The Rise of the Gig Economy and Independent Contractors: What Every Employer Needs to Know about Misclassifying their Workers

My parents always intimated that the ultimate measure of success is obtaining a job that is “secure.” You know…one of those good government jobs…with great benefits. My parents were born in the 1940s. Regarding livelihood, their attitudes were likely molded by THEIR parents-casualties of the Great Depression; victims of overt racial discrimination in the segregated south and grateful to have any job at all (good or bad).

My mother was the first person in her family to graduate college, and both my maternal and paternal grandparents were “domestic servants” and foundry workers with very little education. Their parents were sharecroppers.When I informed my late father when I was seven years that I wanted to be a writer, he told me that I’d “starve to death,” and that I should be a lawyer instead. A lawyer is what I became. I am convinced the idea of working with the goal of “security” in mind was woven into my DNA while I was still in the womb.

By some divine providence, or perhaps by luck, I have never been unemployed, by choice or circumstance, and I’ve never worked in a place so horribly intolerable that I was forced to leave before I could find more suitable employment. I allowed myself to believe that as a consequence of my having made the “right” decisions, those decisions had somehow apportioned me the security I desired. I was wrong.

I came to this realization in an unfortunate way. One of my previous jobs required that I work in a very politicized work environment. I was a good employee but was not liked by a client. As a young employee, I didn’t have the tools at that point in my career to build a bridge and restore the relationship. Instead, I drew inward. The client expressed their dissent to my boss, and my boss, in turn, began to make things very difficult for me. A lightbulb went off. I guess it was my “aha moment.” I realized that I was not safe, and I never would be because my work-fate would always be in the hands of someone else. It was then that a small seed was planted, and I decided I wanted to be my own boss. And, so I started-slowly-on my path to entrepreneurship.

I believe that my contemporaries are making such a connection as well. While the U.S. economy is improving, finding and maintaining employment remains an uneasy feat for some. Even those already established in their careers have faced attenuating circumstances. Many have been laid off, and those that have resumed work with different employers have found the compensation, and sometimes the qualitative value of the work, much diminished.

Enter what is known as the “freelance economy,” aka as the “gig economy.”

The freelance economy refers to the increase in people involved in the contracting market in some respect (either as moonlighters, or full-time independent employees). And, let’s face it, our current labor market is overrun by short-term contracts or freelance work, as opposed to permanent, full-time jobs. Some have called this the “uberization” effect of the workforce, but the fact remains that utilizing independent contractors as opposed to full-time “employees” is a ubiquitous practice in this day and age.

The gig economy did not emerge solely because of its value to employees. Employers also find utilizing independent contractors is beneficial because it is more cost efficient and provides more flexibility.

Small businesses, for instance, often rely on independent contractors or freelancers to keep their business running, usually because the cost of hiring and paying full-time employees salary, taxes, benefits, bonuses, as well as funding training might be too substantial of a financial burden to bear—This is quite understandable. The total cost of onboarding can cost thousands of dollars.

Although utilizing independent contractors as a way to keep overhead expenses low and profit margins high is understandable, a persistent point of contention in employment law centers on who is an employee versus who is an independent contractor. An employer acts at their peril if they misclassify an employee as an independent contractor. If you have incorrectly classified a worker an independent contractor as opposed to an employee, you may be responsible for paying back taxes you never withheld, providing benefits and reimbursing the worker for wages required by the Fair Labor Standards Act. In fact, many businesses have been targeted and punished by the IRS and the Department of Labor for purposely misclassifying workers to avoid paying overtime, payroll taxes, and other employee-related expenses. As a penalty for the intentional misclassification, these employers have been required to pay penalties, in addition to the additional costs also listed above.

To side-step these mistakes, employers should pay careful attention to how employees are classified. Although independent contractor status does not have a fixed definition by all government entities, the general guiding principle in determining whether an individual is an employee or independent contractor is the degree of control the owner exercises over the person’s work. The EEOC has issued guidelines for determining if a business owner has an employment relationship with a worker, and the IRS uses a 20-factor test to determine employee/independent worker status.

The following factors are but a few that will help guide you in determining when a worker is an employee:

  • The employer has the ultimate “right to control” That, is the employer decides when, where, and how the worker does their job.
  • The employer provides the tools, materials, and equipment to perform the job.
  • The worker performs the work on the employer’s premises.
  • The employer determines the hours of work and the length of the job.
  • The worker is not engaged in his/her own distinct occupation or business and does not advertise his or her services or work for more than one person/employer.
  • The employer provides the worker with specific benefits, such as insurance, leave, or workers’ compensation.
  • The employer withholds federal, state, and Social Security taxes.
  • The employer pays the employee on an hourly basis versus on a completed-project basis.

For employers to avoid misclassification of their workers, and to bypass many of the consequences that come with it, it is essential to be proactive and determine upfront your worker’s status. Although the Federal laws provide some guidance, it is also vital to review the employment statutes in the jurisdiction where your business is located since different laws use different standards to assess whether an employment relationship exists.

Do not assume that money and benefits are the controlling factors in establishing an employment relationship. Your failure to pay benefits or a salary does not, by itself, prove that a worker is an independent contractor. Most courts will assess all the factors in determining the classification of an individual worker, such as whether the worker signed an “independent contractor” contract, covered the expense of her own benefits, and shouldered all costs connected with the work she was doing. Make sure that you have proper documentation to support your case should a misclassification challenge arise.