The Uncertainty of Worker Misclassification in the Sharing Economy

Monday, April 11th, 2016 at 4:52 pm, by Michelle Honor

The “sharing economy” is based on “an economic model in which individuals are able to borrow or rent assets owned by someone else.”  The number of companies employing the sharing economy platform, like Uber, Lyft and Airbnb, has grown significantly over the past decade.  Despite the popularity and success of companies employing this platform, the sharing economy presents unique legal challenges.  Perhaps the most hotly contested challenge posed by the sharing economy is the issue of “worker misclassification.”  The issue of worker misclassification arises when companies incorrectly classify their workers as independent contractors instead of employees.  By classifying workers as independent contractors, companies do not have to provide workers with the benefits that are legally required with employee status and can significantly cut their costs. As such, the legal classification of workers in the sharing economy as independent contractors has significant implications for workers, companies and consumers.

The implications for workers can be viewed in two ways.  Proponents of the independent contractor classification scheme argue that the contractor-company relationship provides many advantages to the worker.  These benefits include greater independence for independent contractors than employees, increased scheduling flexibility for independent contractors, as well as an overall higher take home pay.  Furthermore, the increased independence and scheduling flexibility permitted by the classification allow workers to work for multiple companiesCritics of this classification scheme argue that it eliminates labor protections such as minimum wage, worker safety standards, medical leave, overtime benefits and protections from employer discrimination or retaliation in the case of union organization.  Additionally, the classification of workers as independent contractors could end employer-financed insurance such as social security, workers compensation and unemployment benefits, as well as prevent workers from receiving the benefit of lower taxes and employer-provided health insurance under the Affordable Care Act.  Critics argue that the sharing economy often takes advantage of workers who are not non-employees by choice but simply because they need a job.

The belief that classification as independent contractors in the sharing economy takes advantage of workers has resulted in an onslaught of misclassification lawsuits against companies filed on behalf of workers.  These lawsuits highlight the challenges of applying the legal distinction between employees and independent contractors to the sharing economy.  Recently, courts have looked past the traditional common law agency “right of control” test to the “economic realities” test to distinguish independent contractors from employees.  The “economic realities” test is more apt for use in the context of the sharing economy and looks to determine whether workers are “economically dependent on the company or whether workers are truly in business for themselves.”  Under this test, a “worker is in reality an employee if the company controls how the worker performs job duties and [if] the worker’s “business” substantially depends upon the relationship with the company.”

In the recent misclassification lawsuits against ridesharing companies Uber and Lyft, the courts were reluctant to decide the issue of worker classification in the sharing economy without a trial.  In the 2014 class action lawsuit, O’Connor et al v. Uber Technologies, Inc., which alleges that Uber incorrectly classifies its drivers as independent contractors, the court denied summary judgment for Uber.  Invoking the economic realities test inquiry of how much control Uber retains the right to exercise, the court found that Uber could not prove that the workers were indisputably independent contractors.  While Uber is set for trial on June 20, 2016 to decide the issue, Lyft was also denied summary judgment in the 2013 misclassification suit Cotter v. Lyft.  Instead of proceeding to trial, Lyft recently settled the case.  The settlement did not reclassify the workers as employees but required Lyft to change its terms of service nationwide, making them more compliant with California state laws governing independent contractors and making it more difficult for Lyft to fire drivers.

The tendency of courts to leave this legal distinction to trial may have significant consequences for even those companies not embroiled in litigation.  First, like Lyft, the prospect of the uncertainty of litigation and trial may force companies to alter their business models to more squarely fit within relevant state laws regulating independent contractors and/or employees.  While Lyft changed its terms of service to fit more within the California guidelines of independent contractors, Instacart and Shyp have entirely abandoned the independent contractor model and have started to change their independent contractors into employees.  This shift towards a more traditional and clear cut classification of independent contractors is likely to impact the quality of service while a shift towards a more traditional employee classification is likely to increase the price of services in the flexible economy or, alternatively, drive them out of business.  Aside from forcing companies to adopt more rigid classification schemes, other flexible economy firms may simply fold due to the uncertainty.  Recently, housecleaning startup Homejoy failed to secure funding and went out of business after lawsuits over classification of its workers spooked investors and raised alarms regarding the uncertainty of the business model.  Given the uncertainty of sharing economy worker classification in the courts and the surge in consumers’ daily dependence on the sharing economy, it seems clear that a legislative solution to adapt worker classification to the new economy is in order.