On March 12, 2019, Uber settled a class-action lawsuit filed by a group of ride-service drivers for $20 million. The lawsuit, filed in 2013, alleged Uber misclassified its drivers as independent contractors to avoid paying minimum wage and overtime, and providing benefits. Other large companies operating under independent contractor models face similar scrutiny; the attorney for the Uber plaintiffs is pursuing similar cases against Amazon, GrubHub, Lyft, DoorDash, Postmates, Handy and others.
So what does this mean for other businesses operating in the gig economy? Be prepared for a legal challenge.
For business models that depend on independent contractors to remain profitable, challenges to the misclassification of employees as independent contractors will likely always be an issue. Uber’s ride-service competitor, Lyft, recently cited independent contractor classification as a potential risk in its initial public offering (IPO) prospectus, stating that a court determination that drivers were misclassified as independent contractors could harm the business. While the legal implications of independent contractor challenges come as no surprise to large companies such as Uber and Lyft, many smaller business owners are not aware of the risks they face when operating under an independent contractor model.
Challenges to “independent contractor” classification can come from a variety of sources. The contractors themselves, as was the case with the Uber class-action lawsuit, can challenge their status; lawsuits by contractors typically claim failure to pay minimum wage and overtime through the Fair Labor Standards Act (“FLSA”) or comparable state wage and hour laws. The Internal Revenue Service (IRS) or state or local governments can also challenge independent contractor status, which often comes to the attention of government officials when a contractor applies for unemployment or workers’ compensation benefits. Because most anti-discrimination and harassment laws apply only to employers of “employees,” the classification of an individual as an “independent contractor” versus an “employee” also impacts whether employers are liable under those laws, and whether the employers should (or must) develop policies and provide training on discrimination and harassment.
Unfortunately, there is no simple answer to whether or not a particular business model will survive a challenge or suffer financial penalties in the form of damages, fines, or penalties. In fact, there are three (3) primary tests to determine proper worker classification: the economic realities test, the ABC test, and the IRS 20-Factor test. While it is impossible to detail all of the potential issues a business may face on a challenge to independent contractor status, the first step to preparing for a potential legal challenge is to understand how your business will respond to the three tests, which are summarized below.
The Economic Realities Test
Federal and many state courts analyzing FLSA claims typically apply the economic realities test which identifies six (6) factors for analysis: (1) the extent to which the worker’s services are an integral part of the employer’s business; (2) the permanency of the relationship; (3) the amount of the worker’s investment in facilities and equipment; (4) the nature and degree of control by the principal; (5) the worker’s opportunities for profit and loss; and (6) the level of skill required in performing the job and the amount of initiative, judgment, or foresight in open market competition with others is required for the success of the claimed independent enterprise.
The IRS 20-Factor Test
The IRS uses a 20-Factor test, which primarily seeks to determine who controls the work that is performed by analyzing the following factors: instructions, training, integration, services rendered personally, control of assistants, continuous relationship, flexibility of schedule, full-time required, need for on-site services, sequence of work, reports, payment method, expenses, tools and materials, investment, realization of profit or loss, work for multiple companies, services available to general public, right to fire and right to quit. This test is often used in the workers’ compensation and unemployment context, and is sometimes used by state courts to evaluate worker status in employment disputes.
The ABC Test
Some states, such as Illinois, Massachusetts, New Jersey and California, have adopted the so-called “ABC test” when determining employment status. The “ABC test” typically requires a company to prove three (3) factors in order to protect an independent contractor’s status as a contractor, with some variations state-to-state: (1) the worker is free from the control and direction of the hirer in relation to the performance of the work, both under the contract and in fact; (2) the worker performs work that is outside the usual course of the hirer’s business; and (3) the worker is customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed for the hirer. This test is generally considered to be weighted heavily in favor of finding “employee” status and court decisions have confirmed this belief. If you cannot answer yes to all three parts of the test, your worker will be considered an employee, with all the attendant obligations of an employer.
Any business operating under an independent contractor business model, or utilizing a mix of employees and independent contractors, should do so in consultation with experienced counsel who can advise the business of the legal requirements for proper classification of workers.
The St. Louis employment attorneys at McMahon Berger have been representing employers across the country for over sixty years and are available to discuss issues related to classification of workers, legal compliance and other matters. As always, the foregoing is for informational purposes only and does not constitute legal advice regarding any particular situation as every situation must be evaluated on its own facts. The choice of a lawyer is an important decision and should not be based solely on advertisements.