More people are doing jobs outside of a traditional office
Thanks to new business models and technological advancements that allow more jobs to be done remotely, an increasing number of workers are beginning to opt to work as independent contractors (sometimes referred to as consultants or freelancers) rather than full-time employees in more conventional work environments.
While working as an independent contractor certainly has its benefits, such as flexible work hours and the freedom to work from anywhere in the world, such workers should be aware of the potential pitfalls. Of primary concern is the risk involved in being classified as a contractor in an ever-growing gig economy where workers’ rights may not yet be clearly defined.
What is a Gig Economy?
The proliferation of the gig economy is creating many new temporary, part-time jobs that can be done remotely. The Bureau of Labor Statistics defines the term “gig economy” as “single project[s] or task[s] for which a worker is hired, often through a digital marketplace, to work on demand.” This means that a business can hire a worker to carry out tasks while the worker performs them on their own schedule and without direct oversight from the employer itself.
A few examples of businesses that make up the gig economy are those in the “share” economy, in which services such as car rides, deliveries, cleaning, personal services and lodging are offered by ordinary people who are called on-demand to provide them. These companies connect workers with clients through an app or website. Rideshare companies like Uber and Lyft, as well as other “share” businesses like Airbnb and Postmates function under this model. These companies hire workers classified as independent contractors to carry out their services.
People often value the flexibility that comes along with contractor work and choose to work for several companies rather than full-time employees for a single company. For some workers, the main driving factor for electing this type of work is that they can work on their own terms. Contract workers can, for instance, choose to continue owning the rights to their artwork or scientific research rather than passing those rights to their employers, and/or have the freedom to create their own work schedule. For others, doing “gig” work can be a way to make extra money on the side, or can be a way to earn money during hard financial times or after being laid off.
A large number of gig economy workers are those who are attracted to the simple, no-frills nature of some of the on-demand work available in newer “share” economy companies. Often, these jobs are appealing because of how easy they make it for workers to “be their own boss” and set up their working hours at their convenience. But the pitfalls to such jobs, especially to those who rely on them for full-time work, may not become apparent until after having committed themselves entirely to the job.
Problems With the Gig Economy
Silicon Valley tech companies like Airbnb, Uber, and Upwork maximize the use of contractors under the appeal of liberating those workers from conventional 9 to 5 jobs. These companies suggest that by working as contractors, their workers will be able to “seamlessly integrate life with work.” However, many workers have found that this structure often comes at the cost of lower pay, increasingly smaller gigs, longer working hours, and no job guarantee or benefits.
One unexpected problem many gig economy workers face is the unpredictability of earnings and working conditions. For example, many gig companies have full control over the earning rate for its workers, which can change with little or no notice. The Observer reports that Uber fare cuts often require drivers to scramble for more rides and work longer hours in order to earn the same amount they earned before the unexpected rate change.
Additionally, contractors do not have the legal right to demand payment for work-related expenses. For some contractor positions, this means that the cost of doing the job — such as paying for gas, maintenance and vehicle insurance when working for a rideshare company — is often so high that the contractor’s net earnings are lowered significantly, sometimes below minimum wage.
Whether the worker is a logo designer, software engineer, house cleaner or driver, gig work can be precarious work. With uncertain hours and no benefits to provide a safety net, the gig economy displaces risks associated with business onto ordinary people.
What Is the Difference Between an Employee and an Independent Contractor?
In many ways, there is little to differentiate an employee and an independent contractor. It is very common for employees and independent contractors to work side by side in an office, or for both to do the same or similar work. But legally, they are quite different, and are susceptible to different employment benefits, obligations, tax implications and liability.
The Internal Revenue Service (IRS) says a worker is an independent contractor:
if the payer has the right to control or direct only the result of the work and not what will be done and how it will be done . . . You are not an independent contractor if you perform services that can be controlled by an employer (what will be done and how it will be done).
An appropriately classified contractor is a worker who is not a permanent, integral part of the business for which they work. When determining a worker’s classification, the law also considers factors such as who provides the tools or equipment for completing the work, as well as on whom the burden of profit and loss falls upon.
According to the IRS, there are three categories under which evidence for the nature of a worker’s classification will fall: behavioral, financial and the type of relationship between worker and payer.
- Behavioral: Is the worker and how they perform their job controlled by the company? If so, he or she is likely an employee. For example, an employee, not a contractor, is given training by the company in order to comply with company rules and guidelines.
- Financial: Does the payer control the business aspects of the worker’s job? Examples include how the worker is paid, who provides equipment and supplies, and whether work-related expenses are reimbursed. An employee does not realize a profit or incur financial loss from their work, but a contractor can.
- Type of relationship: Does the worker receive benefits (i.e. pension plan, insurance, paid vacation, etc.)? Are there written contracts? Is the work integral to the business? Will the relationship continue? If so, the worker is an employee.
There is no magic formula to determine a worker’s classification, and some factors may weigh more heavily than others when making the determination. Every case is different, and it is up to the employer to examine all parts of the relationship when determining the worker’s classification.
The Benefits of Being an Employee vs. an Independent Contractor
Although direct employees do not often have the same flexibility and independence as contract workers, there are numerous well-established legal rights and benefits to being a direct employee of a company. For instance, only regular employees receive health care coverage, Social Security, paid sick leave and Family Medical Leave protection. Employees also have a right to receive worker’s compensation after an injury, paid by their employer. Contractors, however, do not receive any of these benefits.
Employee misclassification occurs when a worker who does the duties of a regular employee is denied the benefits of an employee due to their classification as an independent contractor. While sometimes such misclassifications are done in error, companies have also been found to intentionally misclassify employees in order to reduce labor costs and avoid paying state and federal taxes. Some companies that have faced pressure to reduce costs have even been found to do so by firing regular workers and hiring them back as independent contractors.
According to the Bureau of Labor Statistics, businesses can reduce labor costs by up to 30 percent by hiring contractors instead of regular employees. Regardless of whether misclassification is done in error or intentionally, the consequences of misclassification are always serious for the worker. They face higher tax burdens with the 1099 self-employment tax rate, lose the right to join a union, are unable to receive overtime pay and are usually ineligible for unemployment insurance or disability compensation. They may also be unjustly paying for work-related business expenses and incurring financial losses where they might otherwise be entitled to compensation. Not only does employee misclassification negatively impact workers, but it also exposes employers to civil fines, back wages and interest.
Minimum Wage Abuse
Minimum wage is the lowest amount an employer is legally allowed to pay its workers. When federal minimum wage and state minimum wages differ, a worker is entitled to the higher of the two. Minimum wage abuse occurs when an employer pays someone less than the minimum wage required by federal and state law.
Some companies that employ contractors may advertise their compensation as well above minimum wage. But this wage is often subject to factors not controlled by the worker that decrease the amount of work available. Because of this, the compensation may amount to so little that the worker earns less than an hourly minimum wage during working hours.
Independent contractors are not required to be paid the minimum wage, according to the Fair Labor Standards Act. However, merely classifying a worker as a contractor rather than an employee does not mean an employer is denying them minimum wage in a legal capacity.
Moving Forward in the Gig Economy
The rapidly growing gig economy brings with it the growth of new business models that in many ways challenge and disrupt established industries. While generating excitement over the economic potential of such businesses, these new businesses are testing conventional views of employer-worker relationships and how labor is organized, and these new business models are often found to be at odds with traditional employer-worker relationships.
Already there have been a number of class action lawsuits against businesses in the gig economy over employee misclassification. Ridesharing services like Uber and Lyft have settled class action lawsuits in 2015 and 2016, regarding misclassification of drivers as contractors rather than employees. In these cases, the drivers agreed to remain classified as contractors.
While the gig economy continues to grow, lawmakers and businesses alike will need to continue developing solutions for properly classifying workers and ensuring that they receive the rights to the benefits they deserve.