A Class of Their Own? Independent Contractors Causing a Conundrum

By Roberto Cruz

Sep. 1, 2015

Photo courtesy of Lyft.

If you still have the suit or dress you wore to your high school prom, go to the closet and try it on. Either because of style or size, it just doesn’t “fit” anymore, does it? The same holds true for worker classifications: no matter what your job is, or how much the times and technology have changed, you are still classified under decades-old standards: employee or independent contractor.

It may be time to create a new classification, update our wardrobe, so our style and the way we work fit much better with today’s business environment.

The on-demand economy, driven by technology companies that immediately deliver goods and services to meet consumer demand, and typified by such companies as Lyft and Uber, is fueled by workers who are engaged as independent contractors.The Argument logo

While these workers set their own schedules and don’t wear uniforms, they also perform services integral to the businesses they serve and are subject to certain company-established standards. This blend of independence and employer control has led to a host of legal problems and brought up thorny issues of workers’ rights. Are these workers independent contractors, employees or something else entirely? Further, how does the classification of these workers set an example for contractors in other fields?

The current environment for on-demand companies has most certainly blurred the classification lines, and if companies aren’t blatantly ignoring the issue, we often see them taking one of two actions.

  1. Some companies are standing by their arguments that on-demand workers are contractors. This stance has led to lawsuits (See Homejoy, Lyft and Uber) and/or staunch outcries in the court of public opinion.
  2. Other organizations are reading the tea leaves and converting their workforces to employees (See Instacart, Shyp Inc. and Sprig) in hopes of not ending up on the wrong side of a class-action lawsuit.

But are these the only two options? Amid the lawsuits, political wrangling, and workers’ rights issues has emerged the idea of creating a third classification or a quasi-independent contractor, or quasi-IC, so that companies and their workers won’t have to keep trying to squeeze their services and business models into the ill-fitting employee or contractor models. A quasi-IC could enjoy safety net benefits provided to employees while enjoying much of the independence of a contractor, all while allowing on-demand companies to leave the courtroom and keep innovating.

So is a quasi-IC the answer? On-demand workers have been in the spotlight lately, but a quasi-IC category of worker could absolutely help all types of independent contractors and the companies that use them.

This third classification would give companies that use contractors more flexibility. Rather than forcing the rigidity of the current classifications on companies, a quasi-IC can better address today’s technology, demands and workforce trends. Also, with all of the independent contractor guidelines, interpretations, rules, cases, and regulations, even the most clear-cut independent contractor would benefit from the clarity that a new quasi-classification could bring. And a quasi-IC class can be created with the input of this workforce, having the potential to become a collaborative effort that addresses issues for both sides of the work relationship as well as issues important to the IRS and other government agencies.

Dependent Contractors

What would it take to create this quasi-IC? Before you say it can’t happen, just look at other parts of the world.

In Canada, courts have created a type of common-law variation on the independent contractor — called the “dependent contractor.” A dependent contractor isn’t a third category, but it does create distinctions between classifications. Dependent contractors are now recognized in Canada by labor commissions and statutes. A recent NPR article quoted a Canadian employment lawyer as stating that if a company has relied on people consistently over the years and if those people derive all or most of their income from that job — then the people may be dependent contractors and entitled to a severance package if terminated.

Germany and Spain also use the dependent contractor class. In Germany, dependent contractors must derive at least 50 percent of their income from one client. In Spain, it’s 75 percent. The U.K. appointed a “freelance czar” in 2014 to champion contractors’ rights and has also considered such benefits as providing pension plans for contractors and maternity leave for self-employed mothers.

The above are examples that may or may not work in the United States. However, they illustrate that it’s possible to create a quasi-IC, either by judicial or political means. Given the polarized political environment in the United States, the possibility of a legislatively created quasi-IC may be tough to accomplish. President Barack Obama has consistently provided funds to fight worker misclassification, but hasn’t pressed for the creation of a new classification.

Some dialogue has started in Washington around this issue. For example, Sen. Mark Warner, D-Virginia, is asking what safety net benefits can be offered to on-demand workers. For the most part, government seems to be focused on making sure businesses are classifying workers correctly under the existing classification rather than creating more appropriate classes.

All things considered, the best chance at creating quasi-ICs may come from the businesses that created the on-demand economy in the first place. A recent BuzzFeed article noted an increasing movement from on-demand companies to create a quasi-IC model. It quoted a Lyft and TaskRabbit adviser as stating that the right answer to deal with the on-demand economy is a third class of worker.

Additionally, TaskRabbit founder and CEO Leah Busque told The Huffington Post: “In the last 12 to 18 months, I believe there has been a slippery slope of new companies that have formed in the name of on-demand services … that maybe aren’t having as much of a focus as they should on the worker.”

With this in mind, companies may, on their own or in collaboration, create worker reimbursement programs, benefits pools or pension plans. Certainly the companies that disrupted entrenched industry can do the same for New Deal-era job classifications.

So what is the role of HR in all of this? More and more, HR executives need to be aware of, and proactive in, matters of compliance. Being aware includes having a general understanding of laws, regulations and trends surrounding compliance, even if day-to-day compliance isn’t your everyday role. Being proactive means taking a more vocal role in compliance, including informing C-level executives of risks and trends as well as unintended consequences, working with legal and conducting HR compliance audits.

Greater awareness and enhanced engagement in compliance matters will translate to hiring practices and a feeling of assurance that your engagements are not putting your company at risk of worker misclassification. Instead, HR executives will be free to pursue and retain top talent in today’s competitive contractor market.

Roberto Cruz is legal and compliance counsel at ICon Professional Services. Comment below or email Follow Workforce on Twitter at @workforcenews.

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