The Independent Contractor’s Dilemma – CPA Practice Advisor
For much of the past decade, a legal and regulatory storm at the state and federal level 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. contributed to the upheaval. Uber and Lyft have faced lawsuits across the country claiming they wrongly classified their drivers as independent contractors rather than employees, in violation of the Fair Labor Standards Act (FLSA) and similar wage and hour laws.
A lawsuit involving nearly 400,000 Uber drivers in California and Massachusetts was settled for around $100 million before trial. However, the court rejected this settlement proposal, deeming it insufficient to adequately compensate the drivers concerned. New York State has determined that Uber drivers are employees for purposes of its unemployment benefits law, and the Massachusetts Attorney General filed suit against Uber and Lyft in July 2021 for filing their drivers as independent contractors instead of employees. The presidential court rejected the companies’ efforts to have the lawsuit dismissed.
The courts have not been the only way to resolve worker classification issues. In 2019, the California legislature enacted a law defining many gig economy workers as employees. Many app-based service providers have launched an aggressive campaign to overturn the law, raising more than $200 million to promote a ballot initiative to overturn 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. This decision was quickly appealed and the case is currently pending in a California Court of Appeals. Voters in Massachusetts will vote on a similar measure in November 2022. A coalition of app-based businesses is again asking voters to declare workers to be independent contractors with certain guaranteed benefits.
These benefits would include a compensation floor of 120% of the Massachusetts minimum wage, or $18 in 2023, 26 cents per mile in compensation for vehicle maintenance and gas, and health care benefits for drivers who work at least 15 hours a week. It’s a hybrid approach that can give the vote traction with voters.
Federal agencies have also focused on the issue of independent contractors versus employees. In 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 finding an independent contractor in class actions. Shortly after the Biden administration took office, the DOL withdrew the Trump-era rule citing inconsistencies with the text and purpose of the FLSA. The DOL is currently finalizing a proposed rule on the matter which should make it more difficult to classify workers as independent contractors. In line with this approach, the DOL said it is “committed to ending” the abusive practice of misclassifying employees as independent contractors, which deprives workers of essential protections and benefits. .
Additionally, the lesser-known but powerful National Labor Relations Board (NLRB or Board) announced in July 2022 that it would revise the standard it uses to distinguish between employees and independent contractors, likely reversing key decisions of the Trump-appointed NLRB.
The classification of a worker is not simply an academic or legal matter. Workers often classified as independent contractors include truck drivers, home healthcare workers, auto mechanics, carpenters, plumbers, painters, roofers, drywall installers, among others.
A worker’s classification has financial and other real-world consequences, both for the individual worker and for the company that uses their services. Independent contractors are not eligible for state or federal minimum wage, overtime pay, workers’ compensation, unemployment insurance, or benefits. They have no protections under federal or state labor law and cannot be covered by union collective agreements.
Employers found guilty of mistakenly classifying workers as independent contractors can be held liable for up to three years of unpaid overtime, (double) damages and attorneys’ fees. Misclassification cases frequently involve many employees, resulting in substantial liability.
No single test is uniformly applied to determine employee versus independent contractor status, although 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), FLSA, and Family and Medical Leave Act (FMLA) require the “economic reality 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 uses some of the most important elements of the other tests mentioned, but is stricter than the others.
All of the criteria are based on the same fundamental questions, namely whether the party engaging the worker has the right to control the manner and means by which the services are rendered.
2022 started like 2021 ended. Gig economy companies that classify their workers as independent contractors continue to face lawsuits, state actions and enforcement by federal agencies to limit the use of the gig economy classification. independent contractors. Therefore, the independent contractor’s dilemma will continue into the indefinite future.
Rick Alaniz, JD, of Alaniz Associates, has been at the forefront of labor and employment law for over forty years. He began his legal career as General Counsel with the U.S. Department of Labor, served on the Presidential Cost of Living Board during the Nixon administration, and also held senior positions on the National Labor Relations Board. , first in Washington D.C. and later in Minneapolis where he coordinated NLRB law enforcement actions in the five-state Midwest region. A partner in private practice since 1985, his experience has only deepened Rick’s enthusiasm for labor and employment law and his drive for continued excellence in the field. He is certified in labor and employment law by the Texas Board of Legal Specialization. Rick writes dozens of labor and employment law articles each year for professional journals and delivers numerous seminars each month to client companies and professional associations across the country.