On-demand work force: Time for a new worker classification?

By Kellen Myers
and Patricia Nemeth
The Daily Record Newswire
Contingent workers, more recently called on-demand workers or even micro-entrepreneurs, are a growing force in the labor market. These workers are relied upon almost entirely by app-based companies operating in the sharing economy, like industry giant Uber.

However, these companies classify on-demand workers almost exclusively as independent contractors and not employees. This has resulted in a host of lawsuits against Uber and other sharing economy companies (such as Handy and Lyft) where on-demand workers argue that they are employees entitled to greater benefits under the law.

These disputes have forced the legal system to examine the relationship between on-demand workers and sharing economy employers under traditional legal tests of employment, with some commentators arguing that the current approach is unable to cope with the impact of changing technology on the modern workplace.

To solve this problem, it may be time to consider a third classification — that of “dependent contractor” — to cover workers who operate in that gray area in-between.

A new level of flexibility

What is clear is that the current legal approach is being stretched to cope with the changing dynamics of the traditional concept of an employer-employee relationship.

More than ever before, contingent workers — a group generally comprised of freelancers, independent professionals, independent contractors, and temporary workers — account for a greater percentage of the American work force. The Government Accountability Office estimates that contingent workers comprised 35 percent of all employed workers in 2006 and nearly 41 percent in 2010.

As the contingent workforce has increased, so too has worker misclassification. In March of this year the Administrative Office of the U.S. Courts reported that 8,160 Fair Labor Standards Act cases were filed in 2014. This was an increase of almost 9 percent from 2013 and is the new all-time high for FLSA cases filed in one year.

Because the state and federal government do not collect payroll taxes for independent contractors, misclassification of workers as independent contractors versus employees has also led to lower tax revenues for state and federal governments. The IRS estimates that the federal government does not receive approximately $1 billion per year due to worker misclassification.

The growth of contingent workers and nontraditional employment may be driven in part by a millennial work force seeking flexibility and greater work-life balance. On-demand work platforms, in particular, look to take advantage of those traits.

For example, on-demand work platforms (basically, an app on a smartphone) provided by sharing-economy companies like Uber and Handy allow workers to simply log in (or out) at any time and perform tasks for consumers such as driving passengers to a location, performing handy-man services, cleaning homes or completing odd-jobs like assembling IKEA furniture. The consumer pays for the service via the app, the company takes a cut of the fee and the rest is passed on to the worker.

Because of how the system is structured, an on-demand worker has no obligation to show up at a particular time, work out of a specific location, or even work for a specific company. An on-demand worker can simply log off the application and take the afternoon, day, weekend or even just a few hours off from work almost any time he or she chooses. This provides a level of flexibility for workers not previously possible.

Clearing the gray area

Understandably, the on-demand work relationship is inherently difficult to classify under the current bifurcated independent contractor/employee approach. The two primary tests courts currently used to determine whether a worker is an independent contractor or employee are the common law control test and the economic realities test.

The common law control test, whose foundations lay in agency law, analyzes how much control an employer has over the manner and means of work performed by an individual. The economic realities test analyzes whether a worker is in business for him or herself or is economically dependent upon the employer.

On-demand workers fall into the gray area between these two tests. An on-demand worker has the freedom to choose when and what apps to log onto to perform work but, when logged in, he or she may be subject to significant control by the employer over things such as the pay rate or how to interact with consumers.

A new dependent contractor classification may capture many of the workers that fall into this gray area. Countries such as Germany and Canada have used such a classification for some time, so it is not an entirely novel idea.

The primary characteristic of a dependent contractor worker classification is economic dependence on a single employer. If the worker’s primary source of income is from one employer but the worker also has many of the traits of an independent contractor, he or she would be classified as a dependent contractor and would have additional legal protections.

Such legal protections could be some, or many, of the same benefits that employees receive. In this way, the on-demand “in-between” class of workers who are more susceptible to economic volatility would receive protection. In turn, employers would have greater certainty as to their legal obligations.

Such clarity (as compared to the ambiguity which currently exists) would likely lead to a decrease in costly litigation for employers. Additionally, the creation of such a classification would provide some structure for sharing-economy companies to survive and for the United States to compete in a global economy where other countries are benefiting from recognizing a third worker classification.

Extent of legal rights

Yet, creating a new classification of workers is not a guaranteed solution. There is still the overarching issue of exactly what legal protections a dependent contractor would receive.

In Germany, dependent contractors have the right to receive annual leave, have access to the country’s labor courts, are covered by anti-discrimination laws and are able to collectively bargain.

In Canada, dependent contractors do not have nearly as many legal rights. Generally, Canadian dependent contractors only have the right to reasonable notice of termination or severance pay, and, in some instances, the right to collectively bargain.

If the dependent contractor classification were adopted, lawmakers would have to determine the type and breadth of legal rights such a classification of worker would receive. These are not easy problems to solve but would place the issue in the hands of the legislature rather than the judiciary. Many would argue this is where it belongs.

However, given the current political climate, it is unlikely that an entirely new classification of workers will be adopted anytime soon.


Patricia Nemeth is founder and president of Detroit-based labor and employment law firm Nemeth Law PC. Kellen Myers is an attorney with the firm.