Employee or independent contractor? The danger of misclassifying workers

Uber, Amazon, FedEx, and Google Express have all faced class-action lawsuits.

As more companies create business models that grow and flex based on service needs, they need to figure out how to correctly identify members of their flexible workforce.
As more companies create business models that grow and flex based on service needs, they need to figure out how to correctly identify members of their flexible workforce. –EPA

In the past few years, workers at companies like Uber, Amazon, FedEx, and most recently, Google Express have filed class action lawsuits alleging they have been misclassified as independent contractors when they’re really full-time employees.

In each case, workers claimed their employers treated them as employees without providing the requisite benefits, like expense reimbursements and health insurance, while the companies maintained these workers were self-employed contractors.

The lawsuits are a major test for the new on-demand economy, where companies create business models that expand and contract based on service needs, and require a flexible workforce. While some freelancers are enjoying the opportunity to be their own boss, or make extra money, others feel their employer is taking advantage of the new “gig’’ economy, cutting corners on workers’ benefits like healthcare, workers’ compensation, sick and vacation time, and expense reimbursements.

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Besides being expensive (FedEx settled its case for $228 million), these legal battles can put companies under new pressure to change their business models.

So why do companies do it?

“There’s much less cost with paying an individual contractor than employing an individual [full time],’’ Theresa Rilli, vice president of operations at Boston-based Atrium Staffing said. “But we’re starting to see that these class action lawsuits settle for millions of dollars, so companies have to look at the big picture.’’

So how can both parties avoid employee misclassification?

Rilli said correct labeling all comes down to whom has more control – the worker or the employer. Rilli is an expert on the subject of misclassification, and provided Boston.com with questions employers and workers should ask themselves before doing business together.

1. Who has the financial control?

If the employer has the right to control the financial and business aspects of a worker’s job, for example by providing him or her with equipment or training to do a job, the worker is more likely to be an employee, Rilli said. Conversely, if the worker has to make a substantial investment in equipment for the job or incur unreimbursed business expenses, he or she is more likely to be an independent contractor.

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Rilli gave another hint: “As an employee, I’m paid regardless of the job I do; I don’t stand to lose. But independent contractors provide a service, and if they don’t do a good job, they may not be paid on time or at all. They stand to profit or lose.’’

2. Who has the behavioral control?

If a worker receives extensive instructions about how and when to get work done, he or she is more likely to be an employee, while an independent contractor typically schedules work on his or her own time, Rilli said. Another clue is whether or not the worker has to wear a uniform, which signals less behavioral control.

3. Is the service outside the employer’s usual course of business?

If the company’s main source of revenue is through the labor of the worker, than he or she is probably an employee, Rilli said. But if the service offered is outside the employer’s usual business, the worker is most likely an independent contractor – especially if he or she has an independently established business of the same nature as the service performed, like an independent advertising agency working on a holiday advertising campaign for a retailer.

4. How long will the company need the worker’s services?

Independent contractors are more likely to have a temporary gig or job they’re performing for an employer, rather than a lifelong service, Rilli said. For example, contractors are often hired when a company launches a new product, or needs additional help during a seasonal spike in the service it offers.

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It’s worth noting that Rilli ultimately described independent contractor as a “nebulous term’’ that must be determined on a case-by-case basis. But one thing is certain: this type of freelance work isn’t going away.

“The millennial generation is the largest of our time,’’ she said. “They’ve grown up in a time of technology and access. The notion of renting, not owning, and having immediate access to things when I want them inherently creates a business model where companies have to flex and grow based on service needs. Understanding where independent contractors work into a business model and using them in an appropriate way is really crucial. A lot of companies haven’t thought about it.’’

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