Bob the Builder on Demand: Labor Markets and a Changing Economy

Adam Pitchel, Associate Member, University of Cincinnati Law Review

Recent technology has changed labor markets for employers, employees, and consumers. The increase of temporary work channeled through an online or mobile-based system raises important questions about the roles and responsibilities of those working in a “gig economy.” Companies that utilize this business model such as Uber, Lyft, Handy, and Airbnb have faced criticism about classifying their workers as independent contractors rather than employees.[1] By doing so, these businesses avoid many of the responsibilities of a typical employer. For example, independent contractors are typically not entitled to anti-discrimination protections, payroll tax contributions, or healthcare benefits.[2] Proponents of this sort of business model champion the flexibility that it provides by allowing people to choose when they work.[3] Conversely, critics argue that this model merely serves to exploit laborers by collecting profits from their work while giving them little or no support.[4]

Issues regarding the applicability of the independent contractor label are currently being litigated in the state and federal court systems. Several class-action suits have been filed by current and former workers of these companies, alleging that they deserve to be categorized as employees rather than independent contractors.[5] Workers argue that their companies exercise too much control over their work product for them to be considered independent contractors.[6] It is likely that the eventual resolution of these suits will provide some guidance; however that will take a significant amount of time. Thankfully, policymakers around the country have drafted legislation that helps alleviate or interpret some of these issues. Legislators attempted to bridge the gap between service provider and worker by offering some benefits to workers while maintaining the independent contractor label.[7] By doing so, lawmakers have provided another way to resolve the question of whether certain workers and independent contractors or employees.

Bob the Builder and the Judiciary

People stuck with the contractor tag have pursued several avenues in attempting to shed that label. Some have tried unionizing, others have tried demonstrating.[8] However, they were met with significant resistance from companies that use this business model and from organizations that view the model as an important development in our changing economy. In Chamber of Commerce v. City of Seattle, a local ordinance authorized union organization of drivers in the Seattle area.[9] The ordinance sought to allow drivers to collectively bargain with their parent companies so that they could “perform their services in a safe, reliable, and cost-effective manner.”[10] This suit was dismissed for lack of jurisdiction; however it illustrates the struggle that these workers face.

Uber has been particularly active in litigating this area of the law. Several dozen class action suits have named Uber as a defendant across the country.[11] The company has been largely successful in forcing many of these actions into binding arbitration; however they occasionally fail to do so.[12] In O’Connor v.  Uber Technologies, the parties disagreed over the independent contractor label, but also over Uber’s general treatment of the drivers including its “deactivation process,” practice of withholding gratuities and rating system.[13] In O’Connor, the parties reached a preliminary settlement agreement that alleviated many of the concerns of the plaintiffs and provided substantial monetary compensation.[14] However, this agreement was rejected by the court because “the settlement does nothing to clarify the status of drivers as employees versus independent contractors.”[15] It appears as though the judiciary is aware of the issues associated with this new type of labor system; however, it has yet to issue a substantive ruling that resolves the independent contractor question. One possible reason for this delay is that judges do not want to declare a critical rule on a body of law that appears outdated.

Bob the Builder and Larry the Legislator

Several states, particularly those with populated cities, have drafted legislation aimed at resolving or alleviating some of the issues in this new labor system.[16] New York legislators recognized a growing need for clarity in this rapidly expanding labor force. In New York, legislators could have  (1) declared that all individuals who worked in this labor-for-hire work force were independent contractors; (2) declared that all individuals in this work force be considered employees; or (3) attempted to combine the needs of the two sides while leaving neither particularly satisfied. Lawmakers chose the third option. The New York Senate proposed a bill that would allow companies to contribute a portion of their revenue into a benefit fund that would be available to their workers to purchase healthcare and other benefits.[17] However, the bill would also broaden the definition of “independent contractors,” (IC) virtually guaranteeing that workers would be unable to shed the IC label in legal matters.[18] This bill has garnered both criticism and support from labor experts who see it as a possible resolution to their problems, but also as a substantial concession to businesses.[19]

The primary question surrounding this legislation is whether companies who choose to contribute to this mutual fund would violate the Internal Revenue Code. The Internal Revenue Service (IRS) has established a series of rules to determine if an individual is an employee or an independent contractor.[20] These rules look at (1) the amount of control the company exerts over how the worker does a job; (2) how the worker is compensated for the work that they do; and (3) the type of relationship between the worker and the company.[21] None of these factors is dispositive of whether an individual is an independent contractor or an employee.[22] They must be considered holistically and they must be applicable to the circumstances of the employment.[23]

Larry the Legislator v. Tim the Tax Collector

The proposed bill will likely comport with the IRS requirements for independent contractors. The changes outlined in the bill do little to affect the behavioral control that companies have over their workers. This is likely because the degree of control is one of the central issues currently being litigated between workers and companies like Uber and Handy. Any resolution about the degree of control that companies exert over their workers will likely come from the judiciary. The bill also does not directly address the method of compensation for workers.[24] It dodges the issue by focusing squarely on possible benefits to be given to independent contractors. Consequently, the only remaining element is the type of relationship between the company and the worker. The bill would allow companies to contribute up to 2.5% of the fee for each job into a benefit fund.[25] This fund could be used by the worker to purchase health insurance and other benefits. However, IRS.gov lists employee benefits as one of the factors to be considered when determining the type of relationship between the worker and the company. It specifically states, “Employee benefits include things like insurance, pension plans, paid vacation, sick days, and disability insurance.  Businesses generally do not grant these benefits to independent contractors.”[26]

It is unlikely however, that this bill will substantially alter anything related to the distinction between an independent contractor and an employee from a federal perspective. The only change made by this bill centers around one part of the test devised by the IRS and this provision remains optional for businesses to participate.[27]

There is also an ethical question of whether workers should be required to barter away an opportunity to become full employees in exchange for a small package of benefits that companies would not be required to provide. This question has no clear answer because if companies like Uber, Handy, and Lyft were required to classify their workers as employees, many people would likely lose their jobs. Some proponents see this bill and similar pieces of legislation as the only reasonable alternatives in the changing economy.[28] They argue that if the ultimate resolution of the independent contractor classification problem is left to the judiciary to decide, workers could be stuck with the “independent contractor” classification without any benefits at all.[29]  While this argument has some merit, it falls flat when you consider the potential “gain” that workers would get. By allowing companies who utilize the services of independent contractors to opt out of the benefit fund, some workers could be left with no benefits and no judicial remedy.

Conclusion

The gig economy is growing rapidly in many areas of the country.[30] The current labor legislative framework is ill-equipped for dealing with the new issues that have accompanied this changing system. New definitions for older terms need to be created and new case law that directly addresses issues like the contractor-employee distinction must be developed. Attempts to initiate this process have begun at both the state and federal level, however there is a growing concern that any legislation concerning these issues will provide too much deference to companies while failing to adequately protect workers. The New York Senate bill is one example of those concerns, however there will likely be other states that consider a similar proposal. Eventually, workers who operate in a gig economy will be forced to make some difficult decisions that range from accepting what little benefits are offered to them or fighting through the court system and risking losing any and all benefits.

 

[1] Benjamin Means & Joseph Seiner, Navigating the Uber Economy, 49 U.C. Davis L. Rev, 1513 (2016)

[2] Id. at 1514

[3] Id. at 1535

[4] Id. at 1542

[5] O’Connor v. Uber Technologies, No. 13-cv-03826, 2016 U.S. Dist. WL 4398271, at 1-19 (N.D. Cal. Aug. 18, 2016); Checker Cab of Philadelphia v. Uber Technologies, 643 Fed. Appx. 229 (3rd Cir. 2016).

[6] Josh Eidelson, It’s a New Game for Uber Drivers if New York Passes this Law, BLOOMBERG BUSINESSWEEK (January 10, 2017), https://www.bloomberg.com/news/articles/2017-01-10/it-s-a-new-game-for-uber-drivers-if-new-york-passes-this-law.

 

[7] Josh Eidelson, It’s a New Game for Uber Drivers if New York Passes this Law, BLOOMBERG BUSINESSWEEK (January 10, 2017), https://www.bloomberg.com/news/articles/2017-01-10/it-s-a-new-game-for-uber-drivers-if-new-york-passes-this-law.

[8] Greg Bensinger, Uber, Lyft Oppose Seattle’s Draft Union Rules, THE WALL STREET JOURNAL (November 23, 2016) https://www.wsj.com/articles/uber-lyft-oppose-seattles-draft-union-rules-1479936176.

[9] Chamber of Commerce of the United States of America v. City of Seattle, No. 16-0322, 2016 U.S. Dist. WL 4595981, at 1-4 (W.D. Wash. Aug. 9, 2016).

[10] Id.

[11] O’Connor v. Uber Technologies, No. 13-cv-03826, 2016 U.S. Dist. WL 4398271, at 1-19 (N.D. Cal. Aug. 18, 2016); Checker Cab of Philadelphia v. Uber Technologies, 643 Fed. Appx. 229 (3rd Cir. 2016).

[12] Paresh Dave, In stinging decision for Uber drivers, appeals court says they must go to arbitration, LOS ANGELES TIMES (September 7, 2016), http://www.latimes.com/business/technology/la-fi-tn-uber-lawsuit-20160907-snap-story.html.

[13] O’Connor v. Uber Technologies, No. 13-cv-03826, 2016 U.S. Dist. WL 4398271, at 1-19 (N.D. Cal. Aug. 18, 2016) (Drivers are rated by Uber using a formula that incorporates customer feedback and cancelled trips).

[14] Id.

[15] Id. at 18

[16] Uber, But for Benefits: NY Tech Companies Propose a Gig Economy Solution, THE VILLAGE VOICE (January 3, 2017), http://www.villagevoice.com/news/uber-but-for-benefits-ny-tech-companies-propose-a-gig-economy-solution-9517993.

[17] Josh Eidelson, It’s a New Game for Uber Drivers if New York Passes this Law, BLOOMBERG BUSINESSWEEK (January 10, 2017), https://www.bloomberg.com/news/articles/2017-01-10/it-s-a-new-game-for-uber-drivers-if-new-york-passes-this-law.

[18] Id.

[19] Id.

[20] Independent Contractor or Employee?, Internal Revenue Service, https://www.irs.gov/businesses/small-businesses-self-employed/independent-contractor-self-employed-or-employee (last visited Jan. 28, 2017).

[21] Financial Control, Internal Revenue Service, https://www.irs.gov/businesses/small-businesses-self-employed/financial-control (last visited Jan. 28, 2017; Type of Relationship, Internal Revenue Service, https://www.irs.gov/businesses/small-businesses-self-employed/type-of-relationship (last visited Jan. 28, 2017); Behavioral Control, Internal Revenue Service, https://www.irs.gov/businesses/small-businesses-self-employed/behavioral-control (last visited Jan. 28, 2017).

[22] Independent Contractor or Employee?, Internal Revenue Service, https://www.irs.gov/businesses/small-businesses-self-employed/independent-contractor-self-employed-or-employee (last visited Jan. 28, 2017).

[23] Id.

[24] Josh Eidelson, It’s a New Game for Uber Drivers if New York Passes this Law, BLOOMBERG BUSINESSWEEK (January 10, 2017), https://www.bloomberg.com/news/articles/2017-01-10/it-s-a-new-game-for-uber-drivers-if-new-york-passes-this-law.

[25] Id.

[26] Id; Independent Contractor or Employee?, Internal Revenue Service, https://www.irs.gov/businesses/small-businesses-self-employed/independent-contractor-self-employed-or-employee (last visited Jan. 28, 2017).

[27] Id.

[28] Jon Weinberg, Gig News: Uber Successfully Pursuing State Legislation on Independent Contractor Status, On Labor (Dec. 11, 2015), http://onlabor.org/2015/12/11/gig-news-uber-successfully-pursuing-state-legislation-on-independent-contractor-status/.

[29] Uber, But for Benefits: NY Tech Companies Propose a Gig Economy Solution, THE VILLAGE VOICE (January 3, 2017), http://www.villagevoice.com/news/uber-but-for-benefits-ny-tech-companies-propose-a-gig-economy-solution-9517993.

[30] Nick Wells, The “gig economy “ is growing – and now we know by how much, CNBC (October 13, 2016), http://www.cnbc.com/2016/10/13/gig-economy-is-growing-heres-how-much.html

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