Technological advancement and the rapid increase in the use of smartphones have given consumers unprecedented access to various market products. On-demand, gig companies have resulted from this innovation. Overnight, our phones have become sources of whole worlds of information, communication, transportation, and employment opportunities. This rapid rise of the “App Age” has proven a formidable challenge for our legislative and judicial bodies as they struggle to keep pace with technological disruptors.
February 01, 2017 Features
Uber and the Gig Economy: Can the Legal World Keep Up?
By Jimmy Frost
The “gig economy,” a byproduct of the App Age, is an economy in which workers and customers are contacted through an online platform and workers are paid through the platform to perform projects for a limited time. These cyber “gig” workers generally work on a job-by-job basis. Additionally, gig workers are in charge of how many hours a week they work and how the job is performed. On-demand software platform companies, such as Uber and Lyft, have gained significant media attention for their recent legal challenges because they do not fit neatly in traditional classifications of workers. Even larger questions loom about the pros and cons of the gig economy as it expands into new market sectors. Proponents of the gig economy point to lower prices and increased employment, especially for persons seeking employment or wanting to supplement their current income, as reasons to support the gig economy as it is. Opponents of the gig economy’s rapid rise point to the lack of labor protections for gig workers and the potential dangerous nature of gig work.
Although measuring the exact number of gig workers has proven difficult, crude estimations suggest gig workers could represent roughly 0.4 percent of U.S. workers.1 But the number of adults who have, at some point, participated in the gig economy is estimated to be 45 million people, more than one-fifth of the U.S. adult population.2 In fact, the normal gig worker is not the millennial you would expect. Rather, the normal gig worker is a baby boomer who utilizes the gig economy to supplement his or her retirement income. For example, Uber claims that it has fewer drivers under 30 years of age than those who are over age 50, and that roughly a quarter of its drivers are age 50 and older.3
Classifying Gig Workers
A pressing legal issue surrounding this new form of employment is the establishment of an appropriate classification for gig workers. Determining a worker’s classification can vary based on the state. The classification of gig workers as either employees or independent contractors has been challenged throughout the gig economy’s existence. Companies operating in the gig economy want to avoid the label “employee” because that would entail, among other things, potential overtime payments, union organization, payroll taxes, unemployment benefits, expense reimbursements, disability insurance, and Social Security. If gig workers are classified as employees, then cyber gig companies’ costs would increase and, potentially, push some of the gig employers out of business.
This has led major players in the gig economy to legally defend the status of their workers. Uber and Lyft have argued that they are not in the transportation business. Instead, they argue they are a platform technology company acting to connect drivers and customers. The legal cases all hinge on the amount of control exercised by the companies over their workers. The plaintiff workers point to Uber’s and Lyft’s monitoring activities, rating systems, and right to terminate drivers for poor performance or without justification as reasons why the companies exercise the requisite control to be deemed employers.
The classification of a worker affects the employer’s tax liability and whether the employer must withhold Social Security, Medicare, federal income, and federal unemployment taxes. The IRS determines employment status under the common law right to control test: The general rule is that a worker is an independent contractor if his or her employer has the right to control the results of the work but not the methods used to accomplish the job.4 States also distinguish along the lines of control, but the specific tests vary by state. A worker can be an employee even if he or she signs an agreement or contract that labels him or her as an independent contractor. An employee is someone who performs services for the employer and whose performance is controlled by the employer.
The National Labor Relations Act (NLRA)5 defines an employee as a worker who is not designated as an independent contractor. The NLRA protects employees’ rights to unionize or act in a “concerted” activity with other employees but does not expand those rights to independent contractors. The NLRA does not require an employer to negotiate with independent contractors over the terms or conditions of their employment. To give further guidance to the employee/independent contractor distinction, the National Labor Relations Board (NLRB) recently articulated an 11-factor weighted test to determine if a worker is an employee under federal labor law.6 The NLRB’s general rule assesses control as a dominant factor in determining employee status but also gives consideration to the extent that the alleged employee has entrepreneurial opportunities for gains or losses.
The Fair Labor Standards Act (FLSA)7 only applies to employees; it does not regulate independent contractors. Determining the employment status of a worker is the threshold question that must be answered to determine if the FLSA requirements are applicable. Courts generally agree that the economic reality of a worker’s relationship with a hiring entity determines his or her status. To determine the economic reality, the courts examine all of the work activity’s circumstances rather than isolated factors. In Frederic v. Lyft, Inc., Lyft and a driver entered into an agreement in December 2015 to dismiss the case alleging violation of the FLSA.8 This left the question open as to what the FLSA’s classification of Uber and Lyft drivers, and other cyber gig economy workers, would be under the FLSA.
Legal Battles over Gig Worker Classification
There have been some city-level attempts to give gig worker independent contractors collective representation. For example, in December 2015, Seattle passed legislation that gave executive driver representation to for-hire independent contractor drivers.9 The legislation allows the gig workers’ representatives the right to bargain with hiring companies regarding issues like payments to drivers, safety, and more. Ordinances like this, however, are being questioned based on whether the NLRA’s explicit exclusion of independent contractors preempts such attempts at legislative circumvention.10
There have been several recent state wage-related cases that further put the classification of drivers into question. In Berwick v. Uber Technologies, Inc., California’s Labor Commissioner determined that Uber drivers were employees under the California Labor Code.11 The “employee” designation in the state wage claim entitled the plaintiff Uber driver to obtain reimbursements for necessary expenditures used in the performance of his on-the-job duties. Various courts have certified class actions for regions of gig workers, which has called into question how workers that utilize this emergent technology should be classified and how, if any, collective bargaining should take place. As one judge described it, the jury, in deciding whether Lyft drivers were independent contractors or employees, would be “handed a square peg and asked to choose between two round holes.”12
Recently, the Wage and Hour Division of the U.S. Department of Labor weighed in on the distinction by releasing an administrator’s interpretation discussing the troubling number of misclassified “independent contractors.” The report contends that these workers are misclassified and, instead, should be classified as “employees.” Of note, an illustration given by the U.S. Department of Labor classifies a cleaning services worker who performs assignments only as determined by the cleaning company but “does not exercise managerial skill” as an employee.13 This illustration could be interpreted as implicating on-demand, gig companies in misclassifying workers as independent contractors.14
Potential Remedies
Due to the uniqueness of the cyber gig worker, some have called for a third category to cope with the gig economy. Seth D. Harris and Alan B. Krueger are spearheading a project entitled “A Proposal for Modernizing Labor Laws for Twenty-First-Century Work: The ‘Independent Worker.’”15 In their proposal, Harris and Krueger recommend that gig workers retain flexible hours, civil rights protections, the right to organize under the NLRA, and the right to tax withholdings. However, gig workers would not be given unemployment insurance, minimum wage, or worker’s compensation. Worker’s compensation, Harris and Krueger contend, could be addressed through the gig worker’s collective bargaining rights. Further, some politicians have advocated for creating collective bargaining rights for these gig workers. For example, California Assemblywoman Lorena Gonzalez Fletcher tried, albeit unsuccessfully, to get a bill passed that would give gig workers the right to collectively bargain for pay and benefits, which would have created a new class of worker separate from the traditional “employee” and “independent contractor.”
Although gig economy companies may react to current court holdings by creating a hiring mix of both employees and independent contractors to help demarcate the two, the inability to quickly create a third category draws into question the ability of the legislature and judiciary to react quickly in governing disruptive technology. It seems apparent that the binary system—independent contractors and employees—for labeling the employment status of workers is no longer appropriate. As technology continues to break the boundaries, a response of some kind will be necessary. Already, several cities have created local municipal ordinances to force these new companies to implement safeguards over their employees. For example, Austin, Texas, recently forced Uber and Lyft to fingerprint their drivers, which caused both companies to leave the city.16 Competing companies, compliant with the fingerprinting regulation, have arrived to fill the void left by Uber and Lyft. Now several other cities, including Atlanta and Chicago, and the state of California are considering equivalent legislation. Perhaps local ordinances like this are the answer to forcing gig companies to comply in smaller settings. These local ordinances could act as a testing ground for finding the right balance of controls over the gig companies and their workers.
Conclusion
Rapid innovation defines the App Age, causing a head-on collision with the encumbered legislative and judicial branches. Unfortunately, with the rapid pace of disruptive technology, it is unclear whether the government can act at an equal pace to keep these companies in check. Perhaps the questions of the gig economy will be solved the same way they were created, through rapid innovation. For example, Uber has implemented test runs for self-driving, autonomous vehicles in Pittsburgh, Pennsylvania, and Arizona.17 This further presses the need to allow current drivers to collectively bargain so that they may be better prepared for widespread displacement. The only certainty is that the legislative and judicial branches are behind in governing technological disruptors, and the gap is widening. ◆
Endnotes
1. John Utz, What Is a “Gig”? Benefits for Unexpected Employees, 62 Prac. Law., no. 3, June 2016, at 19, 23 (“[Seth] Harris and [Alan] Krueger offer 600,000 as a rough estimate of the number of gig workers in 2015. This would be about 0.4 percent of the U.S. employment population. Harris and Krueger reached this number based on very imprecise data, focusing on Uber driver data from 2014 and “Google Trends” data recording the number of times the studied on-demand company names were searched for in the Google search engine.”).
2. The On-Demand Economy Survey, Burson-Marsteller (Jan. 6, 2016), http://www.burson-marsteller.com/ondemand-survey/.
3. Gig Economy: Better for Boomers than Millennials, Forbes (Jan. 24, 2016), http://www.forbes.com/sites/nextavenue/2016/01/24/gig-economy-better-for-boomers-than-millennials/2/#8136c1e13c0d.
4. For many years, the IRS considered 20 factors in determining employment status. See Joint Comm. on Taxation, JCX-26-07, Present Law and Background Relating to Worker Classification for Federal Tax Purposes 3–5 (2007). The IRS has since revamped its analysis to include three broad categories—behavioral control, financial control, and relationship of the parties—directing businesses to look at the entire relationship, consider the degree or extent of the right to direct and control, and document each of the factors used in the determination. See Independent Contractor (Self-Employed) or Employee?, IRS, https://www.irs.gov/businesses/small-businesses- self-employed/independent-contractor-self-employed-or-employee (last updated Nov. 28, 2016).
5. 29 U.S.C. §§ 151 et seq.
6. FedEx Home Delivery, 361 N.L.R.B. No. 55 (Sept. 30, 2014) (adopting the 10 factors set out in Restatement (Second) of Agency § 220 and adding an independent-business factor).
7. 29 U.S.C. §§ 201 et seq.
8. No. 8:15-cv-01608 (M.D. Fla. Dec. 10, 2015).
9. Seattle, Wash., Ordinance 124968 (Dec. 17, 2015).
10. See, e.g., Chamber of Commerce of the United States v. City of Seattle, No. 2:16-cv-00322 (W.D. Wash. filed Mar. 3, 2016) (dismissed for lack of standing).
11. No. 11-46739 (Cal. Labor Comm’r June 3, 2015).
12. Cotter v. Lyft, Inc., 60 F. Supp. 3d 1067, 1081 (N.D. Cal. 2015).
13. See Benjamin Means & Joseph A. Seiner, Navigating the Uber Economy, 49 U.C. Davis L. Rev. 1511, 1533–34 (2016) (quoting David Weil, U.S. Dep’t of Labor, Administrator’s Interpretation No. 2015-1, at 13 (2015), available at http://www.dol.gov/whd/workers/Misclassification/AI-2015_1.pdf).
14. Id.
15. Available at http://www.hamiltonproject.org/papers/modernizing_labor_laws_for_twenty_first_century_work_independent_worker.
16. See Mike McPhate, Uber and Lyft End Rides in Austin to Protest Fingerprint Background Checks, N.Y. Times, May 9, 2016, https://www.nytimes.com/2016/05/10/technology/uber-and-lyft-stop-rides-in-austin-to-protest-fingerprint-background-checks.html?_r=0.
17. See Eric Newcomer & Ellen Huet, Uber Ships Self-Driving Cars to Arizona after California Ban, Bloomberg Tech (Dec. 22, 2016), https://www.bloomberg.com/news/articles/2016-12-22/uber-pulls-self-driving-cars-from-california-for-arizona.