What is the “gig economy”? The gig economy refers to the contemporary workforce environment in which temporary positions are common and organizations contract with independent workers for short-term engagements. Let’s examine what this means and the implications for worker classification challenges that grow out of these new working arrangements.
The growth of the gig economy has been driven in large measure by the rise of companies like Uber and Lyft which field software apps to connect demand for transportation with a supply of people who own their own cars. As software companies, Uber and Lyft don’t employ the drivers or own any taxis/cars. As such the drivers are classified as independent contractors. They meet many of the IRS/DOL requirements for ICs because they work according to their own hours, they don’t take direction or training from any employer, provide their own work materials (car, gasoline, etc.) and need not show up to the same workplace every day. They simply do not work for Uber or Lyft. They work for themselves and just utilize Uber’s app to source customers.
Many companies in other fields outside of transportation have followed this model, building apps to connect workers with customers. The Washio app is for having someone do your laundry, Sprig and SpoonRocket apps find someone to cook your dinner, and Shyp will mail things for you so you can avoid the post office. Zeel connects users to massage therapists (complete with table), while Heal dispatches doctors on a house calls. Saucey will even deliver alcoholic beverages direct to your door while Dufl sends someone to pack your suitcase. All of these companies do not hire any employees. All the work is done by independent contractors who use these respective apps just like Uber drivers use the Uber app.
As IC’s, these workers don’t earn W2 wages, instead filing 1099s at tax time and being liable for the payment of their own income tax. We wrote a post on the pitfalls of embracing the 1099 economy (another name for the gig economy). Gig economy companies embrace the use of independent contractors because it provides the flexibility to react quickly to market demands and drives cost-savings by reducing or even eliminating the cost of providing benefits. However, as numerous high-profile litigations suggest, there are conflicting ideas about what truly constitutes an IC. The potential downside for companies leveraging ICs improperly can be significant as we blogged about here and here.
While recent court cases brought by Uber drivers seeking to be classified as workers (not gigging contractors) have been dismissed by courts, non-software companies like FedEx have been busted (to the tune of $204 million) for classifying workers as ICs when they clearly were not. Employers are required to properly classify each worker in their employ (or under contract). There are different sets of rules for how each classification must be managed from a tax and administrative standpoint. Getting the classification wrong – either intentionally or by mistake – represents a compliance violation of labor laws and can carry stiff fines and penalties as these companies found out. The execution and validation of these two classifications is the responsibility of the employer to ensure compliance with the guidelines set forth by the DOL.
Work with a VMS technology provider and/or Managed Service Provider (MSP) that can indemnify and insure your organization against any classification-related lawsuits or costs, based on their onboarding and supplier management processes. In short, leave the classification challenges to the experts and let them assume legal responsibility.