The Hidden Dangers of 'Uberizing' Your Workforce

Salvador P. Simao and Joanna S. Rich, Corporate Counsel

Technology is changing how, when and where we work. With these changes come shifting attitudes in how workers view their relationship with employers. The "on-demand" economy purports to bridge this gap, giving workers flexibility to choose when to work and connecting employers with available skilled labor when they need it most. The "on-demand" model would appear to provide both workers and employers what they want. But what hidden dangers lie in "Uberizing" your workforce?

Recent legal challenges highlight potential conflicts between the technology-enabled on-demand economy and existing legal frameworks. Getting it wrong, or "misclassifying" your workers, can result in significant costs to your business, including government audits, class action lawsuits, backwage and overtime awards, fines, penalties, liquidated damages and interest, as well as a possible public relations nightmare. If workers are found to be employees, they may also be entitled to employee benefits, unemployment and social security contributions.

This article is designed to help you recognize and avoid misclassification by carefully examining the differences between employees and independent contractors in the United States as well as European and South American countries. The focus of this article is not on the presence of Uber as a company in any of these regions. Rather, we intend to outline the complexity of the employment model of the sharing economy in each jurisdiction.

Independent Contractor or Employee?

In the U.S., overlapping and sometimes conflicting federal and state laws govern the employment relationship and the determination of whether a particular worker is an employee or an independent contractor.

At the federal level, the Fair Labor Standards Act or FLSA governs maximum hour and minimum wage requirements for most workers. Part of a legislative plan to get more Americans back into the workforce after the Great Depression of the 1930s, the FLSA relies on the following broad definitions to determine which workers fall within its scope:

• To "employ" is to "to suffer or permit to work."

• An "employee" is "any individual employed by an employer."

• An "employer" is "any person acting directly or indirectly in the interest of an employer in relation to an employee."

Not surprisingly, these general and circular definitions became the subject of many court decisions. Much of the early FLSA case law attempted to refine these definitions and provide much needed guidance to employers.

In a series of decisions, the U.S. Supreme Court developed the test used today to determine whether a worker is an employee, the "economic reality" test. That test counsels that a worker's employment status is determined by considering the totality of the circumstances surrounding the parties' relationship and the worker's circumstances. Under the economic reality test, "employees are those who as a matter of economic reality are dependent upon the business to which they render service."

Note that different states may use different tests to determine whether a worker is an employee, sometimes even utilizing different tests in different contexts, such as wage and hour, unemployment and disability and anti-discrimination laws. Most of these tests focus on the employer's level of control over the worker. Generally, the more control the employer exercises—or even reserves the right to exercise—over the worker's means and methods of work, the more likely it is that the worker will be considered an employee.

Independent contractors are workers engaged in an independent trade, business, or profession in which they offer their services to the general public. The hallmark of an independent contractor is that he or she is not economically dependent on one employer. Independent contractors are generally able to control how, when and where the work is performed and even who performs it. 

Because they are not "employees" under the FLSA, independent contractors are not subject to the act's minimum wage and overtime requirements. 

Generally, independent contractors are also exempt from many federal and state anti-discrimination laws.

To determine whether a worker is a bona fide independent contractor, courts use the following factors to analyze the economic reality of the parties' relationship:

• Who Has the Right to Control the Work? If the employer can tell the worker how, when and where to perform the work, the worker is likely an employee. The employer's level of supervision or requirement that the worker report to a supervisor is also considered.

• Is the Work an Integral Part of Business Operations? If the worker's services form an integral part of the employer's business, the worker is likely an employee.

• Did the Worker Make an Investment in his Business? If the worker has invested in his own equipment, supplies, facilities or training, he is more likely an independent contractor. Generally, courts will compare the worker's investment with the employer's investment.

• Is There an Opportunity for Profit or Loss? Is the worker's opportunity for profit or loss determined by the employer, or the worker's own managerial skill? For example, if the worker can make a profit by being more efficient or hiring helpers, he is likely an independent contractor. On the other hand, if the worker can increase earnings only by working more, he is likely an employee.

• Does the Work Require Specialized Skill? This factor is often dependent on the industry and the employer's business. Highly skilled workers can be employees, depending on the nature of the work or the industry.

• How Long Has the Relationship Continued? If the worker and the employer have a long-standing relationship of indefinite duration, the worker is likely an employee. In contrast, if the parties' relationship is for a short period of time, or tied to completion of a project rather than a set time period, the worker is more likely an independent contractor.

In July 2015, the U.S. Department of Labor issued Administrator's Interpretation 2015-1, which argued that the economic realities test should be applied in the context of the FLSA's broad scope of employment and the Act's "suffer or permit to work" standard. The Interpretation concluded that "most workers are employees" and cautioned against mechanical application of the economic realities factors and over-emphasizing the right to control factor.

Recent Legislation and Lawsuits

Recently, workers in the "on-demand" service economy have filed class-action lawsuits against start-ups including Uber, Lyft, Handy, Homejoy, Washio and others. These start-ups describe themselves as technology companies connecting skilled independent contractors with people who need their services. In the lawsuits, workers argue that the companies control their work to such an extent that they are truly employees entitled to minimum wage, overtime premium pay, reimbursement for expenses and other employee benefits. Some businesses, like Shyp and Instacart, responded to the lawsuits with announcements that they will re-classify workers as employees. Homejoy, however, cited one such lawsuit as the "deciding factor" to shutter the new business. Still others, most notably Uber, continue to battle the allegations in court.

Uber, the start-up that became the face of the on-demand economy, is facing a spate of lawsuits challenging its business practices, including its classification of drivers as independent contractors. In a federal lawsuit filed in Northern California, Uber drivers alleged that the company exercises such control over them that they should be considered employees entitled to minimum wage, overtime, reimbursement for expenses and other benefits. As independent contractors, the drivers pay for their own expenses, including gas, tolls, insurance and vehicle maintenance.

The dispute was scheduled to go before a jury in June. In late April, Uber and the drivers reached a tentative settlement whereby Uber would pay up to $100 million to drivers in California and Massachusetts, allow drivers to post signs in their vehicles soliciting tips from riders and change its practice of deactivating drivers from the Uber app without warning or recourse. The settlement must be approved by the federal judge hearing the case before it is final.

While the settlement would resolve the claims of the drivers in the class, it does not finally resolve the drivers' status as employees or independent contractors or set a legal precedent. Uber would still be open to misclassification challenges by state and federal government agencies, and its promise to permit further recourse by deactivated drivers may provide additional support to the argument that drivers are in fact employees.

Independent Contractor Issues In Other Jurisdictions

While the U.S. Department of Labor and analogous state agencies often take a hardline approach to independent contractor misclassification, the United States is arguably more accepting of alternatives to the traditional employee/employer model than other countries. However, globalization of the economy and shifting cultural attitudes toward the traditional employment relationship are putting pressure on the traditional model.

In Argentina, the default relationship is that of employee and employer, and bona fide independent contractors are limited to professionals and very specific cases. Generally, all employment activities must be covered by a collective bargaining agreement and employees represented by a union. 

However, unions have not been fully successful in attracting younger workers, particularly in the information technology sector. Employers are responding to workers' shifting attitudes by increasingly implementing flexibility in working time and prioritizing results over time spent at work.

In Brazil, the employer/employee relationship is the default agreement, and workers and companies cannot choose a different legal regimen if the worker will act as an employee in fact. As in the U.S., courts will evaluate the facts and circumstances of the parties' relationship, and how the parties label their relationship is entitled to little weight. To be a bona fide independent contractor in Brazil, the relationship must satisfy several criteria: First, the worker must not be subject to any administrative supervision and any necessary interference must be minimal. Second, the company must evaluate and pay the worker according to deliverables, not based on time worked. It is also essential that employees and independent contractors do not perform the same types of jobs or tasks.

Mexico's employers have embraced technology as a way to adapt to workers' shifting prioritization of productivity and personal happiness, including virtual meetings and reduced working hours. With this new technology has come variations on the traditional employment model. However, courts will examine the nature of the parties' relationship rather than new labels. An employment relationship is one which is (i) personal, meaning that the worker, and no one else, will provide the work; (ii) subordinating, meaning that the worker is under the employer's control; and (iii) work is provided in exchange for wages.

In France, the concept of subordination defines the employment relationship, meaning that the employer gives orders to employees, controls the execution of the orders, and may discipline employees if necessary. In contrast, an independent contractor is free to determine how the task assigned is to be carried out and bears the economic risks associated with the business. 

Mistakenly classifying a worker as an independent contractor can be costly for employers. If the worker is found to be an employee, the employer may be liable for damages, additional wages, and in certain circumstances, criminal penalties.

In Germany, the most important distinction between employees and independent contractors is the degree of independence the worker exercises over his work. Factors relevant to determining the degree of independence include the extent to which the worker must comply with the employer's instructions regarding working hours, the place of work, and the work itself. 

Additionally, employees, unlike independent contractors, are integrated into the business of their employer.

In the United Kingdom, an increasing number of workers take part in the on-demand economy, with nearly sixteen percent of the workforce identifying as being self-employed. Individuals fall within three categories: "self-employed," "employees" and "workers." Employees enjoy full employment protections, while workers have less extensive protection but are entitled to national minimum wage, paid holidays and discrimination protection. Employees provide their own personal services and are subject to the employer's control. Workers are either employees or work under a contract to personally perform work or service to another party who is not a client or customer of the individual's business of profession. This means that many individuals who might otherwise be regarded as self-employed are in fact workers and therefore entitled to some statutory protections.

Conclusion

Employers should be cautious in classifying workers as independent contractors, despite the lure of new technology. Unless and until the legal framework changes to reflect the new variety of working arrangements made possible by technology, it will be difficult to fit these workers into the traditional dichotomy of employee or independent contractor. As aptly stated by the federal judge hearing a misclassification suit against Uber-rival Lyft, any jury tasked with determining worker classification in this new on-demand economy "will be handed a square peg and asked to choose between two round holes." Evidently, the complex issues which have arisen in the U.S. have also bubbled up in other countries around the world where companies such as Uber and Airbnb have launched their businesses. The concerns which surround the "Uberfication" of the modern work force are still very much on-going, and many of the questions that have been asked regarding employee status in a "sharing" economy in each jurisdiction remain unanswered.

Salvador P. Simao is a partner and Joanna S. Rich is a senior associate at U.S. law firm FordHarrison. Simao focuses his practice on the representation of companies in employment law matters with a specialization in wage and hour litigation and compliance. He also frequently defends employers against allegations of age, race, national origin, disability, and sex discrimination; sexual and racial harassment; and retaliation. Rich concentrates her practice on the representation of employers in labor and employment matters. She has experience handling a wide range of issues, including internal investigations of sexual harassment and assault, pregnancy discrimination, whistleblower claims, and misappropriation of trade secrets. She also counsels employers on employee handbooks, FMLA eligibility, wage and hour compliance and disciplinary issues.

Additional global insight was provided by Hannah Price, partner at U.K. law firm Lewis Silkin; Fadi Sfeir, collaborator at French law firm Capstan; Alexander Ulrich, partner at German law firm Kliemt & Vollstädt; Eduardo Juan Viñales, partner at Argentinian law firm Funes de Rioja & Asociados and Jose Carlos Wahle, partner at Brazilian law firm Veirano Advogados.

All firms are members of the global HR and employment law firm alliance Ius Laboris.

Original