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Beware legal pitfalls in the gig economy

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Tapping into consumer demand, entrepreneurs across the county have found new and innovative ways to provide on-demand service, including app-based services such as Uber and Lyft. Where does this leave the American workforce?

According to the Department of Labor, the future of America’s workforce is project-based, also known as the “gig economy.” For employers and employees alike, the gig economy allows for more flexibility.

However, the traditional employment-based protections remain unclear in a project-based employment relationship. This article provides some tips and guidance on navigating the gig economy by properly classifying project-based workers as independent contractors.

 

NOT A TRADITIONAL WORKPLACE

Workers fall under two general classifications: Employee or independent contractor. Considered to be under the economic control of their employers, employees are entitled to all applicable legal protections, including workers’ compensation, minimum wage, overtime and anti-discrimination laws. On the other hand, businesses do not owe the same level of legal protections to their independent contractors.

Because project-based work is uncertain and difficult to track, businesses are best advised to have an independent-contractor relationship, as opposed to an employment relationship. Largely driven by the gig economy, studies show that by 2020 at least 40 percent of all workers will be independent contractors, as opposed to traditional employees. One of the best examples we have of the independent contractor relationship for gig-based jobs is the Razak v. UberBLACK case that was decided by Pennsylvania’s Eastern District Court earlier this year. UberBLACK is a luxury on-demand ride and ridesharing service.

In the case, a group of limousine drivers sued UberBLACK for failing to pay minimum wage and overtime. In deciding whether the minimum wage and overtime laws applied, the court looked at whether the drivers were employees or independent contractors.

Although the court did not see this as the typical independent contractor relationship – particularly because the entire consumer base was served exclusively by drivers operating as independent contractors – the court concluded that UberBLACK’s drivers were appropriately classified as contractors and were not entitled to minimum wage and overtime.

How can your business, like UberBLACK, avoid the problems caused by being bound to a typical “employer-employee” relationship? Here are three tips for success in making sure your project-based workforce is properly classified as intendent contractors:

1. Give project-based workers the right to choose their own schedule and the way they perform their work, within reason.

The best example of this is when a homeowner hires a carpenter or plumber for a renovation or repair project. Homeowners will often discuss the dates and times that work will be done, but if the plumber or carpenter is late or cancels, there is not much the homeowner can do. Homeowners have requirements for plumbers and carpenters while they are in the house, such as not permitting music, shoes or fumes, but these requirements apply only while the carpenter or plumber is in the house. None of these requirements, however, mean that the carpenter or plumber is an employee of the homeowner, only that the homeowner has the right to control the conditions of his or her home. Also, while the scope of the work itself may prohibit other assignments, a homeowner would not prohibit a plumber or carpenter from performing the same services for another household.

Likewise, independent contractors cannot be on a strict “punch the clock” schedule. Any limitations should be geared more toward ensuring quality services, such as UberBLACK forcing breaks upon drivers who have been driving for 12 straight hours. However, unlike employees – whom businesses can compel to remain at a worksite waiting for work – independent contractors must have an autonomous schedule.

Additionally, while this may sound like a counterintuitive business practice, independent contractors must have the ability to work for whomever else they want, including your competitors. For example, many Uber drivers also drive for Lyft. In many cases, there can and should be an agreement in place limiting the transference of trade secrets.

2. Allow the workers’ managerial skills to drive earnings.

While independent contractors do not need to have to have a formal business structure, such as an LLC, to escape the “employee” designation, businesses will have a difficult time convincing a court or agency of the independent contractor relationship without clear managerial separation. Unlike employees who are paid the same each paycheck regardless of actual output, a contractor’s pay should be based on their own ability to drive business. For example, cable television installers may be independent contractors where they control customer volume and the amounts charged. As another example, UberBLACK drivers earn money only when they are providing services.

3. Require a level of investment from the workers to purchase their own equipment.

Remember, for a tenable independent contractor relationship, the workers must be, for the most part, economically independent. This includes an investment in their own materials and supplies, such as UberBLACK drivers being required to purchase (or lease) their own expensive vehicles. Businesses are not precluded from requiring their workers to use a certain type of supply, just like UberBLACK requires the use of certain luxury vehicles. Independent contractors must, however, be expected to invest in their own equipment within the parameters created by business necessity.

As you navigate the gig economy, remember that the best evidence of an independent contractor relationship is the contract itself. You are best advised to consult with an attorney who understands the legal challenges of a project-based workforce that were not anticipated by 20th century employment law.

Keely Jac Collins is a partner with the KingSpry law firm in Bethlehem. She represents Pennsylvania employers of all sizes and can be reached at kcollins@kingspry.com.

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