The On-Demand Economy Continues to Grow, but Legal Consequences Abound for Employers and Employees in the U.S. and Abroad

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by Nancy Cremins

Legal Analysis

The on-demand economy, which consists of independent and frequently short-term temporary employment arrangements, continues to expand in the United States and around the world. The growth of the on-demand workforce has outpaced overall U.S. workforce growth by a multiple of three since 2014, and freelancers are predicted to become the U.S. workforce majority within the next 10 years. Some surveys suggest that as many as 61% of employers plan to switch a significant portion of their full-time permanent positions to contingent jobs in the near future.

While trends indicate that companies intend to continue to move away from standard employer-employee arrangements, the legal landscape for on-demand workers is far from resolved. The classification of on-demand workers as “independent contractors” means there is a growing class of workers that do not have access to employment benefits such as vacation, sick time, and parental leave. Employers are not paying their share of employment taxes. In addition, these workers do not have access to social safety net programs such as workers’ compensation and are not making social security contributions. As more individuals rely on freelance work as their primary means of income, these workers are left without the protections traditional employment provides. As a result, the courts, legislatures, and companies both in the United States and abroad struggle with how to classify these workers and provide them with some access to benefits.  This article summarizes and contrasts some of the different approaches that have been taken since the author first addressed this topic in this journal, and addresses why they matter to businesses in the Commonwealth.

Companies that used independent contractors rather than employees to fuel their global growth, such as Uber, Lyft, and Postmates, continue to face legal challenges to their business practices regarding worker classification.  Several worker-misclassification claims have been settled at significant expense. In April 2017, the food-delivery business DoorDash agreed to pay $5 million to settle a 2015 independent contractor misclassification class action involving 33,744 class members. In March 2017, rideshare company Lyft’s $27 million settlement was approved by the court to resolve a misclassification suit brought by approximately 95,000 drivers.   Although in both cases the companies agreed to pay money to settle claims, neither company agreed to reclassify independent contractors as employees. Instead, each company agreed to clarify its internal policies and provide additional rights for its independent contractor workforce, including limitations on when Lyft may deactivate drivers and an opportunity to be heard in an arbitration paid for by Lyft to challenge the basis for deactivation.

Given that the settlements did not require these companies to re-classify their independent contractors as employees, they may find themselves facing further litigation on this subject. For example, in another case, delivery company Postmates received judicial approval for its $8.75 million settlement of misclassification claims in September 2017 in Singer et al. v. Postmates Inc., Case No. 4:15­cv­01284 (N.D. Cal.). However, Postmates is facing a new misclassification action filed in state court in November 2017, meaning that Postmates will need to settle or litigate these same claims anew.

Only one misclassification suit has made it to trial so far. A six-day bench trial in Lawson v. Grubhub, Inc., Case No. 15-cv-05128 JSC (N.D. Cal.) was concluded with closing arguments at the end of October 2017. On February 8, 2017, the court issued its decision finding that the plaintiff was properly classified as an independent contractor. The court applied California’s 11-factor “economic realities” test set forth in S.G. Borello & Sons Inc. v. Dept. of Industrial Relations, 48 Cal.3d 341 (1989), under which the alleged employer bears the burden of proving that the worker in question is not an employee.  The court found “While some [of the Borello] factors weigh in favor of an employment relationship, Grubhub’s lack of all necessary control over Mr. Lawson’s work, including how he performed deliveries and even whether or for how long, along with other factors persuade the Court that the contractor classification was appropriate for Mr. Lawson during his brief tenure with Grubhub.”

While the 11-factor Borello test[i] sets forth a different independent contractor test than is applied in Massachusetts,[ii] the results of this case will be felt across the U.S. because most prominent on-demand companies are based in California, and California law will likely apply to much of the worker litigation due to California choice of law and choice of venue provisions in agreements with independent contractors across the U.S.[iii]

Of on-demand businesses, ride-sharing giant Uber continues to reign supreme in both its ability to get press coverage and in the sheer volume of legal action it has faced globally for its classification of workers as independent contractors. On balance, the international results for Uber have been decidedly negative, but it is making some progress in the U.S., which reflects how Europe and the U.S. differ on their approaches to worker protection and Europe’s more skeptical view of the use of independent contractors instead of employees.

In April 2016, Uber attempted to resolve its largest worker misclassification class action in O’Connor v. Uber Technologies, Inc., C13-3826 EMC (N.D. Cal.), for $100 million covering 385,000 drivers. However, the proposed settlement was rejected by the court as not “fair, adequate, and reasonable” and because it did not make a determination of how to classify drivers.  This case was complicated by the 9th Circuit’s decision in Mohamed v. Uber Technologies, 836 F.3d 1102, 1008 (9th Cir. 2016), which determined that pursuant to agreements between Uber and the drivers, the drivers’ claims against Uber must be arbitrated.  Following the decision in Mohammed¸ Uber managed to persuade an arbitrator in an arbitration with a single California driver that such driver was properly classified under the Borello test as an independent contractor, and was not an employee.

Further arbitration and litigation was stayed in the Uber suits in California pending the outcome of National Labor Relations Board v. Murphy Oil USA, Inc., No 16-307, which on October 2, 2017 was argued before the Supreme Court and concerns the validity of class-action waivers that bar individuals from pursuing work-related claims on a collective or class basis.

In Europe, some courts and legislative bodies take a decidedly more protective approach for workers.  In 2016, a United Kingdom employment tribunal ruled that Uber drivers should be classified as workers rather than self-employed contractors, which meant that Uber drivers would be entitled to benefits including holiday pay and minimum wage. The decision was upheld on appeal by the U.K. Employment Appeal Tribunal.

In a separate action, the European Court of Justice (“ECJ”) also found that Uber should be regulated as a transportation company, which undercuts Uber’s position that it simply operates as an intermediary between drivers and passengers.

An additional blow to on-demand companies that rely on independent contractors in Europe was delivered by the ECJ in King v. The Sash Window Workshop Ltd., which ruled that misclassified self-employed contractors who are really workers or employees could claim back holiday pay all the way back to the year that the EU’s Working Time Directive[iv] was introduced. Before this ruling, liability was typically limited to one or two years’ back pay in most EU countries.

So, what is being done in the U.S. and Europe at the legislative level to introduce protections for this growing class on freelance workers? In the U.S., an assortment of legislative efforts seek to provide them access to benefits typically provided in the employment relationship. New York City enacted the “Freelance Isn’t Free Act” to impose penalties on companies that fail to pay their contractors, which the city may enforce. New York State established the Black Car Fund, which administers safety and health programs that benefit for-hire drivers, their passengers, and other New Yorkers on the road, and provides workers’ compensation insurance to black car and luxury limousine drivers. Bills proposed in Washington State, New Jersey, and New York would require companies that rely on independent contractors (such as Uber and Grubhub) to contribute to a portable benefits fund that would provide health insurance, time off, workers’ compensation, and other benefits. On the Federal level, in May 2017, Senator Mark Warner (D-VA) and Representative Suzan DelBene (D-WA) introduced legislation to test and evaluate innovative portable benefit designs for freelance workers to give independent contractors access to benefits that to date have only been available for employees.  But where the co-sponsors of this bill are Democrats in a Republican-controlled Congress, it is unlikely that this bill will gain any real traction before the 2018 election cycle.

It appears that additional initiatives in Europe would continue its seemingly more-protective stance. A July 2017 report commissioned by the U.K. Prime Minister on gig economy working practices sets forth a series of recommendations to improve working conditions for on-demand workers, including the proposal to create a new classification for workers on tech platforms, like Lyft and Postmates. In November 2017, the European Pillar of Social Rights, a set of policy priorities, was jointly signed by the European Parliament (the EU’s legislative body), the European Council (which sets EU policies), and the European Commission (the EU’s executive body) which sets forth 20 key principles, structured around three categories: (1) equal opportunities and access to the labor market; (2) fair working conditions; and (3) social protection and inclusion. These key principles will be implemented over time through legislation across the EU member states.

While Massachusetts’ strict “ABC test” to determine whether a worker is an employee or an independent contractor remains one of the toughest in the nation, other states that use similar tests are finding ways to determine that on-demand workers are independent contractors. However, there is presently no evidence Massachusetts courts are currently prepared to move in that direction.

Currently, the only new legislation in Massachusetts that impacts any on-demand companies involves the 2016 regulations on ridesharing companies that imposed a fee on ride-sharing services and established requirements for background checks, inspections, and insurance. Another new development impacting on-demand companies in Massachusetts occurred in  2017, when Uber introduced a pilot program that allows Massachusetts drivers to purchase workers’ compensation coverage that offers $1 million maximum coverage for medical costs and lost earnings due to a work-related accident.

The on-demand economy shows no sign of slowing down. As a result, innovative legislation or company-led initiatives that will protect these workers by providing new worker benefit programs are essential for the growing freelance workforce’s health and stability.  Under the Trump administration, the Department of Labor rolled back Obama era guidance of the “economic realities test” leaving more room for independent-contractor classification than the prior administration. However, the outcome of still pending litigations will likely force changes in policies and the practices of on-demand businesses that will result in additional worker protection. As freelance work continues to grow, Massachusetts may follow other states in finding new ways to provide benefits and protections for these workers. Regardless, when guiding your clients in Massachusetts, the safest bet is still providing full employment benefits to all workers they retain.

[i] The 11-factor Borello “economic realities” test sets forth the following factors used to determine whether an individual is properly classified as an independent contractor:

  1. Whether the person performing services is engaged in an occupation or business distinct from that of the principal;
  2. Whether or not the work is a part of the regular business of the principal or alleged employer;
  3. Whether the principal or the worker supplies the instrumentalities, tools, and the place for the person doing the work;
  4. The alleged employee’s investment in the equipment or materials required by his or her task or his or her employment of helpers;
  5. Whether the service rendered requires a special skill;
  6. The kind of occupation, with reference to whether, in the locality, the work is usually done under the direction of the principal or by a specialist without supervision;
  7. The alleged employee’s opportunity for profit or loss depending on his or her managerial skill;
  8. The length of time for which the services are to be performed;
  9. The degree of permanence of the working relationship;
  10. The method of payment, whether by time or by the job; and
  11. Whether or not the parties believe they are creating an employer-employee relationship may have some bearing on the question, but is not determinative since this is a question of law based on objective tests.

[ii] Massachusetts applies a strict “ABC test” for properly classifying an independent contractor. Specifically, “[a]n employer who wants to treat someone as an independent contractor rather than an employee has to show that the work:

  1. is done without the direction and control of the employer; and
  2. is performed outside the usual course of the employer’s business; and
  3. is done by someone who has their own, independent business or trade doing that kind of work.” Massachusetts Attorney General’s Fair Labor Division on M.G.L. c. 149, s.148B

[iii] The long-standing Borello test is also undergoing scrutiny in California. Currently, in Dynamex Operations West, Inc. v. Superior Court of Los Angeles County, the California high court is considering whether to adopt a revised test to determine whether an individual is an employee or independent contractor. The California Supreme Court requested briefs addressing whether California law should use an “ABC” test similar to the one used in Massachusetts.  Plaintiff’s counsel in the Grubhub case filed a Notice of Supplemental Authority with the District Court regarding the Dynamex matter, however, the court did not delay its decision in Gruhub instead opting to apply the current Borello test in its decision.

[iv] The EU’s Working Time Directive (2003/88/EC) requires EU countries to guarantee the certain minimum rights for all workers and regulates the amount of time people can spend at work in order to protect the health and safety of the European workforce.

 

Nancy Cremins is the Chief Administrative Officer & General Counsel of Globalization Partners, an International Professional Employer Organization helping companies expand in 150+ countries without the pain of setting up an entity.

This article was updated on March 8, 2018 to reflect the latest development in the case ofaweson v. Grubhub.

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The Rise of the On Demand Economy: The Tension between Current Employment Laws and Modern Workforce Realities

cremins_nancy by Nancy Cremins

Heads Up

Over the last several years, startups brought convenience to the masses by providing virtually anything on demand.  Rides, groceries, takeout service, house cleaning, and more are all accessible with a few taps on your smartphone.  The sheer volume of human capital needed to make these on demand businesses function, along with the unpredictable demands of consumers, caused companies such as Uber, Lyft, Postmates, and Instacart (to name a few) to make the business decision to classify these service workers as independent contractors.

Building the infrastructure for an on demand business that serves many customers in multiple cities, or even multiple countries, is an incredibly expensive endeavor.  For example, Uber has gone through 13 rounds of funding and raised over $6.6 billion to support its large-scale operation.  By necessity, these startups must be cost conscious with their capital or risk failure.  Classifying their workers as independent contractors saves them substantial sums of money on employment taxes and benefits.  These businesses claim that independent contractor status is also beneficial for the workers who are permitted to retain flexibility to work on their own terms as often as they want.  For valid reasons, some (though not all) on demand workers do not agree.

Workers classified as independent contractors do not have access to company-provided benefits and protections such as paid time off.  They are not given the payment protections of minimum wage, and overtime pay.  Nor do they have the safeguards of worker’s compensation and unemployment insurance.  These workers also shoulder the cost of the business expenses incurred in performing their jobs, such as their tools, supplies, or the cost of vehicle operation (though those are deductible business expenses).  In addition, workers are responsible for paying all taxes on pay, which means the company is not contributing to employment taxes, Social Security, or Medicare.  Opponents to the present on demand economy practice of classifying workers as independent contractors argue that tight standards on employee classification provide better protections and more financial security for workers.

Around the country, workers, businesses, and localities are approaching the shift to the independent contractor model in a variety of ways.  A host of lawsuits were filed by workers against a number of on demand businesses asserting claims for worker misclassification. These lawsuits are costly and place tremendous pressure on the companies, often resulting in stagnating growth or even closure of the business.  For example, in July 2015, on demand home services business, Homejoy, shut down because it ran out of money defending worker lawsuits and could not raise an additional round of investment due to pending litigation.

Some on demand businesses are attempting to avoid or prevent additional misclassification lawsuits by preemptively classifying their workers as employees.  Instacart (which is defending its own misclassification lawsuit) announced, in June 2015, that it would be commence classifying its workers as employees.  Other companies are maintaining their practice of classifying workers as independent contractors while they wait for the outcome in the bellwether case on the issue, O’Connor v. Uber Technologies et al, C13-3826 EMC, pending in the Northern District of California.

In general, things have not gone Uber’s way in the litigation.  On March 11, 2015, the Court denied Uber’s motion for summary judgment.  On September 2, 2015, the Court certified the case as a class action.  What’s more, during the pendency of the lawsuit, the California Labor Commission ruled that a specific Uber driver was an employee, and not an independent contractor.  While the ruling was non-binding and impacted only one driver, it received  considerable attention.  The trial is set to commence on June 20, 2016 and the outcome will have a substantial impact on the freelance economy.

In another approach, the Seattle City Council voted in December 2015 to approve a bill that would permit drivers for Uber, Lyft, and other ride-hailing apps to form unions and negotiate wages.  Such a city ordinance is unprecedented as it would be the first to allow independent contractors to engage in collective bargaining.  Still, the ordinance may face legal challenges based on the contention that it is preempted by federal law and, if not preempted, that collective bargaining by independent contractors could constitute illegal price-fixing under antitrust law.

Here in Massachusetts, there is a presumption that a worker who provides services to a business is an employee unless all of the following are met:

  • The worker is free from the company’s control and direction;
  • The services provided are outside the company’s usual course of business; and
  • The worker is customarily engaged in an independently established trade, occupation, or business of the same nature that is involved in the services performed for the company. M.G.L. c. 149, § 148B.

Given such stringent guidelines, the safe default position is that a company should classify its workers as employees, not independent contractors.  However, in April 2015 the Supreme Judicial Court took a narrower approach than some anticipated in Sebago v. Boston Cab Dispatch, Inc., 471 Mass. 321 (2015).

In Boston Cab, the Court found: (i) taxi drivers did not provide services to the cab companies or garages; (ii) drivers were free from the direction and control of the cab companies; (iii) services provided by drivers were not in the ordinary course of business of cab companies; and (iv) drivers were engaged in an independently established trade, occupation or business.  As a result, the Court found that the drivers were properly classified as independent contractors.  In reaching this decision, the Court determined that the cab companies “are not concerned with the results of plaintiffs’ operations, as drivers are not required to remit a percentage of their revenues, which includes both fares and tips.”  Id. at 334.

What sets the Boston Cab case apart from the Uber case is the existence of a regulatory framework that applies to cab companies and drivers that does not (at least not presently) apply to Uber drivers.  The Court specifically stated that its conclusion rested in large part on the existence of the regulatory framework of Boston Police Department Rule 403, Hackney Carriage Rules and Flat Rate Handbook (2008) (Rule 403), which creates a system whereby drivers can “operate as either employees or entrepreneurs with their own separately defined and separately regulated business.”  Boston Cab, 471 Mass. at 338.  In holding that drivers were properly classified as independent contractors, the Court found that the “harmonious reading” of Rule 403 and the independent contractor statute as set out in M.G.L. c. 149, §148B led to the outcome that the Legislature intended to preserve the ability of cab drivers to operate either as employees or independent contractors.  Id.

There is no denying that regardless of the still-unresolved employment classification issue, there  has been a cultural shift to more independent contractors as more people want to be their own bosses.  In fact, the number of freelance workers in the U.S. grew from 20 million in 2001 to 32 million in 2014.  A recent poll conducted by Time Magazine finds that now 22% of American adults—45 million people—have picked up some form of “gig” work for these on demand companies.

Some are advancing the position that perhaps there needs to be a new path forward to balance the realities of the rise of freelancing and the on demand economy.  On November 10, 2015, a number of stakeholders, including startups, more established companies, labor activists, and academics, published on open letter advocating that “we must find a path forward that encourages innovation, embraces new models, creates certainty for workers, business, and government and ensures that workers and their families can lead sustainable lives and realize their dreams.”

To that end, these stakeholders advocate for the creation of a universal set of benefits accessible to all workers, whether independent contractor or employee, that would be portable and flexible.  Following that open letter, many of the letter’s signatories participated in a policy discussion that included the Secretary of Labor, Tom Perez to discuss possible solutions.

Given the volume of worker misclassification lawsuits, the rise of freelancing as an increasingly popular choice for U.S. workers in lieu of more “traditional employment,” and the public interest in ensuring that the large number of independent contractors are provided certain basic protections, an innovative approach that provides more safeguards for independent contractors and more certainty to businesses regarding proper classification may be the right path to protect both workers and businesses.

Nancy Cremins is a partner at Gesmer Updegrove, LLP, assisting entrepreneurs with a range of issues, including employment matters and dispute resolution. She is the co-founder of SheStarts, which helps women entrepreneurs start and grow their businesses.