The Proliferation of Independent Contractors and Misclassification of Workers
Employers are always looking for ways to economize on the use of money, especially during economic downturns. Conventional methods of keeping the budget low include misclassifying employees, so they are not eligible for higher pay and benefits that full-time salaried workers receive. Employee misclassification happens when employers label their staff as independent contractors even if they work nearly the same hours as regular employees.
The practice of misclassifying workers has become pervasive as it allows employers to shun from paying unemployment and other taxes on staff. More so, they are not required to pay worker’s compensation and unemployment insurance for every worker who is classified as an independent contractor. The Economic Policy Institute found that 10 – 20 % of employers habitually misclassify at least one worker as self-employed contractors. Direct employees usually get W-2 forms to file with tax returns while independent contractors get a 1099-MISC (miscellaneous income) form.
Apart from earnings and tax matters, self-employed workers are not eligible for anti-harassment laws, and neither do they have the right to unionize. Examples of independent contractors rendering services in the on-demand economy are house cleaners, drivers, technical workers, etc., and this misclassification extends to nearly every economic sector. As things stand, many workers are considered as self-employed, thereby missing out on benefits and labor protections to which direct employees are legally entitled.
This “underground economy” gives such companies a competitive edge over others when they bid for tenders as they can submit significantly lower budgets. National and State governments also miss out on tax revenue as more businesses take this route to keep expenses low. The so-called independent contractors lack legal protections such as unemployment benefits, wage and hour guidelines, and workers compensation. Self-employed workers are not protected under the Fair Labor Standards Act, so their hours and earnings are based on the employer’s discretion.
There are complexities involved in defining which workers fall under the employee category, and things often get blurry. Federal laws stipulate that whenever an employer has the right to control the work and work hours, then workers qualify as employees. Other requirements may extend to an employer having some control over the worker’s behavior and finances for them to be eligible as employees. An Unpaid Wage Lawyer can advise workers to demand their pay if these rules are not followed regardless of their immigration status.
The most significant incentive for categorizing employees as independent contractors is to save on labor expenses as this item takes a chunk of overhead costs. Having more independent workers could save a company about 30% in wages and salary costs, which means more funds to funnel to other areas. For businesses struggling to stay afloat during economic downturns, this misclassification may be the only way to survive and not necessarily aimed at tax evasion.
The Upside to Independent Work
As the gig economy is gathering steam, more workers are drawn to it and even abandoning full-time jobs in favor of different arrangements where they have more control over their lives. A study done by Edelman Intelligence derived that more generation Z workers are turning to the gig economy through freelancing sites like Upwork. Generation Z consists of people born between 1997 and 2000, and they are now the youngest workers entering the job market in droves. Data projects that a whopping 61 million of these workers will join America’s job market in the next few years, and the majority are not seeking traditional employment.
The choice to freelance is much higher in this group, which prides itself as digital natives as compared to previous generations: gen Z (73%), millennials (64%), and Boomers (66%). Gen Z is keen to participate in skills education and training to better their chances of getting hired in the gig economy. This trend means hiring managers to plan employees who are freelance-focused and yet possess the sets of marketable skills.
People over 55 are turning to ‘side hustles’ to supplement their incomes as they ready themselves for retirement, and as incomes stagnate, more people are finding themselves freelancing. This idea has taken hold so much that researchers estimate that by 2020, half of the labor force will be in the gig economy as attitudes toward what is considered work continue to evolve. Another driver toward this line of work is technological advances. Cloud computing, apps, and software for communication, etc. are increasingly tailored for freelance workers, something that was not forthcoming a few years back.
Nonetheless, the drive for independent contractors is also driven by companies seeking to make savings, which means workers who wish to find full-time jobs with employee benefits experience difficulty. 60% of big companies are now seeking independent contractors, and this trend will not dissipate any time soon as the cost of doing business skyrockets. Even finding ample office space is becoming a hurdle for businesses with many employees, but the technology is now facilitating communication and remote collaboration from virtually any location.
Companies are also turning to the gig economy to find people with the desired skills and experience that are presently lacking in the office. This talent is not always accessible, and such a person may not be open to moving for work. Companies that wish to remain competitive extend contractual job offers, so everyone wins in this arrangement.
Regulating the Gig Economy
In spite of these benefits of contract-based arrangements, the government is keen to stop employers from wantonly skirting labor laws to save money, and California is taking the lead. In March 2019, the State Assembly passed a new bill (AB5) that will make it harder for employers to misclassify workers as independent contractors.
Under this bill, thousands of workers who were previously classified as non-employees will now have an employee status and, therefore, eligible to employee protections and benefits. AB5 will codify the ABC test but and exempt certain professions like real estate licensees, insurance agents, and some healthcare professionals. An Unpaid Wage Lawyer can advise workers who are this predicament to speak to their employers to have their status changed.
Assemblywoman Lorena Gonzalez, who spearheaded AB5, surmised that businesses categorize workers as independent contractors to keep costs low and shun worker protection laws. These laws cover minimum wage requirements, overtime pay, and bargaining rights for workers so they can live comfortable lives. Gonzalez went on to say companies that are thriving should not pass their costs on to taxpayers as they deny workers labor law protections that are rightfully owed to them.
As labor advocates jubilate, companies are looking at the legal and cost implications of changing the status of independent contractors to employees, in a volatile economy. AB5 is expanding the reach of Dynamex, a ruling made by the California Supreme Court in 2018 after workers of Dynamex Operations West, Inc. complained about their employment status. This company required drivers to adorn the company uniform while making deliveries, and yet these workers used their vehicles for the job. The Supreme Court found that Dynamex had misclassified these drivers as they were, in fact, company employees.
Dynamex now requires employers to use a three-part test (ABC test) to establish if contractors meet the criteria for employees. Low-earning workers will get the legal protections and benefits they deserve, thus cracking down on unprotected labor, which has been the mainstay of the national economy.
ABC Test Requirements
Unpaid Wage Lawyers typically advise clients that their employers can only be exempt from this labor regulation depending on the following:

• Their workers have complete control over how they render services (their performance), and this is upheld contractually and in reality
• These services are not part of their core business, i.e., the independent hire is engaged with work outside the company’s course of business
• The worker is involved in an independently established occupation or business that is similar to what their employer does

Bill 5 has been a long way coming as independently-contracted workers had been up in arms over how employers are hauling in tons of money but not paying their workers well. Uber drivers went on strike in May, and in response to this action, the National Labor Relations Board categorically stated these workers are not employees. The memo noted that ruled that Uber drivers have complete control of their vehicles, hours, and log-in locations, thus making them independent contractors.
These actors, therefore, have the privilege of “entrepreneurial opportunity” that other kinds of drivers lack such as full-time drivers whose work is dictated and managed by their employers. Uber drivers are free to explore other work opportunities, including working for competitors like Zimride, Getaround, Lyft, BlaBlaCar, and so on. The memo also highlighted the company’s initiative to help drivers earn more during peak times through “surge pricing,” and these terms align with independent contract work arrangements.
Being home to Silicon Valley, California is heralded as the birthplace of the gig economy and employers around the country are looking to emulate how this state handles a labor landscape that is continually evolving. Companies like GrubHub, Amazon, and DoorDash that rely on independent contractors will now have to rethink staffing decisions by administering the ABC test and amending contracts accordingly. This groundbreaking ruling effectively means fewer workers are eligible to work as independent contractors and companies will start having more employees on their payroll.
There is no guarantee that AB5 will be passed into law, but once it does, companies that are caught contravening labor laws may be liable for back taxes, penalties and assessments, and jail time in extreme cases. Employers need to evaluate the employee versus self-employed statuses and make necessary amendments. Change means understanding minimum wage and overtime laws, getting employee details from them, open accounts like compensation and insurance, etc. To seal the deal, these employees must also be added to the payroll and treated as per their new status in every possible way.