We have all heard of the new “gig” economy where workers drive people for Lyft or Uber, deliver food for DoorDash, or deliver packages for Amazon Logistics. Businesses like these frequently misclassify their workers as “independent contractors,” not employees. But such misclassification is no mistake—it is a financial strategy. Large employers who engage in misclassification can save millions of dollars, and nationwide, the funds diverted in the gig economy from workers to employers are undoubtedly in the billions. Misclassified workers lose minimum-wage protections, overtime pay, fringe benefits, Social Security and Medicare contributions, worker’s compensation coverage, state and federal labor-law protections—and the focus of this article, unemployment insurance benefits.
State regulators have begun to consider intentional misclassification as a form of payroll fraud, as it not only deprives workers of earned pay and benefits, it also deprives states of tax revenues necessary to fund employment-related programs like unemployment insurance. A 2022 report by a Wisconsin task force found that misclassification resulted in at least $780,000 in unpaid unemployment insurance taxes alone in 2021. And a 2019 report by the District of Columbia’s attorney general concluded that a construction employer that misclassified its workers could save between 16.7 and 48.1 percent of employment costs, much of which would be diverted from state and federal coffers. The D.C. report also noted that a 1980s IRS study found that 15 percent of employers engaged in misclassification, affecting 3.4 million workers and robbing the federal fisc of $1.6 billion per year in 1984 dollars.
When misclassification is unchecked, it allows employers to effectively “opt out” of state unemployment insurance systems, frustrating the public policy at the heart of those systems. Unemployment insurance was conceived during the Great Depression, when one in every four workers in the country was unemployed, to prevent not only individual suffering but also the ripple effects of mass unemployment.
The first state unemployment insurance law was enacted in 1932 in Wisconsin, conceived of by University of Wisconsin professor John Commons and drafted by two of his former students. The public policy declaration contained in Wisconsin’s unemployment statute stresses the fact that unemployment is more than a problem for the unemployed worker—it is a problem that affects the entire state:
The burdens resulting from irregular employment and reduced annual earnings fall directly on the unemployed worker and his or her family. The decreased and irregular purchasing power of wage earners in turn vitally affects the livelihood of farmers, merchants and manufacturers, results in a decreased demand for their products, and thus tends partially to paralyze the economic life of the entire state. In good times and in bad times unemployment is a heavy social cost, directly affecting many thousands of wage earners . . . .
Wis. Stat. § 108.01(1).
At first, there was some doubt regarding whether providing unemployment benefits effectively helped to shore up the economy during times of recession or depression. However, by 1945, Professor Eveline Burns would write that experts “agree[d] that unemployment insurance should be viewed as an obviously convenient instrument for grappling with a substantial part of the problem of loss of income due to unemployment, and one which, by maintaining a minimum of purchasing power, might act as a national safeguard against a downward economic spiral.”
By the late 1960’s, some still considered unemployment benefits primarily as assistance for unemployed workers but nevertheless acknowledged that stabilization of the economy was an important secondary purpose. As Saul Bernstein put it in 1993, “increased [unemployment] benefits are dispensed at just the right time, in just the right place, and among those who tend to need them most.” And as Nick Gwyn noted in a 2022 review of unemployment assistance during the pandemic, recent research has shown that “where unemployment benefits are more generous, the local economy tends to react significantly less sharply to negative shocks.”
Gig economy employers are not faring well in their efforts to avoid paying employee benefits, with both private and public attorneys bringing challenges against large companies. According to the National Employment Law Project, damages assessed against non-compliant “gig” companies are in the millions, with a $2.5 million settlement with DoorDash in Washington, D.C. for tip-stealing, a $3.4 million settlement with Uber in Seattle for back pay and unpaid sick leave, and a $650 million assessment against Uber in New Jersey, to name a few. And numerous state-court cases have led to misclassification rulings against large gig employers. E.g., Amazon Logistics, Inc. v. Virginia Emp. Comm’n, 892 S.E.2d 331 (Va. 2023), Matter of Khaychuk (Amazon Logistics, Inc.—Comm’r of Labor), 211 A.D.3d 1250 (N.Y. App. 2022); Vega v. Postmates, 35 N.Y.3d 131 (Ct. App. 2020), Lowman v. Unemployment Comp. Bd. of Rev., 661 Pa. 29 (2020) (Uber), Amazon Logistics, Inc. v. Comm’r of Labor (In re Morales), 215 A.D.3d 1188 (N.Y. App. 2023).
A recent Wisconsin case, Amazon Logistics v. Labor and Industry Review Commission, 992 N.W.2d 168 (Wis. App. 2023), provides a useful case study. In this case, an Amazon Logistics delivery driver was discharged. He filed a claim for unemployment insurance benefits. His claim prompted an audit of the company by the state, which found that it owed more than $200,000 in unemployment insurance taxes, penalties and interest.
Amazon Logistics appealed the decision through the administrative agency process. In that appeal, the state Labor and Industry Review Commission (LIRC) found that the delivery drivers were employees under Wisconsin’s two-pronged statutory test. The first prong defines an “employee” as “any individual who is or has been performing services for pay for an employing unit, whether or not the individual is paid directly by the employing unit,” effectively creating a presumption that a worker who performs services for pay is an employee. Wis. Stat. § 108.02(12)(a). Under the second prong of the analysis, an employer can rebut the presumption by proving that six of nine conditions regarding economic independence and entrepreneurial risk are satisfied. Wis. Stat. §. 108.02(12)(bm).
LIRC held that Amazon Logistics had proved only one of the nine conditions. Upon review, the trial court reversed, holding that Amazon Logistics had proved all nine of the factors. The Court of Appeals reversed again, holding that Amazon Logistics had proved only five of the nine factors (one fewer than required) and that the delivery drivers were therefore employees under the unemployment insurance statutes.
The history of Amazon Logistics shows that three different tribunals reached three wildly different conclusions in applying the same statutory factors to the same facts. The case illustrates the need for clearer standards that will lead to greater predictability for workers and employers while protecting the crucial public policy behind unemployment insurance—a safety net that will protect both workers from individual hardship and our society from larger-scale economic collapse in periods of mass unemployment.
