In 2014, approximately 14% to 20% of the U.S. workforce consisted of independent contractors known as “gig workers.” In 2020, the number increased to approximately 35%. Some sources estimate that by 2023, nearly half the workforce will consist of freelance and independent workers. The gig economy is nothing new, but with the new employment environment introduced by COVID-19, an increasing number of companies are looking for ways to fill labor gaps.
In addition to the possibility of remote work, some workers are looking to take advantage of the flexibility offered by gig work, which has become an increasingly popular alternative to traditional work schedules. If your business is interested in using gig workers in a more traditional employment structure, you need to understand how to rely on them without incurring unintentional liability.
What Is a Gig Worker?
As defined by Merriam-Webster, a gig worker is “a person who works temporary jobs typically in the service sector as an independent contractor or freelancer.” Usually, the professions that come to mind are electricians, painters, or mechanics. More recently, however, the role has been widely expanded to cashiers, delivery drivers, and food service workers.
Some of the most popular apps that come to mind include Uber, EatStreet, and Instacart. The companies have started to embrace gig workers as an alternative to part-time employees to fill gaps in scheduling or recruit extra hands during peak hours.
National Push for Employee-Like Benefits, Classifications
Although gig workers remain independent contractors, who don’t qualify for traditional employment benefits, some gig workers who use the platforms as their full-time employment have pushed to classify themselves as employees instead. And they aren’t the only ones. In April 2021, U.S. Labor Secretary Marty Walsh indicated the Biden administration may take the position that many gig workers should be classified as employees.
With this increasing reliance on gig workers to fill traditional part-time employee positions, companies need to take precautions when bringing them on board. While lawsuits such as the ones involving Uber and Lyft make headlines, issues can arise when companies that hire gig workers treat them substantially like traditional employees.
Effect Of Treating Gig Workers as Employees
Although larger companies such as Uber or Lyft bear a greater risk of a general “employee” classification for their workers, smaller companies may be surprised when their conduct turns a short-term-help independent contractor into an employee.
The legal classification of employee versus independent contractor varies jurisdictionally, and the definitions largely center on control and the worker’s relationship to your business. The distinction matters for a variety of reasons, including tax classification, tort liability, and unemployment benefits.
Federal tax liability. The IRS lays out three factors that may be considered when determining whether a worker is an employee or an independent contractor:
- Behavioral control, focusing on the instruction and training given to a worker;
- Financial control, including whether workers incur their own expenses or business profits and losses; and
- Relationship of the parties, examining whether the worker receives traditional employment benefits or has a contract explaining the relationship.
The classifications largely come into play in determining whether your business must withhold a worker’s taxes or provide the individual with a Form 1099-MISC to report what you have paid. Some states also adopt the classification for their tax collection.
Liability for torts. A tort is generally defined as an act giving rise to an injury. In most cases, when an independent contractor commits a tort, the individual is liable. If your business hires an independent contractor and exercises a great deal of control over the work, however, the worker could be considered an employee in determining who is liable for the tort.
In turn, your business may be held vicariously liable for the independent-contractor-turned-employee’s tort committed through the doctrine of respondeat superior. While the doctrines vary from state to state, most are based on some degree of control over the independent contractor.
Notably, some states include exceptions to the rule that independent contractors are liable for their own torts. Some examples include negligent hiring or supervision, nondelegable duties, and inherently dangerous activities. You can largely shield yourself from unwanted liability, however, by maintaining clear lines between independent contractors and employees.
Unemployment insurance and benefits. States have a variety of systems to determine whether someone is an employee or an independent contractor in determining whether you are responsible for any unemployment-related expenses.
Some states use what is known as the “ABC test.” The test assumes the worker is an employee and looks at (A)bsence of control, the worker’s (B)usiness, and whether the worker is (C)ustomarily engaged in the business of the hiring company. Thirty-three states use the test, including Illinois, Indiana, and Ohio.
In Wisconsin, employee or independent contractor status for unemployment benefits is determined under Wis. Stat. § 108.02(12)(bm)1-2. The statute examines two sets of criteria, first, determining whether the worker’s services are free from the employing unit’s control and, second, relying on a nine-point test under which a worker must meet six of the criteria to be considered an independent contractor. Some refer to the state’s test as “A” and “C” of the ABC test.
Michigan uses an “economic realities” test, which considers four criteria: “(1) control of a worker’s duties, (2) the payment of wages, (3) the right to hire and fire and the right to discipline, and (4) the performance of the duties as an integral part of the employer’s business toward the accomplishment of a common goal.”
Bottom Line
Determining whether your hired help is an employee or an independent contractor can be difficult, but it’s easier when you draw clear lines between the two groups. While some business relationships are clear, being mindful of your practices can keep you from unintentionally turning an otherwise independent contractor into an employee.
Given the substantial liabilities that misclassification of an independent contractor can create when the person is deemed to be an employee, it’s essential to consult with an attorney when you’re considering the use of gig workers.
Noah T. Rusch is an attorney with Axley Brynelson, LLP in Madison, Wisconsin. You can reach him at 608-283-6719 or nrusch@axley.com.