Risks to Employers in the Growing Gig Economy

This post first appeared on Risk Management Magazine. Read the original article.

States, countries and multinational bodies are currently
debating whether “gig workers” like drivers for ridesharing or food delivery
services actually work for those platforms or are independent contractors. The
answer to this question determines whether companies must provide this expanding
pool of workers with benefits and other protections. Different jurisdictions
vary widely in their conclusions, creating considerable ambiguity around the
gig economy. This has resulted in a confusing and sometimes overlapping array
of laws and regulations, creating potential risks for both companies and

In February, the United Kingdom’s Supreme Court decided that
Uber drivers should be classified as “workers.” The U.K. has three employment
classifications: “workers,” “self-employed” and “employee.” Workers receive
more benefits and protections than the self-employed, but not as many as

After the court decision, Uber stated that U.K. drivers will
now be paid a minimum wage, receive paid holiday time and, if eligible, be
enrolled in a pension program to which the company will also contribute.
However, these benefits will only count against the time that drivers are
actually transporting customers, not the time that they are waiting for fares.

In September 2020, Spain’s Supreme Court ruled that food
delivery people are employees of the app companies they deliver for. According
to El Pais, the court found that the food delivery app Glovo was “not a
mere intermediary” between restaurants and delivery drivers, but rather “a
business that fixes the conditions for the provision of its services, and owns
the assets essential to carrying out its services.” In March, the Spanish
government (in agreement with trade unions and business groups) passed a law
classifying gig workers as employees and giving them corresponding rights,
including the right to unionize and access to the algorithms that decide their
work assignments, a transparency measure that may nominally help prevent
discrimination. The law must be approved by the country’s cabinet before going
into effect.

As countries individually decide how to handle the issue,
the European Union began the first of a two-part deliberation process in
February. The initial stage involves consulting workers and platforms to help
determine a potential solution. Expected to take place before the summer, the
second stage will focus more on the “content of the initiative,” according to
Margrethe Vestager, the EU’s top official overseeing the digital economy.

To date, the United States has not enacted any official
national regulation or law regarding gig worker classification. In 2019, the
Trump administration’s Department of Labor issued a non-binding opinion letter
stating that gig workers were independent contractors because they “set their
own hours, were free to find work on competing platforms, and were not an
integral part of the business because they merely used the software the company
creates.” While not legally binding, such opinion letters can be used as evidence
in lawsuits as a stand-in for a formal court decision or law.

During the 2020 presidential campaign, Joe Biden indicated
that he believes gig workers should be classified as employees, but has not
expressly pursued the issue since taking office. Potentially indicating future
movement on the issue, however, the Biden administration rescinded the
Department of Labor letter in February 2021. 

Absent national regulatory action, U.S. states are handling
the question in their own ways. Building on a 2018 state court ruling,
California passed AB 5 in May 2019. The legislation implemented a stricter
standard for gig work companies and uses a three-part “ABC” test to determine
whether a worker is an independent contractor:

A. The person is free from the control and
direction of the hiring entity in connection with the performance of the work,
both under the contract for the performance of the work and in fact.

B. The person performs work that is outside
the usual course of the hiring entity’s business.

C. The person is customarily engaged in an
independently established trade, occupation or business of the same nature as
that involved in the work performed.

Rideshare companies like Uber and Lyft essentially ignored
AB 5, however, and subsequent regulations intended to clarify ultimately
weakened its impact. In November 2020, California voters passed Proposition 22,
which created an exemption for app-based drivers, classifying them as
independent contractors.

Overruling Uber’s objections, a Massachusetts court recently
ruled to allow a lawsuit by the state’s attorney general challenging the
classification of gig workers as independent contractors to proceed.

In March, the U.S. House of Representatives attempted to
rectify the lack of federal guidance, passing the Protect the Right to Organize
Act (or PRO Act). Including the same ABC test used in California, the PRO Act
would reclassify many gig workers as employees and pave the way for them to
potentially unionize. It is unclear whether the bill will pass a divided
Senate, however.

Risk Management Concerns

“For gig economy employers trying to navigate the myriad
laws and changing regulations regarding employee classification, a good rule of
thumb would be to follow the most restrictive test in the given jurisdiction,”
said Lara Shortz, head of the labor and employment practice group at Michelman
& Robinson, LLP.  Further, she
recommended that employers “regularly conduct audits of the workforce to ensure
that workers are properly classified either as employees or independent
contractors.” Given the shifting regulatory landscape, this will help employers
avoid misclassifying workers, running afoul of government enforcement actions,
and facing penalties by the Internal Revenue Service for unpaid taxes. 

Other penalties could include class actions for unpaid
benefits, overtime, and meal and rest breaks. Specifically in California,
“misclassification claims can also result in lawsuits brought under the Private
Attorneys General Act, which also involves hefty penalties,” Shortz said.
“We’ve seen certain companies try to take very creative approaches to
classification, and this can tend to backfire in the face of litigation.” 

For example, in January 2020, the attorney general of
Washington, D.C., announced that contractor Power Design Inc. had agreed to pay
$2.5 million for misclassifying 500 workers as independent contractors rather
than employees.

Because misclassification claims are considered wage and
hour matters, insurance may not be an option to defray these risks. “Typically,
and at best, employers can attempt to negotiate separate riders with their
insurance carriers to cover defense costs in the event of a misclassification
lawsuit, but even if successful, covered defense costs are often limited,”
Shortz said.

The shifts in classification and corresponding regulations
may push gig workers to pursue unionization. In a 2020 survey of 1,115 gig
workers, freelancers and contractors from human resources software provider
Ceridian, while 79% of respondents were somewhat or extremely satisfied with
their gig or contract work situation, 56% still favored unionizing. The top
reasons cited included “to negotiate higher wages” (69%), “to negotiate better
benefits (e.g., health, dental, pension)” (59%), “to ensure greater equality
(e.g., more equitable compensation across companies)” (55%), “better workplace
health and safety” (39%) and “better job security” (34%). As these issues
develop, companies can consult with legal counsel to prepare for the
possibility of unionization.

Aside from classification and the resulting liabilities,
these companies also face potential liability for gig worker safety issues.
Traditional employees receive safety training, including instructions on how to
avoid and communicate safety concerns, while gig workers may not. This not only
puts workers in more danger, it also exposes companies to lawsuits from injured
workers or people injured by them, and may blind companies to operational
hazards that could cost money to address later. The gig economy often forces
workers to try to complete as many orders or rides or other services as quickly
as possible, which can lead to reckless driving and potential accidents. In
turn, this may create additional liability for companies. Lawmakers may tackle
these issues in future regulations clarifying worker classifications.

To address these problems in the meantime, Gallagher’s
workplace risk team recommended companies build risk management into their
operations by introducing risk assessment, pathways for workers to report
concerns and mechanisms for response. Some insurance lines may be available to
cover related risks, such as D&O liability and workers compensation.

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