The Debate Over Classifying Workers as Employees or Independent Contractors Has Flared Up Again
A slew of conflicting developments this spring from courtrooms, legislative chambers, and regulatory offices are sowing confusion for business owners and investors regarding whether to regard their workers as employees or independent contractors. Depending on whether state or federal law applies, sometimes they’re both simultaneously.
“The state of the law now is a mess,” Sean Burke, an associate general counsel at the University of Pennsylvania, wrote in a recent essay. In New Jersey, for example, Uber drivers should earn sick leave as employees. But they cannot form a union and are ineligible for overtime under the [Fair Labor Standards Act, or FLSA], because federal law considers them independent contractors. In California, they are independent contractors under federal law, and most likely the state labor code as well—but for state wage orders they are employees. The set of conflicting outcomes plainly makes no sense, neither as a matter of logic nor for the sake of justice or efficiency.”
The JDSupra website’s March update on independent contractor counted seven different cases under way involve groups as disparate as Dollar General store resetters, State Farm Insurance agents, GrubHub delivery drivers, and lots of truckers.
What to do? For now, make sure you have a lawyer who understands your state’s labor laws and is keeping up with the news.
Roots of the Problem
Untangle this knotty mess and you’ll find many threads, including labor laws based on out-of-date principles, the rise of the gig economy, perceived abuses of current rules, the transition from Barack Obama’s administration to Donald Trump’s, and general liberal-conservative disagreements over what the standards should be.
The current round of confusion dates from April 2018, when the California Supreme Court adopted the so-called ABC standard. That standard, which already had long been in effect in New Jersey and parts of New England, says an individual is an independent contractor when: A) The individual is free from control and direction while performing the service; and B) The individual’s service is performed outside the usual course of the employer’s business; and C) The individual is in an independently established business.
Since then, a California legislator has sought to turn that ruling into state law. Alarmed, some Californians have sought exemptions from the proposed legislation. In late March, a U.S. District Court in Sacramento, Calif., dismissed a lawsuit filed by the Western States Trucking Association seeking to nullify the California Supreme Court’s embrace of the ABC standard. The association plans to appeal. Meanwhile, some trucking companies are said to be dropping owner-operator lease arrangements in the state out of concerns that those rigs’ drivers will be reclassified as employees, the Commercial Carrier Journal reports.
And on May 2, the U.S. Circuit Court of Appeals for the 9th Circuit declared that the state Supreme Court’s ruling applies retroactively to cases still being litigated.
Gig Economy Impact
On Wall Street, the initial public offerings of Lyft in March and the planned one for Uber on May 9 has ratcheted up the debate over how to regard drivers on the lift services. Deepa Das Acevedo, an assistant law professor at the University of Alabama, noted that a federal court in Pennsylvania ruled in 2018 that drivers for UberBLACK, Uber’s elite limousine service, weren’t employees, while the Commonwealth Court decided UberX drivers are not independent contractors.
In early April, the Texas Workforce Commission took the independent contractor route. It voted 2-1 to declare that people hired through a digital app to perform all sorts of tasks, from driving to handyman work, were classified as independent contractors. As a the tech companies creating those apps don’t have to pay unemployment taxes.
When Barack Obama was president, the federal Department of Labor (DOL) had been leaning toward reclassifying many independent contractors as employees. It cited cases such as one in which a construction firm forced more than 1,000 workers to leave their old employers’ payrolls and then go back to their jobs as independent contractors. The move saved the employers hundreds of thousands of dollars in payroll taxes.
The Donald Trump administration has taken a different approach. On April 29, DOL issued an opinion letter that basically said an unnamed “virtual marketplace company” (with a business model suspiciously like Uber or Lyft) could regard its drivers as independent contractors. DOL gave several reasons why:
The service providers (i.e. drivers) set their own schedules and decide whether to accept jobs, thus making themselves responsible for their own profits and losses.
They can choose to work outside of the software created and run by the virtual marketplace company and can even run two different companies’ apps simultaneously.
Service providers get paid directly by the consumer via the virtual company’s platform, without any extra money coming from the company.
The virtual marketplace company’s main purpose is to provide referral software, not the end-market service of transporting a customer from one place to another
Who Really Is a ‘Builder?
The question of what a company’s main purpose is can lead to some interesting existential questions. For instance, the Obama-era DOL issued an opinion letter in 2015 that said a construction company that frames residential houses should regard carpenters as integral to an employer’s business because carpentry is an integral part of framing houses.
But a legislative director for the National Association of Home Builders said then that, while “framing is a necessary component to constructing a house … it could be argued that it is not integral to the builder’s business.” (Emphasis hers.) It could be argued that this means a builder can be regarded as a builder without actually having to construct homes.
“The inconsistency in classification outcomes for gig workers is caused by the thing that triggers inconsistent classification for FedEx drivers and other ‘non-gig’ workers: labor and employment law’s reliance on a single concept like control,” Acevedo wrote. ”Until and unless that changes, courts will continue to produce confusing and contradictory opinions on how to regulate this new area of work.”