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What is the current state of gig workers? Are they employees or independent contractors?

Posted by Ryan M. Newburn | Dec 20, 2021 | 0 Comments

In recent years, and especially during the COVID-19 pandemic, many individuals and companies have envisioned an economy less reliant on the mundane 9-to-5 traditional employment relationship. The gig economy has emerged as an emancipating alternative, allowing individuals more freedom to create their own work schedules.

Companies throughout the country laid off thousands of workers, and other workers realized they could remove the constraints of traditional employment while working from home. Tens of thousands of jobs were instantly created out of an exponential growth in the need for home delivery of goods.

Parents, especially women, were forced into the gig economy because a regular 9-to-5 jobs became incompatible with their newly created burdens at home. At the heart of this shift lies a key benefit of gig work: flexibility.

People have turned to gig work because it allows them to concentrate on other things during the day, like caring for children and other family members and picking up work when it best suits their schedule. After the COVID-19 pandemic, the gig economy has become firmly ingrained in America's economic fabric; there will be many issues and challenges the country will face reimagining its workforce to accommodate the massive shift towards gig work.

What is a gig worker?

Before diving deeper into the gig economy, some basic terminology should be discussed. There are several different beliefs on how to define and classify a gig worker correctly. Generally, a gig worker is someone who earns their income outside of the traditional, long-term employee-employer relationship. Gig workers typically do short-term work for multiple clients. The work can be project-based, hourly, or part-time, and either be an ongoing contractual relationship or part-time work. There are several types of gig workers: independent contractors, online platform workers, contract firm workers, temp workers, and on-call workers.

Gig workers are also defined based on their legal classification and tax status. Traditional employees receive W-2 forms from their employers, which withhold a certain amount of their earnings for federal and state taxes, social security, and Medicare, collectively called payroll taxes. Temp agency and sub-contracted work are frequently W-2 based work too, but the contracting company provides these workers W-2s rather than the entity who the worker actually reports to for work. Conversely, gig workers, or independent contractors as they are classified for tax purposes, receive 1099 forms when they work for companies without being a direct employee. Payroll taxes are not deducted in the 1099 form, and many of the traditional rules and regulations that apply to direct employment relationships do not apply.

The distinction between a gig worker and an employee is also made based on a holistic analysis of the nature of the work. These classifications depend on particular characteristics of the job, such as:

  • Scheduling
  • Flexibility
  • How the worker is portrayed to the public
  • Oversight of the worker

This approach is a form of employee and independent contractor analysis that companies, state legislatures, the IRS. and courts battle over.

Pros

Foregoing the traditional employer-employee relationship offers several benefits to workers. Gig workers control their employment and jobs, so they only have to answer to themselves and the work they accept. Relatedly, this dynamic allows gig workers to choose their own jobs to avoid getting bogged down with work that doesn't interest them or meet their desired compensation. Gig work offers excellent flexibility compared to a rigid 9-to-5 job. This can be especially helpful for workers who have significant child or other family-related obligations and those that work better at different times of the day. Finally, gig work has been credited with opening new avenues for people to pursue passions and start side businesses.

Cons

However, this freedom and flexibility come with costs. First, gig workers classified as independent contractors are responsible for their own taxes. Gig workers must pay the government payroll taxes because an employer does not do this for them on a W-2. Gig workers have to make quarterly payments to the IRS and put away enough income to cover these payments, which many workers struggle with. Second, the flexibility gig work offers is not a one-way street. Clients can terminate gig workers whenever and without warning, leading to financial problems when workers are suddenly without work. Third, gig workers seldom receive premium employment benefits regular employers offer, like employer-sponsored health insurance and retirement savings plans. Thus, gig workers take on significant stress and time burdens by managing their own health insurance and retirement planning.

Finally, gig work has been subject to moral dilemmas. There has been much discussion over algorithmic processes and managerial oversight unfairly influencing job allocation, resulting in ethnic minorities and women being discriminated against. These problems are exasperated because many anti-discrimination statutes do not protect gig workers like they do employees, and such workers have less collective action power to stop companies from abusing them.

The Gig Economy

The gig economy has experienced rapid growth in the past decade with no signs of stagnation. Six million workers have joined the gig economy over the past decade. Furthermore, the gig economy grew 33% and added two million gig workers in 2020 alone, expanding even faster than the U.S. economy as a whole. Today, 35% of U.S. workers are engaged in the on-demand gig economy, with that number expected to increase to 50% in 2027. The global gig economy grew from $204 billion in 2018 to $347 billion in 2021 and is expected to sustain that growth by reaching $455 billion in 2023.

Laws that Affect Gig Workers Throughout the United States

Employees enjoy the benefits of several paramount federal laws, such as the Fair Labor Standards Act of 1938, which mandates minimum wage, overtime wages, and 40-hour workweeks, along with the D.C. Human Rights Act of 1977, which prohibits employment discrimination based on race, national origin, and sex. When gig workers are classified as independent contractors instead of employees, they lose many of the legal rights that these statutes afford because those laws only cover "employees." Basically, gig workers are left to fend for themselves on the federal level. However, there have been state movements to grant gig workers more substantial rights.

California passed AB 5 in 2019 to give more power to a landmark state supreme court ruling seeking to reclassify some contractors as employees to provide them with the pivotal legal protections federal and state law bestows. The bill embraced the "ABC" test, which mandates a worker be classified as an employee, not an independent contractor, unless all of the following are met:

(1) the individual is free from the employer's control in performing the work;

(2) services are performed outside of the employer's normal business; and

(3) the worker is customarily engaged in an independently established business of the same nature as the performed service.

Almost 100 exceptions for specific industries were written into the law, thereby restraining its overall effect. Extreme industry backlash to the law's passage ensued, and many companies started to lobby for being exempted from the law. Uber, Lyft, and other tech companies successfully led a $200 million-funded ballot initiative exempting ridesharing and delivery companies form AB 5. Even though AB 5 was expected to reclassify two million independent contractors as employees, the law's overall impact remains unclear due to industry activity and uncertainty on how the state plans to enforce the law.

Elsewhere, New York proposed a law that would allow industrywide bargaining for gig workers, specifically the 250,000 app-based rideshare and delivery drivers in the state. Under the law, once 10% of app-based rideshare and delivery drivers signed a card supporting a union, the union would be designated the exclusive bargaining agent for all drivers in the state. A 10-cent per ride or delivery fee would finance the union, leading to tens of millions of dollars for the union annually.

Critics highlighted a provision that would keep drivers from going on strike and would exempt tech companies who bargain with the workers from complying with city or county minimum wage laws and state labor laws on discrimination and other employment-related matters. Labor unions have also opposed the law, seeing it as coming short of recognizing independent contractors as employees. Intense negative backlash ultimately ended the bill's chances. A federal bill with similar aims at allowing gig workers to unionize, the Protecting the Right to Organize Act, was introduced and passed in the House in March, but the bill went nowhere in the Senate.

Independent Contractors vs. Employees

As previously discussed, the distinction between independent contractor and employee is paramount because employees are afforded certain legal rights, like healthcare, retirement benefits, unemployment insurance, and anti-discrimination protections. States, the IRS and the federal government all differ on how exactly these classifications are made. There is no general "magic" test to this analysis. Instead, it is based on a variety of factors focusing on the behavioral, financial, and relational link between worker and company. Those factors include:

  • How the worker is paid
  • Who provides tools for the job
  • Can the worker be disciplined or fired
  • Whether the worker determines their own schedule
  • Whether the worker is held out as an employee to the public.

For instance, a worker who...

  • has a set schedule,
  • receives specific details for performing a job,
  • is directly disciplined by an employer,
  • is paid on a weekly basis, and
  • that wears a uniform signifying the work for a company

... will be classified as a traditional employee. Nevertheless, employment relationships can be unique, and whether a worker is an employee or independent contractor will depend on specific aspects of the relationship between the worker and company.

How Companies Can Integrate Gig Workers

There are several effective strategies a company could implement to take advantage of the gig economy. Above all, small companies should avoid doing anything that would lead gig workers to be classified employees because they might not have the financial means to comply with all of the associated laws.

Companies should hire for specific tasks and timeframes to ensure that expectations are met and avoid delegating too much to someone who might not deliver. Employee engagement should also be maintained by ensuring that gig workers receive meaningful work and checking in with workers to discuss concerns and needs.

Procedures and work delegation should be centralized to create a clear workflow and breakdown of various responsibilities of workers. Finally, holding periodic team-building events can help give workers a sense of belonging to a company they have a minimal and impersonal relationship. Companies should consider these tips about gig worker integration because gig work, like it or not, is the future of the U.S. economy.

Questions about Independent Contractors vs. Employees? Contact our experienced lawyers at Newburn Law today so that we can answer any additional questions you might have.

About the Author

Ryan M. Newburn

Ryan Newburn is a business and legal expert trusted by Executive Teams and Boards of Directors to apply sound business principals to solve legal and financial problems. Ryan's practice focuses on mergers and acquisitions, financings, corporate formations and corporate governance in a broad range of industries including energy, distribution services, healthcare, medical devices, and technology. Leveraging his formal business training and years of practical experience, including as an executive at public and private companies, Ryan has advised hundreds of companies in dozens of industries of unique legal and financial issues.

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