[By Steven Chung]
Last week, I wrote a column stating that increased use of gig economy jobs will further blur the line between who is an employee and who is an independent contractor.
The blur has created some unexpected results. For example, you might be surprised to learn that professional athletes are employees of either their team or their league (MLB, NFL, NBA, etc.). You would think that with their endorsement contracts, and possible side ventures, they would want to be independent contractors and take advantage of the more generous tax write-offs. On the other hand, if they were to get injured during a game, they would prefer that their employer foot the medical bills and qualify for disability benefits.
Today, I want to look at why it is hard to draw the line between who is an employee and an independent contractor.
Different Rules For Determining Employee/Independent Contractor Status
One reason for the confusion is because different agencies use different tests, mainly because they have different goals. For example, the U.S. Department of Labor, which enforces the Fair Labor Standards Act, wants to ensure that workers have access to minimum wage, overtime compensation, family and medical leave, unemployment insurance, and safe workplaces. So to determine employee status, the Department of Labor uses the “economic reality” test. This test looks at whether the worker follows the usual path of an employee and is economically dependent on the business which he or she serves. If the worker is economically dependent on the business, the worker should be classified as an employee.
The IRS on the other hand, wants employers to pay federal payroll and unemployment taxes for every employee they hire. They use the common law rules to determine employee status. Generally, this test looks at three key factors: 1) Whether the company controls or has the right to control how the workers perform their duties; 2) Whether the company controls how the employee is paid, whether expenses are reimbursed, or whether the employer provides the necessary tools for the job; and 3) Whether there are written contracts or employee type benefits (i.e., pension plan, insurance, vacation pay, etc.) and whether the work performed is a key aspect of the business. In addition, the IRS has additional categories for specific professions such as statutory employees and statutory nonemployees.
Finally, state labor and tax agencies have their own tests to determine employee status such as California’s recently adopted ABC test.
Most employers generally want to classify workers as independent contractors to cut costs. But to do so, they will have to comply with all kinds of federal and state laws.
Employment Classification Audits Are Usually Decided Arbitrarily
Thankfully, the factors used to determine employee/independent contractor status under both federal tests are mostly similar. But when making the determination, agency rules and court rulings generally state that the examiner must look at all of the facts and circumstances of each case. Depending on the situation, one factor may be more relevant than another, or all factors should be weighed equally.
So if a business is selected for an employee classification audit, the auditor makes their own decision using the factors as a guide rather than a rule. If the auditor decides unfavorably on a case, it will proceed to appeal or litigation where a new examiner, an appeals officer, or a judge will make a final decision. Even then, cases can be decided inconsistently and generally there are few published court or agency decisions to provide guidance, especially where a worker is found to be an independent contractor.
This means that it will be difficult to advise clients on close cases and counsel cannot guarantee that the people they hire will pass an employee classification audit. Even if the workers meet a majority of the factors that shows that they are independent contractors, an auditor may decide otherwise based on his or her interpretation of the rules and application of the factors. This can mean that it can take months or even years before a case is concluded.
Politics And Innovation Can Change The Game
As I mentioned in my previous column, I use a local transportation service if I need to get somewhere and I am too lazy to drive. The owner networked and advertised for customers. Or he may just drive around an airport or a bar in order to pick up a customer who needed a ride home. In this case, most would agree that he is an independent contractor since he sets his schedule and finds his own customers. But services like Uber provide the customers to the driver so long as he turned on the app and reported for duty. Would that automatically make him an employee? He might be an employee under the ABC test, but not under the common law test, according to an opinion from the general counsel of the National Labor Relations Board.
When California was in the process of passing AB 5, the legislation that would codify the ABC rule to determine employee/independent contractor status, there were massive lobbying efforts on both sides. Business groups advocated maintaining independent contractor status, particularly for certain professions. Employment advocate groups asked for employee protections and benefits to cover a larger class of workers as they have less money to pay for rent, food and health care.
Even though the ABC test is California law, it is expected to be heavily litigated as it can cripple small businesses that are used to hiring contract workers for piecemeal work.
In addition, Uber, Lyft, and Doordash have announced that they will launch a voter initiative to exempt their industries from AB 5. They are likely to argue that the bill will increase costs to consumers thus creating an “access to transportation” problem in the state. If the initiative passes, it might lead the way to laws allowing self-driven cars controlled by artificial intelligence.
As new technology changes how people work, traditional job classifications may change, especially if there is enough political will.
Determining the line that separates an employee from an independent contractor is difficult due to different rules being enforced differently. This creates inconsistencies and uncertainty. This can be particularly harmful for small businesses that want to run simple operations and allow their workers to be flexible with their time. While new laws like AB 5 may provide simpler solutions, the devil is in the details. And the details will be fleshed out in litigation as businesses and their lawyers come to terms with how the ABC test will apply to their workers.