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Written by: Alexa Wallace
Research and Writing Editor, American Journal of Trial Advocacy
For many of us, we hear the term “gig economy” and think it’s another millennial hashtag with absolutely zero meaning in our everyday life. But really, the emergence of the gig economy has a direct impact on us all. Put simply, the “gig economy” is a new way of saying independent contract or part-time work, and over 55 million people are now working this way. That number is only expected to grow as technology and time progress. So, this raises a new question, if corporations are switching to contracted labor as opposed to employed workers, what happens to things like social security, workers’ compensation, and benefits that come with being an employee?
The Supreme Court has held that the traditional method of distinguishing whether a worker is an independent contractor or employee is to apply the common law rules. These common law rules provide that the test
is whether the employer, under the contract, whether oral or written, has the right to direct the time, the manner, the methods, and the means of the execution of the work . . . The right to control the manner and method means the right to tell the employee how he shall go about doing the job in every detail, including what tools he shall use and what procedures he shall follow.
This “right to control” is the basis of current contention between gig workers and the companies that employ them. The federal government has become increasingly interested in this controversy because of the potential loss of “billions of dollars in tax revenue” due to the misclassification of employees as independent contractors. However, on the contrary, the classification of workers also “has considerable significance for workers, businesses, and the public generally.” The significance is due to the fact that
[o]n the one hand, if a worker should properly be classified as an employee, the hiring business bears the responsibility of paying federal Social Security and payroll taxes, unemployment insurance taxes and state employment taxes, providing worker’s compensation insurance, and . . . complying with numerous state and federal statutes and regulations governing the wages, hours, and working conditions of employees. The worker then obtains the protection of the applicable labor laws and regulations. On the other hand, if a worker should properly be classified as an independent contractor, the business does not bear any of those costs or responsibilities, the worker obtains none of the numerous labor law benefits, and the public may be required under applicable laws to assume additional financial burdens with respect to such workers and their families.
Companies like Lyft and Uber use the “gig” business model to contract out work, and thereby avoid paying claims like expense reimbursement to drivers, minimum wage standards, overtime pay, and taxes to the IRS. This triggered a slew of lawsuits by drivers who want to be classified as employees and receive these benefits and, further, the protection of a union. Lyft has already settled some of these suits to the tune of nearly $29 million. Meanwhile, Uber has suggested it is willing to pay up to $170 million to quiet the riot of lawsuits barraging its doors.
The two central ideas to these lawsuits are that the companies want to find a new way to classify employees in an already heavily regulated area, and that the drivers believe their rightful classification is as an employee. So far, at the federal level, the app-based companies are in the lead. Peter Robb, general counsel for the National Labor Relations Board, declared in a memo in May that Uber drivers were independent contractors and not employees because they “set their hours, own their cars and are free to work for the company’s competitors.” This means drivers are unable to unionize and obtain the legal protection unions provide for workers “when they complain about working conditions.”
California’s response to the upheaval is known as Assembly Bill 5. This bill added a new element in California to the federal test to determine employment status. The new element is that a company wanting to classify workers as independent contractors must show the work performed is outside the usual course of business for the entity. This new enactment allows the attorney general of California, city attorneys, and local prosecutors to file suit against companies who violate Assembly Bill 5’s provisions. If a case arises from one of these officials filing a suit, the company will be forced to reclassify its employees and comply with the laws and regulations it was previously avoiding by its misclassification. Uber has responded with confidence that it will still be able to pass the test at the state level; however, those outside the corporation are not so sure. This test to this confidence started on January 1, 2020, when Governor Newsom of California signed the bill into law.
The significance of California making this law and not the federal government is that corporations are based within states; so, the state law controls what the companies can and cannot do. However, it will still take time and litigation to prove the effects this new law will have on the gig companies, and whether the companies will move to avoid an unfavorable outcome or continue to gain clearance to operate as usual. Only time, and more lawyers, will tell.
Peter Swaniker, What are the Pros and Cons of the Gig Economy?, Forbes (Jan. 8, 2019, 12:22 PM), https://www.forbes.com/sites/quora/2019/01/08/what-are-the-pros-and-cons-of-the-gig-economy/#7bf8ede71388.
Nationwide Mut. Ins. Co. v. Darden, 503 U.S. 318, 325 (1992).
Royal v. Ga. Farm Bureau Mut. Ins. Co., 333 Ga. App. 881, 883 (Ga. Ct. App. 2015) (quoting RBF Holding Co. v. Williamson, 260 Ga. 526, 526 (Ga. 1990)).
Dynamex Operations W. v. Superior Court, 416 P.3d 1, 6 (Cal. 2018).
Id. at 5.
Megan R. Dickey, Lyft Lays Out Financial Risks Associated with Reclassifying Drivers, TechCrunch (Mar. 1, 2019, 12:18 PM), https://techcrunch.com/2019/03/01/lyft-lays-out-financial-risks-associated-with-reclassifying-drivers/.
Daniel Wiessner, Uber Drivers Are Contractors Not Employees, U.S. Labor Agency Says, Reuters (May 14, 2019, 3:04 PM), https://www.reuters.com/article/us-uber-contractors/uber-drivers-are-contractors-not-employees-us-labor-agency-says-idUSKCN1SK2FY.
Minda Zetlin, Uber Says New California Employment Law Doesn’t Matter Because Rides Aren’t Its Core Business, Inc. (Sept. 12, 2019), https://www.inc.com/minda-zetlin/uber-california-ab5-tony-west-employees-independent-contractors-lawsuits.html.
Wiessner, supra note 9.
Zetlin, supra note 10.
AB5 is Now Law in California. Now What?, JDSUPRA (Oct. 7, 2019), https://www.jdsupra.com/legalnews/ab5-is-now-law-in-california-now-what-86489/.
John Myers, Johana Bhuiyan, & Margot Roosevelt, Newsom Signs Bill Rewriting California Employment Law, Limiting Use of Independent Contractors, L.A. Times (Sept 18, 2019, 3:55 PM), https://www.latimes.com/california/story/2019-09-18/gavin-newsom-signs-ab5-employees0independent-contractors-california.