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FMG Law Blog Line

The Gig Economy, Uber, and the Future of Worker Classification

Posted on: January 21st, 2016

By: Behnam Salehi and Allison Shrallow

The “gig economy” is a unique business model in which companies connect consumers to various services through internet platforms. Instead of hiring employees to perform the services, most “gig economy” employers hire independent contractors to perform the work.   As independent contractors, they enjoy flexible hours, and the ability to earn money quickly with little to no training time and work for more than one “gig economy” employer at any given time.  This model also appeals to businesses as they benefit from exponential profit growth while avoiding expenses traditionally associated with hiring employees, such as paying insurance premiums and overtime wages, filing payroll taxes and reimbursing workers for employment-related expenses. This model has expanded exponentially in recent years, in both worker participation and corporate growth, and a recent study suggests that nearly one in five adults either derive full or supplemental income through working “gig economy” jobs.

The major source of conflict surrounding the “gig economy” arises from whether “gig economy” workers qualify as independent contractors or employees. Many, if not most, “gig-economy” businesses, like Uber, view themselves as passive platforms that connect consumers with independent contractors to provide services, while maintaining little or no control over the workers.  In contrast, some workers have recently filed lawsuits alleging they are employees of a “gig economy” employer and therefore entitled to certain protections only afforded to employees.  To resolve this dispute, many courts and the U.S. Department of Labor (“DOL”) have used the following Economic Reality Test to determine whether an individual is an independent contractor or employee under the law:

  1. The extent to which the work performed is an integral part of the entity’s business,
  2. The worker’s opportunity for profit or loss depending on his or her skill,
  3. The extent of the relative investments of the employer and the worker,
  4. Whether the work performed requires special skills and initiative,
  5. The permanency of the relationship, and
  6. The degree of control exercised or retained by the employer.

On July 15, 2015, the DOL issued a memorandum expressing the department’s belief that “most workers [classified as independent contractors] are [in fact] employees under the FLSA’s broad definition [of an employee].” Most notably, the DOL expressed that the FLSA, which applies only to employees, applies to workers even if the employer does not exercise the requisite amount of control over the workers as long as they are economically dependent on the employer.

While no one factor in the Economic Realities Test is dispositive, the crux of the analysis seems to focus on factor number six, or the degree of control exercised or retained by the employer, in determining whether an employee-employer relationship exists. As discussed here, as of December 9, 2015, over 160,000 Uber drivers in California are entitled to join a misclassification class action lawsuit scheduled to go to trial in June 2016. While the workers’ ability to work flexible schedules and decide if and when to accept an assignment, weighs in favor of finding them to be independent contractors,  Uber’s right to withhold compensation for route deviations, train employees, and terminate drivers evidences a high degree of control which weighs in favor of finding the drivers to be employees.

While the California Uber drivers’ misclassification lawsuit is pending, other jurisdictions have dealt with this issue.  For example, Florida’s Department of Economic Opportunity found an ex-Uber driver to be an independent contractor holding Uber did not possess the requisite level of control over the worker as well as the performance of the work.   In contrast, however, a California Labor Commissioner of the Division of Labor Standards Enforcement found Uber improperly classified an Uber driver as an independent contractor, reasoning Uber was involved in every aspect of the operation and had the requisite amount of control over the worker to qualify as her employer.

More often than not, California courts set the trend for the rest of the nation’s laws.  Thus, if a California court finds Uber’s workers to be employees, then such a decision would likely affect similar “gig economy” businesses nationwide, which in turn would present economic, regulatory, structural, and financial ramifications for this business model.

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