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Disputes increase over who’s an employee and who’s an independent contractor

March 23, 2016

When the Uber car pulls up to the curb, passengers may not be too concerned about what classification of worker is behind the wheel, but companies, courts and government agencies increasingly are debating whether the driver is an employee or an independent contractor.

Independent contractors have long been a part of the workforce. However, with the rise of on-demand service providers who run their businesses almost solely with independent contractors doing a variety of tasks from driving to cleaning houses to picking up dinner, closer scrutiny is being paid to what, exactly, these workers are in the new “gig economy.”

“I think (the issue) is front and center because it’s a new business model and because it impacts such a large group of employees within these models,” said Frost Brown Todd LLC attorney Amy Wilson.

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The most notable opposition to this new model is coming from the workers who took these jobs in the on-demand sector. Lawsuits have been filed against tech-embracing startups such as Uber and Mechanical Turk by their workers who argue they have been misclassified as independent contractors.

Even businesses that are likely to have storefront operations have not been immune to the backlash. Companies that have incorporated independent contractors into their workforces have been taken to court. One such case, In re: FedEx Ground Package System, Inc. Employment Practices Litigation, 10-3115, came through the 7th Circuit Court of Appeals in July 2015.

The pick-up and delivery drivers for FedEx Ground Package System in 24 states filed a class action in the mid-2000s, claiming the company retained such control over their work that they were employees. In July 2015, the appellate panel agreed, reversing the summary judgment in favor of the company and remanding the case with instructions to enter judgment for the drivers.

Indeed, citing the increasing misclassification of workers in the United States, the U.S. Department of Labor issued an interpretation the same month the 7th Circuit ruled in favor of the FedEx drivers. The missive takes a broad view of the Fair Labor Standards Act definition and concludes that most workers are employees.

Raw deal vs. innovation

Workers who are considered independent contractors forgo some key perks provided to those who are employees. They typically do not get overtime pay, health insurance, life insurance or retirement benefits.

In addition, they have to calculate and pay all withholding taxes. If they get injured, they will not have any workers’ compensation or disability insurance to draw upon. If they lose the job, they will not be eligible for unemployment insurance.

Fillenwarth Dennerline Groth & Towe LLP attorney David Vlink sees more and more workers designated as independent contractors in unionized manufacturing plants. He speculated the companies like the classification because it weakens the collective bargaining unit and people are attracted to these kinds of jobs because initially they get bigger paychecks. They may not realize the benefits they are doing without and the money they will have to pay to cover their tax obligations and to buy insurance.

“Most people don’t even understand being an independent contractor is a raw deal compared to being an employee until something happens,” Vlink said.

Whether a worker is an employee or independent contractor is determined by how much behavioral and financial control the company has over its workforce. Arguing in support of their employee status, the FedEx Ground drivers noted they were required to emblazon the FedEx logo on their trucks, wear FedEx uniforms, and regularly input information into electronic scanners that were connected to the company’s website. In addition, the company set the routes and determined customer prices along with reserving the right to change a driver’s route and to terminate drivers at will.

Despite the rise in litigation, Wilson does not expect businesses will stop designating workers as independent contractors. Companies are innovating and, as a result, pushing the rules so that maybe a new classification for workers will eventually emerge. Under a new third category, perhaps companies would be allowed to offer some benefits and training to its workers “without the threat of a class action,” she said.

Gray area

How many workers are currently classified as independent contractors is uncertain. A proposal by The Hamilton Project, an economic policy organization within the Brookings Institution, estimated the total at 600,000 workers, or 0.4 percent of the U.S. workforce.

To try to get a more exact number, the Labor Department’s Bureau of Labor Statistics will be teaming up with the U.S. Census Bureau to survey the national worker population. The information on the proportion of workers in the on-demand sector will be included in the 2017 Current Population Survey.

Still, the Department of Labor released the July 2015 interpretation because it believes companies are misclassifying workers to avoid providing employee protections, such as overtime and health benefits, and to skirt paying employment taxes to the government.

The federal agency noted it has received numerous complaints from workers alleging misclassification and has brought successful enforcement actions against employers. The department did not respond to an IL inquiry to provide the number of complaints and actions.

haskin-john-mug Haskin

The Indiana Department of Labor also takes tips from workers who suspect they are misclassified. However, the state agency said the number of complaints it has received is confidential.

Typically, workers only seek legal help when something happens that highlights the disadvantages of their status as independent contractors. When they do not see themselves as having the same recourse as regular employees to fight a perceived injustice in the workplace or pay medical bills from a health crisis, these workers raise a claim of misclassification.

John Haskin, founding partner of John H. Haskin & Associates LLC, has gotten calls from workers who feel they were mistreated by their employer. He tells them while the company’s actions may be unfair and unjust, the actions may not be unlawful. But when a business does run afoul of a law or regulation, workers can bring successful complaints.

burgan-blake-mug Burgan

“If there’s truly a wrong, there is a remedy,” he said.

Employers found to be misclassifying workers can suffer a financial blow. They can be hit with having to cover unpaid wages, liquidated damages and attorney fees. Moreover, they will have to provide overtime and benefits plus pay employment taxes going forward.

Businesses thinking about hiring independent contractors usually do not think about the potential risks, said Blake Burgan, partner at Taft Stettinius & Hollister LLP. Although he advises clients of the potential issues with misclassification because of the government’s heightened scrutiny, he noted the frustration in not having a more precise test for determining where a worker belongs.

This area of employment is such a gray area, it is tough for companies and attorneys to maneuver. Burgan sees companies using new business models to which the law has not been previously applied. But he is hopeful the court decisions from the multiple lawsuits over alleged worker misclassification will provide some benefit by giving more guidance into which category Uber drivers and similar workers fall. •

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