Legislative initiatives and a generational shift are changing the dynamics of the American workplace. Cowden Associates’ Elliot Dinkin urges employers to be aware of these developments and the inherent risks.
Companies of all types and sizes are using contingent workers at a greater scale than ever before. Beyond the traditional outside contractor, who might perform a discrete set of specific tasks, the contingent workforce, as often as not, now operates within an organization just as if it is part of the employee base. Professional services can be supplied under a statement-of-work agreement; a freelancer with unique skills might be retained through an online labor marketplace, or traditional temporary workers might be hired through a staffing agency.
The gig economy is a task-based approach to work that enables greater flexibility for both the workers and the company engaging them. Economists note the globalization of the contingent workforce and predict rapid growth in this sector.
The gig economy is innovative but has created a hotbed of litigation, particularly over the issue of worker classification – namely whether a worker is an independent contractor or an employee for purposes of wage-and-hour protections, protection from workplace discrimination and other federal and state employment benefits.
Even before the rise of the gig economy, worker classification had been complicated by the fact that differing tests apply, depending upon whether classification pertains to income tax withholding and employment tax withholding and reporting under IRS regulations, FLSA coverage or coverage under other employment benefit programs, such as unemployment insurance or workers’ compensation. Therefore, it has always been possible that application of the different tests could yield different results, with resulting uncertainty and exposure to liability for unpaid taxes or unpaid overtime. The classification issues arising in the gig economy have only complicated an already difficult determination.
Risks vs. Rewards
There are significant offerings of technology systems to help companies manage gig workers (Gigs) to ensure compliance with tax, wage and hour and other employment-related rules. This is clearly not enough, as the contingent workers and their tasks create compliance risks.
The challenge is that if Gigs are not managed properly, the costs will far outweigh the benefits. As in every aspect of your operations, balancing the risks and rewards is essential, and having an effective management system in place is critical.
Beyond the noncompliance from misclassifying contingent employees, the full range of risk problems that can occur during operation of the tasks assigned to these employees must be considered:
- Regulatory Compliance – If the Gigs are engaged in any activities subject to regulatory compliance requirements or company policies or procedures, they need to have communication and training.
- Operational Risk – If Gigs are engaged in critical tasks that can affect business continuity, quality control and operational schedules, they present operational risk that must be adequately managed.
- Information Risk – If Gigs handle confidential data, they present an information security risk, so controls must be put in place. There is a huge reputational risk associated with any significant data breaches or instances of regulatory noncompliance. Penalties and costs of remediation may be significant.
It should be obvious that the Gigs must be managed appropriately to ensure they receive communications and training to address company risks and compliance requirements overall. The challenge — considering how difficult it is for regular employees — is extending this requirement to Gigs.
Gigs must be integrated into the company culture and understand the established policies and guidance around risk tolerances and limits. Their roles and tasks must be clearly defined so that they receive the same consideration as employees engaged in such roles and tasks. A clear record indicating ownership of the relationship with each contingent worker, defined roles and tasks, communications, policy distribution, attestations of understanding and risk-based training must be created and maintained.
Approach to Compliance
Once the various issues have been defined, establishing an internal process is essential and should include the following:
- Understand the makeup of the gig workers population. Follow a path that distinguishes between experienced Gigs (who have a career behind them and seek the autonomy of freelancing) compared with the mobile new Gigs (with limited experience).
- Evaluate what type of packages would be more suitable for Gigs. Why not consider providing various forms of other benefits and/or simply providing lump-sum payments to reflect the preference of Gigs for cash?
- Create a single HR focus to deal with Gigs’ specific issues. This should bring a degree of consistency in management of Gigs within the organization.
- Focus on onboarding and integration. Management and HR need to (1) be involved in the integration of Gigs and (2) where practical, use top Gig talent to perform certain tasks and training for the company as they bring on more Gigs, with the objective to position the company as an employer of choice for Gigs.
Establishing a Method to Manage Future Law Changes
One thing is certain: There will be more litigation and law changes regarding Gigs. For example, in California, Uber and Lyft have announced that if they lose the legal battle and are required to reclassify drivers as employees, they anticipate the need to offset an anticipated increase in costs up to 30 percent by cutting the number of workers and scheduling drivers in advance to avoid overtime, thereby reducing the flexibility that is currently enjoyed by drivers. In the meantime, Uber and Lyft have embarked on a $90 million lobbying effort to support a ballot initiative to exempt them from AB5’s impact as well as to seek agreement with governmental and labor groups to create a new category of short-term or on-demand workers. This compromise is somewhere between contractor and employee, who then would be eligible for only certain state employment protections and benefits.
Previous negotiations included the companies’ willingness to support a system of worker-determined benefits, including PTO and retirement benefits pro-rated on how often drivers work, base rate pay for drivers to increase driver pay overall and the formation of a drivers’ association to enable drivers to connect with peers and to provide an appeal process for driver deactivations. Regardless of how this all is settled, the risks associated with regulatory, operations and information compliance will continue and require a specific management focus centered on risk.
Numerous states have considered or are considering laws related to gig workers. As these laws will most definitely differ from state to state, businesses everywhere will need to monitor the changing laws to apply the right test for the specific compliance issue at hand in the various locations.