In today’s workforce, one in ten U.S. workers work outside of permanent, full-time employment. Additionally, beyond the traditional outside contractor who might perform a discrete set of specific tasks, the contingent workforce, as often as not, now operates within an organization just as if it is part of the employee base. Yet, the conundrum to ensure proper classification of the gig workers (Gigs) combined with regulatory forces attempting to take away the attractiveness of this arrangement, by creating various operating risks, is challenging.
Let’s look at the issues:
Even before the rise of the gig economy, worker classification has been complicated by the fact that differing tests apply, depending upon whether classification pertains to income tax withholding, employment tax withholding, reporting under IRS regulations, FLSA coverage, or coverage under other employment benefit programs such as unemployment insurance or workers’ compensation.
As such, it has always been possible that application of the various tests could yield different results,
creating uncertainty and exposure to liability for unpaid taxes or unpaid overtime. The classification issues arising in the gig economy have only complicated an already difficult determination.
Beyond the non-compliance from misclassifying contingent employees, the full range of risk problems that can occur must be considered:
▪ Regulatory Compliance ̶ If Gigs are engaged in any activities that are subject to regulatory compliance
requirements or company policies or procedures, they need to have communication and training.
▪ Operational Risk ̶ If Gigs are engaged in critical tasks that can affect business continuity, quality control, and operational schedules, they present operational risk that must be adequately managed.
▪ Information Risk ̶ If Gigs handle confidential data, they present an information security risk and controls must be put in place. There is a huge reputational risk associated with any significant data breaches or instances of regulatory non-compliance. Penalties and costs of remediation may be significant.
Litigation and law changes regarding Gigs (with more anticipated to follow):
Uber and Lyft have embarked on a $90 million lobbying effort to support a ballot initiative to exempt them from AB5’s impact as well as to seek agreement with governmental and labor groups to create a new category of short-term or on-demand workers. Both Uber and Lyft have announced that if they lose the legal battle and are required to reclassify drivers as employees, they anticipate the need to offset an anticipated increase in costs up to 30% by cutting the number of workers and scheduling drivers in advance to avoid overtime, thereby reducing the flexibility that is currently enjoyed by drivers.
The California Trucking Association was the first group to file a challenge to AB5, several months ago. They noted that the imposition of the ABC test—which would classify them as employees unless they could show that they performed work outside the usual course of the hiring entity’s business, among other things—would end their ability to continue as owner-operators and decimate the industry. It would deprive over 70,000 independent truckers of their ability to work. Their main legal argument: that AB5 is preempted by the commerce and supremacy clauses of the Constitution and the Federal Aviation Administration Authorization Act (FAAAA).
On 12/31/2019, a judge to agreed and provided a temporary restraining order, blocking AB5 as it applies to the California trucking industry. The judge indicated that the association showed that Prong B of the ABC test—requiring workers to perform work “outside the usual course” of the business to be classified as contractors—“is likely preempted by the FAAAA because AB5 effectively mandates that motor carriers treat owner-operators as employees, rather than as the independent contractors that they are.”
This is good news for the truck drivers, but it has zero impact on the average gig company that utilizes an independent contractor workforce. However, it may sway the federal court judge who will be asked to rule on a similar request for gig economy companies.
Just a few days ago, UBER and Postmates filed suit seeking the law to be declared invalid as it applies to them and other companies.
Another lawsuit, this one filed by freelance writers and other similar artists who believe that AB5 unfairly punishes them.
As of January 6, 2020, a federal judge stated he will not temporarily exempt freelance journalists and photographers from the AB5 as the bill was signed three months prior, and the suit was filed a day before the effective date. There will however, be a full hearing in March 2020, giving the gravity of the issue.
Numerous states have considered or are considering laws related to gig workers. As these laws will most definitely differ from state-to-state, businesses everywhere will need to monitor the changing laws to apply the right test for the specific compliance issue that apply in various locations.