The Challenge of Misclassification in the Gig Economy

According to a 2016 Pew Research survey, some 24% of American adults have used some sort of digital commerce platform to earn money. This approach to earning a living is considered part of the gig employment phenomenon. In a 2016 study conducted by Harvard’s Lawrence Katz and Princeton’s Alan Krueger, 16% of American workers work for a temporary help agency, contract as independent contractors, or hold an on-call position. Current trends anticipate the gig economy to comprise more of the workforce in the future. In this issue of Astronology®, we look into the recent trend of gig employment and a critical challenge surrounding it.

In 2015, the Economic Policy Institute (EPI) reported that workers misclassified as independent contractors had grown considerably. Also stated in the report was that “New ‘sharing economy’ [also known as gig economy] businesses create cause for concern about misclassification because it is unclear how ‘autonomous’ these workers really are.” The report further expresses, “Employers who misclassify avoid paying payroll taxes and workers’ compensation insurance, are not responsible for providing health insurance, and are able to bypass requirements of the Fair Labor Standards Act, as well as the 1986 Immigration Reform and Control Act.”

A direct result of this misclassification is gig workers being forced to pay the full ACA tax or purchase their own health insurance. However, these costs may not be within their gig incomes. These conditions have given rise to lawsuits alongside the rise of gig-like jobs. For instance, Lyft recently settled a $27 million class-action lawsuit brought by drivers seeking to be classified as employees. Currently, Uber is in court for a similar class-action lawsuit. In light of this, the next question to consider is if labor laws will ever catch up to the rise of the gig industry.

Some employers have lobbied state legislatures to assist in legal coverage. In response, 28 states have legalized ride-hailing services, such as Uber and Lyft, labeling their workers as independent contractors. In Arizona, all workers using online labor platforms for work are considered independent contractors. This means that, while workers will find it hard to file successful claims for state-run benefit programs, gig workers still retain the right to sue over benefits and protections owed to employees under federal law. In New York and Washington, portable benefits, an encompassing benefit program designed for independent workers, are being considered.

As the workforce continues to change and more independent workers comprise our labor force, it will be important to see how legislatures continue to react. Do you work for an organization that supports or has some form of independent workers? How large a part of your organization are gig workers? How does your organization support gig workers? Please share your thoughts in our comments section below!

The Fissured Workplace and Employee Misclassification

In recent times, companies such as Uber and Handy have been faced with lawsuits challenging whether the individuals working for them should truly be considered “contractors.” Are their “staff” in reality employees being denied rights reserved to those in the proper classification? In this issue of Astronology® we explore the fissured workplace and the accompanying issue of employee misclassification. How large of an issue is misclassifying employees? Is this part of larger concerns related to the fissured workplace?

What is the Fissured Workplace?
David Weil, an administrator for the United States Department of Labor’s Wage and Hour Division, popularized the term “fissured workplace” to describe the surge in employers’ use of contracted laborers. In 2014 Weil highlighted on the US Department of Labor’s blog what results from workplace fissuring: “The blurred lines from the fissured workplace make achieving compliance with the wage and hour laws we enforce a difficult task. Intense competition between business models like subcontracting, temporary agencies, labor brokers, franchising, licensing, and third-party management leads to low pay, and noncompliance pulls down standards for all – making it difficult for responsible employers to survive in low margin, fiercely competitive conditions. The costs in this race to be the lowest bidder are borne by workers deprived of their wages and their rights.” There’s a danger involved in a fissuring workplace: the danger of misclassification.

The Growth of Contracted Workers
But how many people actually are working in an independent contractor arrangement? To get a better understanding, economists Larry Katz and Alan Krueger replicated the 2005 Contingent Worker Survey in 2015. The results of the survey provide an estimate of how much labor is being contracted out by employers in the United States. The 2015 survey noted a jump from 10% in 2005 to 16% of workers in 2015 in “alternative arrangements,” working while not directly being an employee of an organization. Why the increase in outsourcing and contracting? In a Wall Street Journal online article, Anna Louie Sussman and Josh Zumbrun point to fissuring.

The Consequences of Misclassifying Workers in a Fissured Workplace
The Wage and Hour Division (WHD) website explains that although the department supports the proper use of independent contractors, there is a difference between legitimate independent contractors and misclassified employees. By classifying a worker as an independent contractor, an employer avoids expenses such as overtime pay, unemployment compensation tax, workers’ compensation insurance, and employee benefits such as sick pay & vacation. Such attempts to cut costs results in losses for everyone, however. Not only are employees cheated, but heavy fines from organizations found guilty of misclassification can add up to 41.5% of the contractor’s pay. Also of note is that these penalties can go as far back as three years. As a result, the WHD has worked with the IRS and many states to combat worker misclassifications. With 32 states cooperating in 2015, the WHD investigations resulted in more than $74 million in back wages for more than 102,000 workers in a variety of industries, including janitorial and hospitality.

“In general, independent contractors should comprise a small minority of most employers’ workforces,” states Jennifer Loftus, National Director for Astron Solutions. “Activities that are non-strategic in nature, and not the primary focus on the organization, are best candidates for outsourcing. When independent contractors or contract labor begin to comprise a noticeable and / or large portion of the workforce, the organization leaves the door open to lawsuits and investigations. When in doubt about workers’ proper classifications, check with outside legal counsel or other outside advisors. Proactive protection to the organization is advisable over negative consequences down the road.” Do you think fissuring workplaces will be curtailed as more misclassified employee cases come to light? Tell us your thoughts! We enjoy hearing from our Astronology® readers!