Assessing Potential Independent Contractor Engagements During a Time of Shifting Rules

Foley & Lardner LLP

Foley & Lardner LLPIf it feels like you keep hearing about “independent contractors” as a risk area garnering constant attention, you have a well-calibrated radar. For more than a decade, alleged misclassification of workers as independent contractors has generated significant litigation, as well as federal and state-level regulatory and legislative activity.

Over the last couple of years in particular, the gig economy has forced courts, regulators and legislatures to wade into the uncertain legal waters surrounding “gig” work created by innovative new ways of delivering services to consumers through new technology platforms.

 These tensions will come to a political head this week in California’s general election, when voters will have a say in how the state classifies its gig economy workers.  Similar circumstances could arise in the near future in other states and even at the federal level.  With no existing uniform standards, finding common ways to assess risk across multiple jurisdictions with differing political philosophies is imperative for large companies.  Thankfully, a few practical approaches are available, even in these shifting seas that we expect to remain on the horizon for some time.

At the federal level, you have the Department of Labor proposing to ease restrictions on independent contractor use after tightening them during the Obama administration.  However, former Vice President Biden has indicated support for tighter restrictions on independent contractor use similar to those in California (see below). If voters elect Biden and flip control of the Senate to the Democrats, it would not be surprising to see federal independent contractor legislation that attempts to address the intersection of freelancers and the critically important gig economy.

In contrast, the laboratory that is California labor and employment law paints a picture of the need for contractor standards that properly eliminate abuse of the practice while still allowing for legitimate freelance arrangements and promoting gig economy opportunities and innovation.  After the California Supreme Court’s Dynamex Operations West, Inc. decision in April 2018 and the state legislature’s effective codification of Dynamex in California AB5, business groups have tried – mostly unsuccessfully – to have the law overturned in the courts.  California voters will weigh in on Proposition 22 this week, which if passed, will exempt drivers for app-based platforms (Uber, Lyft, DoorDash, Instacart, etc.) from the Golden State’s statute.  The results of that voter initiative will almost certainly have huge ramifications on broad gig economy issues, either by creating momentum to lessen restrictions or perhaps by seriously dampening whatever political momentum against them might exist.

In these polarized times, where entire platforms of doing business are dramatically impacted by the viability of an independent contractor model and where the ability to manage risk can spell success or doom, is there a practical path for a business to walk?  While those opportunities might be limited for companies whose fundamental business depends on gig workers, for more traditional companies that already have employees, several practical measures are possible:

  • Thinking about independent contractors as a way to reduce labor costs will almost always put you at risk. Regardless of the stringency of the applicable legal test, if the reason for considering an independent contractor engagement is the cost of labor, the work performed by the labor will almost always look like employment work, not contractor work.
  • If you currently have employees performing the same type of work, do not engage a contractor for the same general purpose. If the type of work is something employees do – or would reasonably do in the normal course of business – there is virtually no valid scenario in which an employer can engage someone as a contractor for the same thing.
  • If “everyone else does it,” there is a possibility that everyone else does it unlawfully. Merely because an industry has thus far avoided legal peril does not mean the industry has a lawful labor model (this is particularly common with technology-based startups).If an industry’s work is largely accomplished through contractors, those contractors may very well be performing the common work of the industry – which is what employees normally do.
  • Think about engaging an independent contractor for your business like hiring a contractor for your house. Valid independent contractor engagements almost always involve discrete, limited-length projects comfortably outside the mainstream of the work the business performs. When we hire a plumber to repair a leaky pipe, we (well, most of us anyway) do so because we lack the expertise to properly complete that task ourselves and it is unrelated to the day-to-day activities we perform in our home with our families. A legal independent contractor relationship should have the same overall feel to it.

Regardless of the outcome of the national elections this week and whether a federal version of California’s AB5 is in the offing, many employers will continue having to navigate their business through multiple jurisdictions.  Finding common ways to manage risk and do business is always a winning strategy and, with independent contractor engagements likely to remain under scrutiny for years to come, applying these practical tips can offer mileage across the country.

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Foley & Lardner LLP

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