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The "Gig Economy" and the Need for New Worker Classifications

The emerging "gig" or sharing economy is generating considerable debate in legal, business and culture circles in Silicon Valley and elsewhere.
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The emerging "gig" or sharing economy is generating considerable debate in legal, business and culture circles in Silicon Valley and elsewhere. Start-up companies in ride sharing, delivery, personal services and other sectors are disrupting established industries and firms while generating investor excitement about the economic potential of these new organizations. They are also testing conventional views of how labor is organized to provide services and meet the needs and interests of today's workforce.

The organizational foundation of these companies rests on worker relationships that are, in many respects, new and novel but potentially at odds, in fundamental ways, with traditional employer-worker relationships. Labor policy in the United States has promoted a relationship between employers and their employees based on wage and hour regulation, requirements of workplace and worker protection, protection of governmental taxation system, A great deal of this government policy was enacted in the 1930s over fears of exploitation of workers, including child labor, and the articulated need to protect income taxation systems.

The introduction of new models of workplace relationships has resulted in lawsuits to determine if the workers are employees who are protected by these workplace laws or independent workers who are contracting with companies to provide services on a fee for hire basis. Uber is an example of a venture that utilizes a new relationship with its workforce and is facing lawsuits in which some drivers claim they have been improperly treated as contractors rather than employees. Uber and Lyft, another ride-sharing service, recently settled two of their class action lawsuits with the drivers agreeing to remain classified as contractors.

One of the underlying constraints that the new model firms face is the rigidity of the labor laws that force the relationship between firms and their workers into one of only two classifications--employees or independent contractors. Recently, the US Department of Labor (DOL) issued a restatement of its policies on classification of workers as employees and independent contractors. The report largely rehashes existing policies on when workers are to be classified as employees and receive the full range of benefits provided by company human resources offices. The Department of Labor report was issued because of its view that there were too many instances of "misclassification" of workers as contractors and, somewhat ominously, articulates its view that "most workers are employees" under federal labor laws. While the traditional employer-employee relationship may be the norm, it doesn't necessarily follow that most workers benefit from being treated as employees under federal and state law. Indeed, there are strong incentives for workers to choose an alternative relationship within which to perform work - flexibility, chief among them -- and similarly strong incentives for new economy companies to match those workers' interests with the companies' business plan.

Complicating matters further, the DOL's restatement of its binary classification is just one of many similar tests imposed by a labyrinth of federal and state agencies. For example, the IRS uses a 27 factor test to determine the classification of a worker. The Department of Labor uses an "economic realities" test of many factors while the Employee Retirement Income Security Act uses a "common law agency" test. All fifty states have employee definition tests for unemployment compensation and workers' compensation benefits. There is no comparable maze of definitions for the only alternative--independent contractors--other than they are the opposite of being an employee. Recently, efforts have been made to use entrepreneurial initiative and incentives to demark the distinction between employees (who are considered not to possess such incentives) and independent contractors (who do possess this initiative or purpose). The courts considering whether sharing economy workers are "controlled" by the companies they work for or if the "economic reality" is that they are employed by the companies have been struggling to articulate a thoughtful analysis and, as a result, there are inconsistent outcomes in court cases.

In the current situation involving demand economy workers the workers select their own working hours and often provide the instrumentality or tools for performing the work (e.g., their own automobiles) which would indicate they are independent contractors. However, opponents of this viewpoint argue that the employer has the right to evaluate the driver's performance and to terminate the driver for failure to adequately perform his duties, factors that they claim make the drivers employees and not contractors.

The recent settlements between both Lyft and Uber and the classes of their drivers preserves the status of drivers as contractors and may help mitigate or bridge the conflict over drivers' status by tweaking the termination provisions in a way that helps to give drivers more control. But as with any settlement, the agreements apply narrowly, in those cases only to past and current drivers in California, and don't affect the relationships that other sharing economy companies have with their contract workers. Litigation undoubtedly will continue for some time, but efforts to classify 21st century ways of working within the binary constraints of WWII era labor laws is unlikely to produce a healthy result. Instead, if the goal is to preserve job flexibility, innovation, and growth, while at the same time providing more security for workers, a better path would be either to create a new third category of worker, as some other nations already have; and/or create new systems of portable benefits, better suited to the gig economy, that tie benefits to workers rather that the workplace. Both of these approaches promise a more enduring and suitable resolution of the worker classification problem in the gig economy.