Each year, January 1st represents a new start. Individuals resolve to be healthier, safer, kinder, and more prosperous.  For businesses, New Years Day is often associated with new regulations – imposed at the Federal, State, and municipal levels – that are aimed at achieving the same goals for the economy and for the American workforce.  This year is no exception.  More than 100 new employment laws and ordinances, spanning across twenty states and numerous localities, took effect on January 1, 2022. However, do they apply to all workers – or just to employees?  As the distinction between employee and non-employee becomes less clear, companies must determine the applicability of each new regulation.

For decades, vague or competing criteria for worker classification has combined with shifts in political influences to make it difficult for companies to be assured of compliance with Federal and State worker classification laws.  The rise in the number of “gig economy” workers (15% year over year growth in Q3 2021 alone) has led to a surge in litigation alleging misclassification as well as workforce activism. At issue – protection offered to employees by wage, discrimination and anti-retaliation laws, access to benefits, and the right to unionize.

App-based companies are joining together to create a third category of worker – an individual contractor who is entitled to a base wage and certain benefits.  This concept was first tested in California.

California’s ongoing efforts to classify app-based workers as employees encountered a setback in 2020 with the passage of Prop 22, exempting gig companies from state law and allows them to keep treating their drivers and delivery workers as independent contractors instead of employees. Sponsors of Prop 22 spent over $200 million to ensure its passage.  However, Prop 22 was ruled unconstitutional and the fight in California continues.

In Massachusetts, Uber, Lyft, DoorDash and Instacart are funding the Coalition for Independent Work to persuade Massachusetts voters to pass a measure similar to Prop 22.  It would declare all app-based drivers to be independent contractors and not employees and offer them access to some new benefits such as a pay floor and paid sick leave. Similar efforts are underway in Washington, Colorado, Illinois, New Jersey, and New York. Governments worldwide are grappling with the issue of appropriate classification.

  • In the U.K. Uber was ordered to treat drivers as workers with some employment benefits, and the Uber business model was declared illegal.
  • The European Commission proposed new rules that could lead to the reclassification of millions of gig workers in Europe, entitling them to a minimum wage, paid leave and unemployment insurance. Up to 4.1 million gig workers could be affected by the legal change.
  • India’s Supreme Court agreed to hear a petition by gig workers seeking social security and other benefits afforded to other workers.
  • A workforce advisory committee in Ontario, Canada, has recommended a third category for gig workers, “Dependent contractors”, would be entitled to basic employment rights such as a minimum wage, minimum or core benefits and termination pay. The same committee has also proposed a portable-benefits plan like the one Uber started lobbying for in Canada earlier this year.

Local, State and Federal regulators and legislators are investigating claims that the promises made to prospective workers by gig companies are not met. The U.S. Federal Trade Commission recently warned gig companies and others that they could be fined up to $43,792 per violation if they mislead workers about how much they can earn on their platforms.  There are also new regulations and court cases that could be transformative, including those addressing how much companies are telling workers they can earn, and companies’ level of transparency on delivery fees and tips.

nextSource Insights

The inclusion of independent contractors in your workforce will provide an exceptional level of flexibility, delivering specialized talent, enabling you to rapidly respond to fluctuations in demand, and delivering a cost-effective alternative to a permanent employee.  However, inappropriate use of gig workers can lead to government fines and penalties, extensive litigation costs, and significant damage to your brand.

Employers leveraging freelancers and gig workers are expected to be clear on all the regulations and laws governing independent contractor status in their State and at the Federal level. Each state has its own patchwork of regulations. Some require written agreements while others consider gig workers “at-will” contractors. The tax reporting implications are often quite different for independent contractors, freelancers and gig workers and it is important for the employer to be compliant with the laws in their business locations.  The introduction of a new category of “dependent contractors” will bring with it further confusion and difficulty in ensuring adherence to all requirements,

To help our clients navigate through this complexity, nextSource brings together our internal expertise, access to the industry’s finest employment attorneys, and applications that automatically update your independent contractor management system with applicable regulations as they occur, ensuring accurate classification.  Reach out to us to determine how best to engage the gig economy as a part of an effective contingent workforce management program.