Some start-ups today are basing their entire business model on the premise that a majority of all their workers come in as independent contractors or franchisees. Worker misclassification is proving to be a huge challenge these days, making it imperative for employers, old and new alike, to exercise a high level of caution and judgment before classifying their workers as independent contractors or permanent workers. Because any misclassification could prove very expensive as the erring employer faces law suits and non-compliance charges.
According to the Economic Policy Institute, the gig economy has encouraged employers such as Uber to argue that their workers are not employees, because:
But counter-arguments to this point out that the Uber drivers do have the requirement to follow a strict set of guidelines and have a duty to accept a minimum number of jobs in a week. Their time on the app is tracked and measured down to the minute by Uber. Uber can fire them if their acceptance rates fall below the stipulated levels. This makes them look a lot like employees with a W2 status!
This is why it pays to be sure at the outset, rather than face the regulators and correct the error later on which can amount to enormous amounts including paying all the workers’ compensation insurance, unemployment, minimum and back wages, overtime, penalties and fines that all add up and could possibly threaten your organization’s very survival. Below are some famous cases that attracted the costs of rectifying such misclassifications.
Homejoy: Once a darling of the investor community and the press, Homejoy offered on-demand home-cleaning services using software to automate the process. Mounting losses and poor customer retention destabilized Homejoy in spite of a $40 million investment. The last straw on the camel’s back came in the form of misclassification litigation, and Homejoy quietly shut its doors down.
Lyft: Even as Uber is fighting its employee misclassification charges in San Francisco, the ride-hailing company Lyft ended up quietly settling a worker misclassification class action suit for $12.25 million and changing its terms of service to meet California’s independent contractor classification requirements. The new regulations cover the 300,000 drivers working with Lyft across the U.S. Lyft’s woes are far from over, as no one knows whether there will be more class action suits to face in other states.
FedEx: FedEx was fined $466 million in two separate class action suits over the misclassification of its workers, both of which it accepted and paid after the court found fault with its contract which created all the constraints of an employment relationship, within an independent contractor classification.
Uber: Though facing a class action suit similar to Lyft’s (which incidentally was filed by the same lawyer), Uber is determined to fight the case against its employment practices and quite unwilling to settle the issue like Lyft did. By fighting to the bitter end, Uber may end up having to recognize its drivers as employees and be made to pay them back wages, expense reimbursements, health insurance costs, retirement, sick pay, Social Security, Medicare, workers’ compensation, disability and other benefits as well as taxes and potentially mounting penalties. Binding one’s workers with any contractual clauses prohibiting their participation in class action suits and other legal challenges against their employment status is also illegal and bound to carry no legal weight in any court of law. Additionally, the service providers cannot be arbitrarily discharged, without being notified of the issue or an opportunity to correct their mistakes.
According to estimates made by St. Louis University law professor Miriam Cherry and Duke economist Michael Munger, Uber could end up being recognized as an employer and not just a software platform facilitation the drivers to find work. The resulting costs to Uber could reach tens of thousands of dollars per driver, should its lawsuit go south! The report estimates the costs Uber could incur over one driver, earning $50,000 per year, at $4,940 – as per the table below.
In all, Uber may find itself paying $20,423 per driver, as per an estimate by the Bureau of Labor Statistics.
These costs do not include Uber’s responsibility to pay for the maintenance of the vehicles and bridge tolls incurred, all of which could add up to nearly $9,542 per year.
There’s no doubt that these costs will prove to be an insurmountable burden to Uber. Many smaller companies in the service delivery space have survived by simply reclassifying their workers as employees and not as contractors any more to meet the requirements of various employment laws at the state and federal levels.
We’ll be watching carefully as this and other cases unfold.
If you’re looking for a way to ensure your contingent workers are not misclassified and haven’t yet invested in a solid VMS, check out Smart Track, the world’s best VMS by contacting email@example.com today.
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