Legal Alert

Fitting a Square Peg Into a Round Hole: Worker Classification in the Gig Economy

February 15, 2018

In a significant decision on the status of so-called "gig economy" workers, a California federal judge recently ruled that a former GrubHub Inc. delivery driver was an independent contractor, not an employee.

In Lawson v. GrubHub Inc. et al., U.S. Magistrate Judge Jacqueline Scott Corley concluded that GrubHub Inc. did not exercise sufficient control over drivers to convert them into employees. The court noted that GrubHub Inc. did not dictate the manner in which Lawson made deliveries and did not require a uniform, specific hours, signage, or training.

This ruling may have far-reaching implications for other gig economy companies if other courts adopt a similar approach.

Many companies within the gig economy share a similar model, typically matching customers with available products or services through mobile phone apps. Companies use this platform to avoid the costs associated with employment, including benefits, office space, and certain taxes. For workers, this model was originally seen as a form of survival—undertaken only to supplement another stream of income.

Increasingly, workers are making a living off of "gigging" alone. According to surveys compiled by Bloomberg, about 36 percent of today's workforce is made up of freelancers. If the gig economy continues to grow at this rate, the amount of full-time "giggers" will pass 50 percent of the workforce in about 10 years.

Numerous surveys have found that workers, particularly those at the start and end of their careers, actually prefer the independence of gig work. For example, the "2017 State of Independence in America" survey conducted by MBO Partners (an operating systems provider for independent workers), found that 74 percent of full-time giggers were highly satisfied with their work, and a striking 84 percent said they were happier working on their own than in a traditional job.

The gig economy is attractive to many because it's flexible and simple. Workers can set their hours to match their schedule. Much of the work does not require specialized skills, so there are few barriers to joining the workforce. There are also many types of jobs available, from driving for Lyft, to manual labor for TaskRabbit, to house-sharing for Airbnb.

Since their inception, however, gigging companies have struggled against government regulations tailored to more traditional business models. Gigging companies have consistently been targeted for investigations for skirting legal requirements regarding employee protections and benefits. Hundreds of cases have been filed around the country disputing whether gig economy workers are employees or independent contractors. To date, these lawsuits have resulted in few final legal determinations, as gigging companies have attempted to settle cases in the face of adverse determinations rather than court decisions that could undermine their entire business model.

Adding to the challenge for companies, courts use several different tests in different contexts to determine whether a worker is an employee or an independent contractor. While all of the tests are related, they often consider different factors and may weigh those factors differently. Thus, a worker can be an independent contractor in one context—for example, under federal tax rules—but be considered an employee in another context, such as under state unemployment law.

For example, the common-law test generally examines the ability and amount of control an employer exercises over a worker. The greater the control, the more likely that individual will be deemed an employee. Under the Fair Labor Standards Act, courts apply the "economic realities test," which hinges on whether the individual is economically dependent on the business for which he or she works.

All of these analytical frameworks predate the gig economy, so courts have struggled to apply these outdated tests to this new type of working relationship. Accordingly, courts across the nation have come to different conclusions on the same issue. This has created an environment of legal uncertainty. Although the decision in the GrubHub case may appear to provide a roadmap for how to structure the working relationship to ensure a worker is an independent contractor, a look at cases from around the country suggests that ambiguity is likely to persist on this issue.

The ride-share industry has been the subject of numerous misclassification claims as well, with conflicting results. In Uber Technologies, Inc. v. Barbara Berwick, an Uber driver claimed that the company owed her unpaid wages—as well as reimbursement of expenses and waiting-time penalties—pursuant to the California Labor Code. Uber claimed that the plaintiff was an independent contractor, but the Labor Commissioner's Office disagreed. The Commissioner found that the company operated like an employer by providing the driver with a phone to access the Uber app. Moreover, Uber vets prospective drivers, requiring that they provide banking and other personal information, including a Social Security number. Key to the decision was the finding that the plaintiff's work was integral to Uber's business. Uber has appealed that decision.

On the other hand, in McGillis v. Dep't of Econ. Opportunity, the Third District Court of Appeals in Florida, applying a test focused on the degree of control, determined that Uber drivers "decide[d] whether, when, where, with whom and how to provide rides." That level of free agency indicated that Uber drivers were independent contractors and not employees.

Misclassification claims are not limited to drivers. Workers as diverse as exotic dancers and tennis umpires have brought misclassification claims, with similarly inconsistent results. For example, in Meyer v. United States Tennis Ass'n, aff'd Meyer v. United States Tennis Ass'n, New York federal courts agreed that four U.S. Open tennis umpires were independent contractors because the umpires worked at their convenience, identified their availability, were free to engage in other employment, received no fringe benefits from the USTA, nor were they on the USTA's payroll, and claimed independent contractor status on their income tax returns.

Cases involving exotic dancers have reached conflicting results purportedly applying the same legal standards. In Hilborn v. Prime Time Club, Inc., a proposed class of exotic dancers were deemed to be independent contractors because they controlled the manner of their performances, experienced certain risks of profit or loss beyond that of normal employees, possessed special skills with respect to their performances, and their relationship with the employer was not one of permanence. In McFeeley v. Jackson St. Entm't, however, the U.S. Court of Appeals for the Fourth Circuit ruled that exotic dancers were employees because the employer controlled how the dancers performed their work, imposed written guidelines, and set fees for charging patrons for private dances. Thus, even in applying the same common law control test, courts have delivered mixed results on the classification of exotic dancers.

In an attempt to work around the legal uncertainty that drivers face, some localities have tried to pass protections for ride-share drivers. For example, in December 2015, the Seattle City Council enacted an ordinance giving drivers classified as independent contractors the right to form a union and therefore collectively bargain. The U.S. Chamber of Commerce sued to block the ordinance, alleging it violated antitrust laws. In April 2017, a federal district court in Washington granted a preliminary injunction to block the ordinance from taking effect. Chamber of Commerce of the United States of Am. V. City of Seattle et al. The Ninth Circuit heard oral arguments in the case on February 5, 2018, and a decision on the legality of the ordinance is forthcoming.

In the absence of legislative or regulatory changes that bring the law into line with the modern reality of the gig economy, the legal risks for companies in the gig economy are likely to continue, as are the attempts to provide a safety net for gig economy workers that some worry are lacking.

Ballard Spahr's Labor and Employment Group has a wealth of experience in conducting audits and determining whether a worker is an independent contractor or an employee under a wide variety of state and federal laws and drafting agreements with independent contractors which minimize future litigation risks.

Copyright © 2018 by Ballard Spahr LLP.
(No claim to original U.S. government material.)

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This alert is a periodic publication of Ballard Spahr LLP and is intended to notify recipients of new developments in the law. It should not be construed as legal advice or legal opinion on any specific facts or circumstances. The contents are intended for general informational purposes only, and you are urged to consult your own attorney concerning your situation and specific legal questions you have.

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