The court rejected that proposed settlement, however, as
insufficient to adequately compensate the affected drivers. The state
of New York has determined Uber drivers to be employees for purposes
of its unemployment benefits law, and the Massachusetts attorney
general filed suit against Uber and Lyft in July 2021 for classifying
their drivers as independent contractors instead of employees. The
presiding court rejected the companies’ efforts to have the lawsuit
dismissed.

Courts have not served as the only avenue to address worker
classification issues. In 2019 the California legislature enacted a
law defining many gig economy workers as employees. Numerous app-based
service providers mounted an aggressive campaign to overturn the law,
raising over $200 million to promote a ballot initiative to nullify
the law. On November 3, 2020, California voters approved Proposition
22 with 59% of the vote.

However, in August 2021 a California district court judge ruled that
the ballot measure was unconstitutional and declared it unenforceable.
That decision was promptly appealed and the matter is currently
pending in a California Court of Appeals. Massachusetts voters will
vote on a similar measure in November 2022. A coalition of app-based
companies is again asking voters to declare the workers to be
independent contractors with certain guaranteed benefits.

Those benefits would include an earnings floor of 120% of the
Massachusetts minimum wage, or $18 in 2023, 26 cents per mile as
compensation for vehicle maintenance and gas, and healthcare stipends
for drivers who work at least 15 hours per week. It is a hybrid
approach that may give the ballot measure traction with the voters.

Federal agencies have also been focused on the issue of independent
contractors versus employees. During the final days of the Trump
administration, the Department of Labor (DOL) announced a rule
defining the distinctions between employees and independent
contractors under the FLSA.

The rule favored an independent contractor finding in-class cases.
Shortly after the Biden administration assumed office, the DOL
withdrew the Trump-era rule citing inconsistencies with the FLSA’s
text and purpose. DOL is currently finalizing a proposed rule on the
issue that is anticipated to make it more difficult to classify
workers as independent contractors. Consistent with this approach, DOL
has stated that it is “committed to ending” the abusive practice of
misclassifying employees as independent contractors, which deprives
the workers of critical protections and benefits.

Additionally, the less well-known but powerful National Labor
Relations Board (NLRB or Board) announced in July 2022 that it will
review the standard it uses to distinguish between employees and
independent contractors, likely reversing key decisions by the
Trump-appointed NLRB.

How a worker is classified is not merely an academic or legal
question. Workers often classified as independent contractors include
truck drivers, home health workers, auto mechanics, carpenters,
plumbers, painters, roofers, and drywall installers, among others.

A worker’s classification has real-world financial and other
consequences for both the individual worker and the company utilizing
their services. Independent contractors are not eligible for state or
federal minimum wages, they are not entitled to overtime pay, workers’
compensation coverage, unemployment insurance, or benefits. They
receive none of the protections of state or federal workplace law and
are ineligible for covered under union collective bargaining
agreements.

Employers found to have misclassified workers as independent
contractors can be liable for up to three years of unpaid overtime
pay, liquidated (double) damages, and attorneys’ fees.
Misclassification cases frequently involve numerous employees
resulting in substantial liability.

No single test is uniformly applied to determine employee versus
independent contractor status, though some well-known, federal laws
require the use of a specific test. For example, the Americans with
Disabilities (ADA) and the National Labor Relations Act (NLRA) require
the use of the “Common Law Test.”

The Age Discrimination in Employment Act (ADEA), the FLSA, and the
Family and Medical Leave Act (FMLA) require the “Economic Realities
Test.” The IRS uses its own test, the “IRS Right to Control Test,”
which is essentially a variation of the common law test. Increasingly,
states are adopting the so-called “ABC Test.” It utilizes some of the
more prominent elements of the other tests mentioned but is stricter
than the others.

All of the tests at their core have the same fundamental questions of
whether the party that engages the worker has the right to control the
manner and means by which the services are rendered.

2022 started much as 2021 ended. Gig economy companies classifying
their workers as independent contractors continue to face lawsuits,
state action, and federal agency enforcement intended to limit the use
of the independent contractor classification. Consequently, the
independent contractor dilemma will continue into the indefinite
future.

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