For the so-called “gig economy” to be profitable, it relies on one fundamental idea. The workers who perform the gigs are not employees of the company but independent contractors.
In theory, being an independent contractor can allow someone to pick up small tasks to fill in times when they’re not busy at another job. The contractor can hire out to multiple gig companies, building out full-time hours from multiple sources. In reality, many gig workers work full-time hours for a single concern.
Unfortunately, there are some real downsides to being an independent contractor instead of an employee. For one thing, independent contractors aren’t protected by many of our major employment laws, including minimum wage and overtime rules. Their employers don’t pay half of their employment taxes. They don’t receive paid workers’ compensation, disability or unemployment benefits.
Those employment laws were put in place for a reason, and some argue that gig economy companies are gaming the system by skirting them. Some workers have filed lawsuits claiming that they are legally employees, although none of those lawsuits has really resolved the issue. California just passed a law making gig economy workers statutory employees, and other states are considering similar measures.
One state cracks down on what it considers employee misclassification
That’s why it made national news when the state of New Jersey determined that Uber’s drivers are legally employees. The state charges Uber and a subsidiary, Raiser, with failing to pay the unemployment and disability insurance required for employees between 2014 and 2018.
According to New Jersey, Uber and Raiser now owe $530 million in back taxes plus $119 million in interest. A spokesperson for Uber said that it plans to challenge “this preliminary but incorrect determination” that its drivers are legally employees.
According to the New York Times, New Jersey audited 1% of its employers last year and found that over 12,000 workers had been wrongly classified as independent contractors instead of employees. For those workers alone, the toll was high: They lost out on $462 million in wages and millions more in unpaid employment taxes.
If New Jersey successfully collects these unpaid employment taxes, other states are sure to follow.
Under the federal Fair Labor Standards Act, which many state laws emulate, worker classification is decided by a multi-part test. The main factors are geared toward determining whether the company or the worker has more control over the details of the work. Another factor is whether the work being performed is core to the company’s business.
Do you think Uber exerts enough control over its drivers that they should be considered employees? Or are the drivers each running an independent business?