Independent Contractor vs. Employee: Why Misclassification Matters and What We Can Do To Stop It  

Introduction

Whether companies treat their workers as employees or independent contractors has profound implications for workers’ pay and benefits, for employers, and for public revenues. High-profile worker lawsuits against Uber and other on-demand giants seeking fair pay or workers’ compensation have recently thrust the business practice of misclassification into the national spotlight again.^[i] But for decades, many companies in transportation, janitorial, logistics, home care and domestic work, construction, tech, and other sectors have imposed take-it-or-leave-it non-employee contracts on their workers, putting them outside of the workplace protections and tax requirements that apply only to employees and employers. Under the law, however, these arrangements are permissible only when the worker is running a separate business.

In most instances, an individual performing labor or services for another should be covered as an employee under our employment laws, unless the person operates an independent business, with specialized skill, capital investment, and the ability to engage in arms-length negotiations over the terms of a job. In key industries in our economy, however, independent contractor misclassification is prevalent and has become standard operating practice for companies looking to save on payroll costs, outbid competitors, or avoid workplace regulations.

Here are some high-profile examples:

• FedEx requires its ground-delivery drivers to sign independent contractor agreements, which have been found to be shams in several large cases around the country;^[ii]
• Uber drivers are claiming employee status in many suits and agency claims;^[iii]
• Amazon’s “last mile” delivery drivers were treated as independent contractors but claim they should be employees;^[iv]
• Honor, a Hollywood-backed home care agency, recently switched its workers’ status from independent contractor to employee;^[v]
• A 2013 study by the Workers Defense Project and the University of Texas found that more than 40 percent of construction workers in Texas are either classified as independent contractors or paid under the table.^[vi]

Unchecked, independent contractor misclassification can cause long-term damage to the economy and workers, but there are solutions. State reforms already have helped curb abuses, recouping millions of dollars, while the federal government has taken a strong stand against the practice, evident in its multi-agency task force and the U.S. Department of Labor’s July 2015 guidance clarifying that most workers are covered employees.^[vii]

[i] See, Rebecca Smith and Sarah Leberstein, “Rights on Demand: Ensuring Workplace Standards in the On-Demand Economy,” (National Employment Law Project, Sept. 2015), https://www.nelp.org/wp-content/uploads/Rights-On-Demand-Report.pdf.

[ii] See, e.g., FedEx Settles Independent Contractor Mislabeling Case for $228 Million, (Forbes, June 2015), chronicling other settlements, http://www.forbes.com/sites/robertwood/2015/06/16/fedex-settles-driver-mislabeling-case-for-228-million/#2684ad395f5a.

[iii] A high-profile Uber class action covering MA and CA workers recently settled for money damages, but did not resolve the independent contractor question.  See Uber lawsuit website, http://uberlawsuit.com/. Other Uber driver claims that they are employees under a variety of state claims, including unemployment insurance, workers compensation, and wage and hour.

[iv] Amazon cuts back on price, delivery times by cheating workers, lawsuit says, (Los Angeles Times, April 2016), http://www.latimes.com/business/la-fi-amazon-contractors-20151030-story.html.

[v] Tim Mullaney, “Honor to Directly Employ Home Care Workers,” (Home Healthcare News, Jan. 29, 2016), http://homehealthcarenews.com/2016/01/honor-to-directly-employ-home-care-workers/.

[vi] “Building Austin, Building Injustice:  Working Conditions in Austin’s Construction Industry,” Workers Defense Project in collaboration with the Division of Diversity and Community Engagement at the University of Texas at Austin (June 2009), available at http://www.buildaustin.org/Building%20_Austn_Report.pdf.

[vii] U.S. Department of Labor, Wage and Hour Division, The Application of the Fair Labor Standards Act’s “Suffer or Permit” Standard in the Identification of Employees Who Are Misclassified as Independent Contractors, Administrator’s Interpretation No. 2015-1, (Jul. 15, 2015), http://www.dol.gov/whd/workers/ Misclassification/AI-2015_1.htm.