Exclusive Interview with Scott Mirsky, Principal, Paley Rothman

“The Gig Economy Is Here To Stay But May Have To Adapt As Needs Change”

 

“The facts and circumstances of the arrangement between the worker and the contracting company must be analyzed to determine if the worker is truly an independent contractor'”, says Scott Mirsky, Principal, Paley Rothman. In an interview with HR.Com, Scott talks about the pitfalls of hiring independent contractors, what to expect from the Biden Administration with regards to independent contractor, and more.

Experts from the interview:

Q: How has Covid-19 impacted the gig economy? What is going to be the implication of this economy on the future of work and businesses?

Scott: Gig workers were instrumental in keeping the economy moving during the Covid-19 pandemic. Gig workers were the “hidden” front line workers. When consumers were too nervous to go to the grocery store or to pick-up dinner, gig workers stepped-up to do the job.

Certainly, the gig economy is here to stay but may have to adapt as needs change. For instance, many Uber drivers who customarily drove passengers around town pre-pandemic became grocery shoppers during the pandemic in order to put food on the tables for their families.

Q: What sort of new challenges will this work culture bring to the worker classification space?  

Scott: The number one challenge - and we saw this during the Covid-19 pandemic - is that since gig workers are not “employees,” they do not receive customary employee benefits that come with traditional employment. This left the gig workers particularly vulnerable during the pandemic. As independent contractors, these workers do not receive paid leave or health benefits from the company that contracts with them. Luckily, the federal government stepped-up and allowed gig workers to collect unemployment insurance benefits (a benefit that is not traditionally available to independent contractors).  

Q: What are the risks and responsibilities associated with hiring independent contractors? 

Scott: Businesses who choose to work with independent contractors (instead of employees) must be very cautious as this type of business-model is riddled with pitfalls. The term “independent contractor” is not a flexible term that a business can use at its discretion. The facts and circumstances of the arrangement between the worker and the contracting company must be analyzed to determine if the worker is truly an “independent contractor.” If a worker is misclassified, the consequences for a business can be severe. If a misclassified individual typically works over 40 hours each week, the business would be required to compensate the worker for his/her unpaid overtime pay plus an equal amount in liquidated damages. In addition, a business could face an audit or investigation from any number of state and federal taxing agencies (e.g., IRS, state unemployment office, state workers compensation offices).  If the audit goes south for the business, in addition to back taxes, large fees and penalties may be assessed.

Q: DOL (for the purpose of wage) and IRS's (for the purpose of payroll tax) definition of an employee, the ABC Test and individual state legislations, etc., today there are several policies that govern classifications. What are the key factors that employers be mindful of while classifying employees and independent contractors so that they do not misclassify?

Scott: Generally speaking, state laws will have the most expansive definitions of the term “employee” and will present the biggest challenge for businesses who want to use independent contractors. For example, under current California law, virtually all workers who provide the same services as the contracting business will be deemed employees unless the worker fits within a specific exempt job category (e.g., physicians, lawyers, graphic designers, home inspectors, and freelance writers to name a few).  

So, it does a business little good to be in full compliance with the DOL and IRS regulations regarding the use of independent contractors (unless the business is being audited by the DOL/IRS or the worker’s lawsuit focuses on FLSA violations) and yet fail to comply with the definitions promulgated by a state’s legislature.  

Q: What are the risks associated with misclassifying workers as independent contractors?

Scott: As explained above, the risks are high. Litigation dealing with misclassifying workers is rampant and can be subject to class or collective actions. In addition to damages, if a worker prevails in a lawsuit, the business will have to reimburse the worker’s counsel for his/her attorney fees.   

Q: What is the status of the Trump Administration's Independent Contractor Rule, since the Biden Administration had announced plans to rescind the rule? What should be employers be mindful of when classifying workers?

Scott: The Trump’ Administration Contractor Rule (the “Trump Rule”) is contrary to the agenda of the Biden Administration. The unstated purpose of the Trump Rule was to make it easier for gig businesses to classify their workers as independent contractors. The Biden Administration would like to swing the pendulum in the other direction and expand the definition of “employee.” At the moment, the DOL will continue to utilize the “economic realities” test, which focuses on whether the worker is economically dependent on the business for work. The “economic realities” test examines the following seven factors:
 

1. Extent to which the services rendered are an integral part of the principal's business
2. Permanency of the relationship
3. Amount of the alleged contractor’s investment in facilities and equipment
4. Nature and degree of control by the principal
5. Alleged contractor’s opportunities for profit and loss
6. Amount of initiative, judgment, or foresight in open market competition with others required for the success of the claimed independent contractor
7. Degree of independent business organization and operation

One way for a business to limit the economic dependency between itself and an independent contractor is to allow (and encourage) the independent contract to work with multiple businesses.  

Q: What sort of changes do you expect from the Biden Administration on this front in future?

Scott: The Biden Administration will push for a more expansive definition of “employee.” We have already seen this happen. For example, President Biden is encouraging Congress to pass the Protecting the Right to Organize Act of 2021 (“PRO Act”), which uses an expansive definition of the term “employee.” While this Act is specifically targeted toward the right of workers to organize and collectively bargaining, business rights groups are extremely concerned that this type of Act, if passed, would have far reaching negative ripple effects outside of the union context and will open the door to other less business-friendly statutes. In short, businesses are concerned that the PRO Act is a glimpse into the future of where the Biden Administration is heading on the independent contractor issue and concern is high.

Q: What are the common mistakes that companies do when it comes to classifying workers?

Scott: Most mindful employers already know that they should limit their control over independent contractors. This includes:  do not provide training, allow the worker to select his/her own hours, do not provide equipment/tools, and do not hire independent contractors to do the same work as employees within the business.

However, many businesses make small missteps that can destroy the argument that the worker is an independent contractor.  For example, 
 

• Giving an independent contractor a copy of an employee handbook
• Requiring an independent contractor to fill out a Form I-9 (Employment Eligibility Verification)
• Submitting an employee timesheet for hours instead of an Invoice for services

All of the above should be avoided.
 

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