When is a worker an employee? It’s more than semantics. Whether a worker is an independent contractor or an employee is a high-stakes question that can impact minimum wage, overtime and benefit rights. In recent years, the fight over worker classification has heated up. Here’s what’s happening now.
The Rise of Gig Work and State-Level Legal Battles
Uber, Lyft, Instacart and other gig-economy platforms have changed the way many people work, and this has led to questions over worker classification.
According to Pew Research Center, 16% of Americans have made money from gig work. Among people who had done gig work in the last 21 months, 68% said it was a side job, and 31% said it was their main job. Although many people depend on gig work to make ends meet, not everyone is happy with the setup: 34% of gig workers say that gig-economy companies have been unfair when it comes to pay, and 46% say these companies have been unfair when it comes to benefits.
Some states have tried to address the issue. In California, AB 5 created strict standards for worker classification. Then voters approved Proposition 22 to let app-based companies like Uber and Lyft classify workers as independent contractors, but SHRM says that a judge declared the rule unconstitutional.
A similar situation is taking place in Massachusetts, where a ballot initiative would allow gig drivers to be classified as independent contractors. Bloomberg Law says that this initiative is being challenged in the state’s Supreme Court.
Meanwhile, in Washington, HB 2076 is set to give gig workers minimum rates, paid sick leave and workers’ compensation, but it won’t classify them as employees, according to Bloomberg Law.
The Possibility of a New NLRB Standard
In late 2021, the National Labor Relations Board (NLRB) invited briefs regarding the independent contractor standard. Specifically, the NLRB is asking whether the Board should adhere to the standard established in a 2019 court case, and if not, what standard should replace it.
According to SHRM, the court case in question overturned a 2014 ruling that made classification as an independent contractor more difficult.
The Fight Over a Trump Administration Rule
On January 7, 2021, the Trump administration published an independent contractor rule that was supposed to become effective on March 8, 2021. The Biden administration first delayed and then withdrew the rule, but it wasn’t over yet. According to the Insurance Journal, a federal judge in Texas reversed the withdrawal in March 2022. As a result, the rule is considered effective as of March 8, 2021.
According to the National Law Review, this rule asserts that a workers should be classified as independent contractors if they are in business for themselves, and they should be classified as employees if they are economically dependent on the employer for work. In determining this issue, two factors are given the most weight. The first factor is the nature and degree of control over the work, and the second is the worker’s opportunity for profit or loss. Three additional factors are given less weight: the amount of skill required, the degree of performance of the working relationship between the worker and the employer and whether the work is part of an integrated unit of production.
The decision to reinstate the rule has been celebrated by the Coalition for Workforce Innovation (CWI). “The withdrawal of the duly finalized economic realities test was both procedurally and substantively defective, and the Coalition is pleased it has been vacated as a matter of law,” said Evan Armstrong, Chair of CWI, in a press release from CWI. “The Department's actions undermined the very independent workers they purported to protect. CWI believes the updated economic realities test appropriately reflects the modern economy and looks forward to working with the Department of Labor to further support independent workers and the choices they make for themselves, their families, and their livelihoods.”
The Road Ahead
The matter of worker classification is far from settled, and it will continue to be debated at both the state and federal level.
In the meantime, companies accused of improper worker classification can face expensive lawsuits and fines. In one recent example, the DOL says that a Las Vegas telemarketing company will pay more than $1.4 million in back wages and liquidated damages over misclassification. In another example, the DOL says a federal judge in New York has ruled that a misclassification lawsuit can move forward despite an arbitration agreement.
Given the ongoing debate and the potential for legislative change regarding worker classification, business owners should proceed carefully.
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