For the so-called gig economy, there was some painful news out of Washington earlier this week: The Feds have underscored how wary they’ve become about the concept. And whether or not you’re a fan of the trend, this is something you should know about.

Internet companies building businesses on connecting supposedly independent service providers with customers have become big business. Uber, Lyft, and Airbnb between them so far have raised $9.1 billion in investments. The sector is growing at a frantic rate. The independent status of the providers is fundamental to this. Because they don’t need to hire employees, equipment, and facilities to let all these people work, the dozens of gig economy companies that already exist save major amounts of money while still making good chunks — typically 15 percent to 30 percent on transactions — which is like a license to their own currency printing press.

Under fire

There’s been pressure about some of these firms. Uber has become a target of rhetoric from candidates for the presidency, and it is a proxy for the wider industry. There are outstanding lawsuits and a ruling from the California Labor Commission that said, in a specific complaint, a driver for Uber was actually an employee of the company.

Lawsuits are still running and the California case is in appeals. But the new big news is that the Department of Labor underscored that the test to see if someone is an employee is very broad. The government, which includes other branches, like the IRS, and the states are concerned. Here are two paragraphs from the document released on Tuesday:

Misclassification of employees as independent contractors is found in an increasing number of workplaces in the United States, in part reflecting larger restructuring of business organizations. When employers improperly classify employees as independent contractors, the employees may not receive important workplace protections such as the minimum wage, overtime compensation, unemployment insurance, and workers' compensation. Misclassification also results in lower tax revenues for government and an uneven playing field for employers who properly classify their workers. Although independent contracting relationships can be advantageous for workers and businesses, some employees may be intentionally misclassified as a means to cut costs and avoid compliance with labor laws.

The Department of Labor's Wage and Hour Division (WHD) continues to receive numerous complaints from workers alleging misclassification, and the Department continues to bring successful enforcement actions against employers who misclassify workers. In addition, many states have acknowledged this problematic trend and have responded with legislation and misclassification task forces. Understanding that combating misclassification requires a multi-pronged approach, WHD has entered into memoranda of understanding with many of these states, as well as the Internal Revenue Service.1 In conjunction with these efforts, the Administrator believes that additional guidance regarding the application of the standards for determining who is an employee under the Fair Labor Standards Act (FLSA or "the Act") may be helpful to the regulated community in classifying workers and ultimately in curtailing misclassification.

Regulators are worried about workers getting caught without the traditional protections employers have been expected to give, and they’re concerned that important tax payments aren’t being made because companies aren’t collecting them. Although this memo is about a wider problem than only the gig economy companies, it clearly includes them.

No one is safe

I’ve heard from a number of labor lawyers at this point. This doesn’t mean that any of the gig companies are automatically in trouble. The tests to determine if a person is an employee are complex and can vary completely by the specific facts of one case. However, you can’t assume that any of these companies are on legal high ground even if they have their employees agree that the people are independent contractors. Another paragraph:

Technological advances and enhanced monitoring mechanisms may encourage companies to engage workers not as employees yet maintain stringent control over aspects of the workers' jobs, from their schedules, to the way that they dress, to the tasks that they carry out. Some employers assert that the control that they exercise over workers is due to the nature of their business, regulatory requirements, or the desire to ensure that their customers are satisfied. However, control exercised over a worker, even for any or all of those reasons, still indicates that the worker is an employee.

If you’re encouraged to wear the company t-shirt, use the company scheduling system, follow the company’s rules about how to interact with customers, and let the company set the rates (true for some of the gig businesses, not for others), then you’re on thin ice.

The memo says that “most workers are employees under the [Fair Labor Standards Act's] broad definitions, which use a standard that employment means “to suffer or permit to work.” A lot of gig economy companies have got to be very nervous right now, and for good reason. Should they have to cave on the independence of workers, you could expect some of these companies to disappear and others to treat the people as employees — and very possibly raise their rates to cover the additional costs.

Published on: Jul 17, 2015
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