Employment and Labor

Employee vs. Independent Contractor: How This Classification is Bringing Legal Challenges to the Gig Economy

Employee vs. Independent Contractor: How This Classification is Bringing Legal Challenges to the Gig Economy

The gig economy is a labor market characterized by temporary positions or freelance work with independent workers for short-term engagements as opposed to permanent jobs. Think Uber, Delivery Dudes, Taskrabbit, and Upwork.  This business model relies upon matching labor supply with demand without the traditional responsibilities — and costs — of an employer/employee relationship.  Workers are, instead, classified as independent contractors.  However, businesses are finding that the gig-economy is moving faster than traditional employment and labor laws, creating uncertainty and an uptick in expensive misclassification litigation.  As discussed further below, many on-demand businesses have had to fight claims, often asserted as class action lawsuits, that workers were misclassified as independent contractors when, in fact, they were employees.

Employees vs. Independent Contractors

By classifying workers as independent contractors, companies avoid paying for brick and mortar offices, training, and employee benefits which reduces their overall costs and risks associated with hiring full-time employees.  And the independent contractor loses the protection that an “employee” would be entitled to under various state and federal laws, including the Fair Labor Standards Act (FLSA), which provides minimum wage and overtime pay protection for employees.       

The general test used by courts to determine whether a worker is an “employee” or an “independent contractor” traditionally comes down to what is known as the “economic realities test.”  Under this test, courts generally apply a number of factors as guides when making a determination as to whether a particular worker is an independent contractor or employee.  No one factor is more important than another. Rather, courts look at the totality of the working relationship.  The factors considered by the courts include:

  • The nature and degree of control by the employer (including who sets the pay amount, work hours, and how workers perform);
  • The relative investment in facilities and equipment by the worker and the employer to see whether they appear to be sharing the risk of loss);
  • The permanency of the worker’s relationship with the employer;
  • The extent to which the work performed is an integral part of the employer’s business;
  • Whether the worker’s managerial skills affect his/her opportunity for profit and loss; and
  • The worker’s skill and initiative and whether he/she exercises independent business judgment. 

Misclassification Can Lead to Lawsuits

Many on-demand companies have been sued by workers claiming that they were misclassified as independent contractors when they, in fact, were employees.  Uber, DoorDash, Delivery Dudes, and GrubHub are just a few that have had to defend such claims.  Some misclassification claims can be settled quickly for relatively small amounts, but other class-action claims have been quite successful and lucrative for the plaintiffs — and their attorneys, who would be entitled to the recovery of attorneys’ fees from the employer on successful claims.  For example, in 2016, Uber agreed to a $100 million settlement of two class action lawsuits brought by its drivers (this settlement, however, was not approved by the court).  Also, Lyft settled for $27 million a misclassification lawsuit brought by its drivers in California, and DoorDash has likewise agreed to settle a similar lawsuit for $5 million (under both agreements, the companies will continue to classify its drivers as independent contractors.

Perhaps the most significant misclassification case right now is Lawson v. GrubHub, Inc., currently pending in the Northern District of California.  Though class action treatment was denied by the court, meaning the outcome will directly affect only the named plaintiff (who is seeking less than $600 in damages), there will be indirect effects felt throughout the gig economy.  At issue in that case is whether the plaintiff, who was a delivery driver for GrubHub, was improperly classified as an independent contractor rather than as an employee.

The trial of the Lawson v. GrubHub, Inc. case was held before a Magistrate Judge from September 5-12, 2017.  In an attempt to demonstrate GrubHub’s control over Lawson and other delivery drivers, Lawson introduced evidence of his required attendance at training and meetings, scheduling of “blocks” of time in which drivers were to be available to accept deliveries, incentives for drivers to wear GrubHub shirts and hats, and additional incentives for drivers to accept more deliveries.  GrubHub, on the other hand, introduced evidence that Lawson was free to work for other businesses (and did, in fact), that Lawson was free to sign up for accepting deliveries during particular times – or not, and that its delivery services were not part of GrubHub’s core business.

No ruling is expected from the GrubHub trial until October 30th at the earliest.  That is the date on which the judge has scheduled closing arguments, after which the case will be ready for a final ruling from the judge.  The case is being closely watched by other on-demand companies, as a ruling that the plaintiff should have been classified as an employee will certainly be used by other workers to bolster similar misclassification claims.

What to do?

Because of uncertainty related to worker classification, the only way to avoid increased litigation expenses and potentially large settlements or judgments is to classify all workers as “employees.”  This was the course taken by on-demand companies Munchery and Instacart.  In doing so, companies may see benefits that outweigh the costs of reclassification.  These benefits potentially include: 

  • Certainty;
  • Avoidance of expensive misclassification lawsuits;
  • Increased quality through control;
  • Potential workforce reduction; and
  • Improvement of brand image by attracting quality workers.

In the event the costs to reclassify are too great, companies must be prepared to fully support their decisions to classify workers as independent contractors.  The following tips may assist with that:   

  • Have a written contract that sets out the expectations of the parties, the specific type of work to be performed, who will provide the tools and equipment, and how payment will be made.  Though not determinative, it does not hurt to define the worker as an independent contractor.  Also, any additional factors that would help to support a finding of an independent contractor relationship should be included, e.g., that the worker can also work elsewhere, even for a competitor; that the worker may hire others to do the work; that the worker is not required to work a particular schedule, etc.
  • Utilize a method of compensation that is not an hourly wage.  Though an hourly wage may not be enough, in and of itself, to destroy an independent contractor relationship, if there are other methods of payment that would work (like payment for the job to be performed), those would be better.
  • Take a large step back in controlling the method or manner in which the worker completes his or her work.  Designating how the worker is supposed to dress, the schedule in which he or she is supposed to work, what tools and equipment are to be used, etc., will work against an independent contractor finding.
  • Draw a big line between the company’s employees and independent contractors.  They should be treated very differently, such that it would be clear to anyone what the differences are.

Traditional legal classifications of an employment relationship do not fall squarely into the traditional models of “employee” or “independent contractor” when weighing factors presented by the gig-economy.   Given the uncertainties that arise from abrogation of these traditional roles, we likely will see misclassification lawsuits continue to rise until there have been some definitive judicial rulings or, perhaps, legislative action to more clearly define the classification of the on-demand workforce.