Dependent contractors and developing lessons from the tech sector
The traditional employment law model essentially divided workers into employees and independent contractors. Employees had rights whereas independent contractors were self-employed and had the freedom that goes with being self- employed, but no employment protection.
The legal test as to whether a person is an employee or an independent contractor is very similar across Europe and in the US, Canada and even China. It includes whether an individual has to work fixed hours, whether they provide their own equipment or tools, whether they have to provide personal service and perhaps above all, whether they are controlled in the way that they carry out their work. For more information, see the geographic survey at the end of this report. In the US, even where there is “at will” employment, being an employee does still mean that a person is subject to Wage and Hour laws. These carry rights to payments, as well as having social security implications. In Europe it usually means dismissal protections and rights to a minimum of five weeks paid vacation per year. Tax needs to be deducted at source for employees but independent contractors are paid gross.
Now the world is not so simple. There is a new type of person doing work facilitated by technology.
Uber is the most well-known example of a “neutral technological platform” which allows consumers to find each other and do business. Workers in this model are “consuming” the service of the platform. Each side may rate the other. In that case it is a taxi service, and there are many other examples, TaskRabbit, Homejoy, Lyft, Shypt, Washio and Caviar. Together with others, they represent a huge range of services that consumers look for in their day-to-day lives including the quick delivery of good quality meals, laundry services, domestic cleaning services and odd job help. These websites and apps make it easy for consumers to find services that they want NOW. If you want a good meal delivered to your home or you want a driver to pick you up, you just need to press a button on your phone.
For many of these models to work financially, those behind the “neutral technological platform” need to be confident that those they are facilitating to gain work are not able to successfully claim employee status, with all of the social security, taxation and contingent regulatory cost that that entails in every jurisdiction. The big issue is the risk that these people may not in fact be deemed to be independent contractors.
Uber has been challenged in a number of states across the US regarding its drivers. Although many states including Georgia, Pennsylvania, Colorado, Indiana, Texas, New York and Illinois have held that Uber drivers are independent contractors, the California Labor Commissioners’ Office has shaken up the whole sharing digital economy by suggesting that Uber drivers are employees. An estimate of the cost of this reclassification is that in California alone it could cost nearly USD209million (the bulk in insurance, the rest in payroll taxes). And then there are potential class actions for some 45,000 drivers in California alone. There are approximately 20,000 in London, etc. And Uber now faces UK actions on worker status. Of course, employment status is not the only way to limit the disruption the model can cause. See “Entrepreneurs of the self” in this report for how city transport regulations or collective pressure can reduce the disruptive effect of these business models.
The California decision is being appealed but it has sent shockwaves across the sector. Its implications are already being felt. It means venture capital funds are looking carefully at business models before investing into companies in this sector.
To quote another case involving Uber in California
“The application of the traditional test of employment – a test which evolved under an economic model very different from the new “sharing economy” – to Uber’s business model creates significant challenges. Arguably, many of the factors in that test appear outmoded in this context. Other factors, which might arguably be reflective of the current economic realities (such as the proportion of revenues generated and shared by the respective parties, their relative bargaining power, and the range of alternatives available to each), are not expressly encompassed. It is conceivable that the legislature would enact rules particular to the new so-called “sharing economy”. Until then, this Court is tasked with applying the traditional test of employment and its progeny to the facts at hand. For the reasons stated above, apart from the preliminary finding that Uber drivers are presumptive employees, the test does not yield an unambiguous result.”
O’Connor et al v Uber Technologies, Inc. et al
These kinds of debate are above the pay grade of many judges, and investors may be wary of these levels of ambiguity in other business models.
Some businesses have already lost their funding and gone out of business. Others are at risk.
So what can businesses do to increase the chances of those providing services to be deemed to be independent contractors?
The key is giving the person providing the service power to decide as many of the potentially “transferable decisions” to how they work as possible.
Key issues to allow the service provider to decide:
price – if the services are charged at a fixed or determined fee by the technology platform they run a greater risk of being deemed to be employees;
are the service providers able to compete with each other for business? – if a consumer can choose between different providers that really helps the argument that they are independent contractors;
are they choosing their own hours? – no fixed hours is typical in this sort of business and important;
are they using any branded equipment to perform their service? – the less the better …
how prescribed is the service that is being offered? – the more it has to be carried out in a particular way or within a particular time frame, the greater the risk.
In almost every country there is no absolute way to be sure of status. This is extremely frustrating for businesses and investors alike. It is always a balancing act. However the greater the freedom and the less the golden rules above are broken, the more likely a service provider will be considered an independent contractor.
So what can the platform provider do?
Facilitate the marketplace and let others then provide the service as much as possible the way they wish to do it;
allow feedback. A rating system for service providers from those the provider knows have used the service can be invaluable, but it needs careful construction and use – see the 2015 guidance in the inset box below from the recently appointed US Labor Administrator, David Weil (the same one who wrote “The Fissured Workplace” referred to in our Introduction); and
set basic minimum rules of conduct to ensure that consumers know what service the providers using the platform will give. Example, a clean car, a criminal records check where appropriate, a smart dress code where relevant.
Technological advances and enhanced monitoring mechanisms may encourage companies to engage workers not as employees yet maintain stringent control over aspects of the workers’ jobs, from their schedules, to the way that they dress, to the tasks that they carry out. Some employers assert that the control that they exercise over workers is due to the nature of their business, regulatory requirements, or the desire to ensure that their customers are satisfied. However, control exercised over a worker, even for any or all of those reasons, still indicates that the worker is an employee.
US Department of Labor Wage and Hour Division Administrator’s Interpretation No. 2015-1
Is the law behind the real world?
The division between employee and independent contractor does not seem to work in the new sharing digital economy. Should there be a new category? Those concerned with workers’ rights fear that this type of work is leading to exploitation. They say it is taken up by reluctant individuals who really want a genuine, secure job with all of the rights that go with it. Others say that this sort of work provides the freedom for individuals to work when they want and as they want and gives the flexibility needed in modern life.
No doubt in the real world there are people for whom either of these are true. It may be that we need a new legal category.
In the US there has been talk of creating a new category of “dependent contractor”. US Presidential candidate, Hillary Clinton has said that this is an area that needs to be looked at. This person would have some but not all of the rights given to employees. In Europe we already have the category of “worker”. Germany and Sweden have something similar to the concept of “dependent contractor” already. Perhaps this is a fairer description.
In China, due to a strong focus on bureaucracy and administrative licensing, combined with historically strong communist employee protection, a new category of worker is not immediately on the legislative horizon. But in practice, services like Uber are gaining market shares rapidly.
But in Europe it comes with a cost if they have “worker” status. Workers in Europe have the right to paid vacation. They also need to have taxes deducted at source. Although they do not generally have unfair dismissal rights in most countries, many of the costs associated with employees do apply and therefore the investment model may not work.
Rather than “dependent contractor” should we not be looking at calling some of these individuals “facilitated contractors”? They are genuinely free to choose what work to offer and to accept. The neutral technological platform is facilitating their ability to sell their service or their labour. The law needs to be able to find a way of differentiating between those who are really casual workers who need more work, and those who genuinely choose and value the freedom that technology platforms give them.