The On-Demand Economy Continues to Grow, but Legal Consequences Abound for Employers and Employees in the U.S. and Abroad

by Nancy Cremins

Legal Analysis

The on-demand economy, which consists of independent and frequently short-term temporary employment arrangements, continues to expand in the United States and around the world. The growth of the on-demand workforce has outpaced overall U.S. workforce growth by a multiple of three since 2014, and freelancers are predicted to become the U.S. workforce majority within the next 10 years. Some surveys suggest that as many as 61% of employers plan to switch a significant portion of their full-time permanent positions to contingent jobs in the near future.

While trends indicate that companies intend to continue to move away from standard employer-employee arrangements, the legal landscape for on-demand workers is far from resolved. The classification of on-demand workers as “independent contractors” means there is a growing class of workers that do not have access to employment benefits such as vacation, sick time, and parental leave. Employers are not paying their share of employment taxes. In addition, these workers do not have access to social safety net programs such as workers’ compensation and are not making social security contributions. As more individuals rely on freelance work as their primary means of income, these workers are left without the protections traditional employment provides. As a result, the courts, legislatures, and companies both in the United States and abroad struggle with how to classify these workers and provide them with some access to benefits.  This article summarizes and contrasts some of the different approaches that have been taken since the author first addressed this topic in this journal, and addresses why they matter to businesses in the Commonwealth.

Companies that used independent contractors rather than employees to fuel their global growth, such as Uber, Lyft, and Postmates, continue to face legal challenges to their business practices regarding worker classification.  Several worker-misclassification claims have been settled at significant expense. In April 2017, the food-delivery business DoorDash agreed to pay $5 million to settle a 2015 independent contractor misclassification class action involving 33,744 class members. In March 2017, rideshare company Lyft’s $27 million settlement was approved by the court to resolve a misclassification suit brought by approximately 95,000 drivers.   Although in both cases the companies agreed to pay money to settle claims, neither company agreed to reclassify independent contractors as employees. Instead, each company agreed to clarify its internal policies and provide additional rights for its independent contractor workforce, including limitations on when Lyft may deactivate drivers and an opportunity to be heard in an arbitration paid for by Lyft to challenge the basis for deactivation.

Given that the settlements did not require these companies to re-classify their independent contractors as employees, they may find themselves facing further litigation on this subject. For example, in another case, delivery company Postmates received judicial approval for its $8.75 million settlement of misclassification claims in September 2017 in Singer et al. v. Postmates Inc., Case No. 4:15­cv­01284 (N.D. Cal.). However, Postmates is facing a new misclassification action filed in state court in November 2017, meaning that Postmates will need to settle or litigate these same claims anew.

Only one misclassification suit has made it to trial so far. A six-day bench trial in Lawson v. Grubhub, Inc., Case No. 15-cv-05128 JSC (N.D. Cal.) was concluded with closing arguments at the end of October 2017. On February 8, 2017, the court issued its decision finding that the plaintiff was properly classified as an independent contractor. The court applied California’s 11-factor “economic realities” test set forth in S.G. Borello & Sons Inc. v. Dept. of Industrial Relations, 48 Cal.3d 341 (1989), under which the alleged employer bears the burden of proving that the worker in question is not an employee.  The court found “While some [of the Borello] factors weigh in favor of an employment relationship, Grubhub’s lack of all necessary control over Mr. Lawson’s work, including how he performed deliveries and even whether or for how long, along with other factors persuade the Court that the contractor classification was appropriate for Mr. Lawson during his brief tenure with Grubhub.”

While the 11-factor Borello test[i] sets forth a different independent contractor test than is applied in Massachusetts,[ii] the results of this case will be felt across the U.S. because most prominent on-demand companies are based in California, and California law will likely apply to much of the worker litigation due to California choice of law and choice of venue provisions in agreements with independent contractors across the U.S.[iii]

Of on-demand businesses, ride-sharing giant Uber continues to reign supreme in both its ability to get press coverage and in the sheer volume of legal action it has faced globally for its classification of workers as independent contractors. On balance, the international results for Uber have been decidedly negative, but it is making some progress in the U.S., which reflects how Europe and the U.S. differ on their approaches to worker protection and Europe’s more skeptical view of the use of independent contractors instead of employees.

In April 2016, Uber attempted to resolve its largest worker misclassification class action in O’Connor v. Uber Technologies, Inc., C13-3826 EMC (N.D. Cal.), for $100 million covering 385,000 drivers. However, the proposed settlement was rejected by the court as not “fair, adequate, and reasonable” and because it did not make a determination of how to classify drivers.  This case was complicated by the 9th Circuit’s decision in Mohamed v. Uber Technologies, 836 F.3d 1102, 1008 (9th Cir. 2016), which determined that pursuant to agreements between Uber and the drivers, the drivers’ claims against Uber must be arbitrated.  Following the decision in Mohammed¸ Uber managed to persuade an arbitrator in an arbitration with a single California driver that such driver was properly classified under the Borello test as an independent contractor, and was not an employee.

Further arbitration and litigation was stayed in the Uber suits in California pending the outcome of National Labor Relations Board v. Murphy Oil USA, Inc., No 16-307, which on October 2, 2017 was argued before the Supreme Court and concerns the validity of class-action waivers that bar individuals from pursuing work-related claims on a collective or class basis.

In Europe, some courts and legislative bodies take a decidedly more protective approach for workers.  In 2016, a United Kingdom employment tribunal ruled that Uber drivers should be classified as workers rather than self-employed contractors, which meant that Uber drivers would be entitled to benefits including holiday pay and minimum wage. The decision was upheld on appeal by the U.K. Employment Appeal Tribunal.

In a separate action, the European Court of Justice (“ECJ”) also found that Uber should be regulated as a transportation company, which undercuts Uber’s position that it simply operates as an intermediary between drivers and passengers.

An additional blow to on-demand companies that rely on independent contractors in Europe was delivered by the ECJ in King v. The Sash Window Workshop Ltd., which ruled that misclassified self-employed contractors who are really workers or employees could claim back holiday pay all the way back to the year that the EU’s Working Time Directive[iv] was introduced. Before this ruling, liability was typically limited to one or two years’ back pay in most EU countries.

So, what is being done in the U.S. and Europe at the legislative level to introduce protections for this growing class on freelance workers? In the U.S., an assortment of legislative efforts seek to provide them access to benefits typically provided in the employment relationship. New York City enacted the “Freelance Isn’t Free Act” to impose penalties on companies that fail to pay their contractors, which the city may enforce. New York State established the Black Car Fund, which administers safety and health programs that benefit for-hire drivers, their passengers, and other New Yorkers on the road, and provides workers’ compensation insurance to black car and luxury limousine drivers. Bills proposed in Washington State, New Jersey, and New York would require companies that rely on independent contractors (such as Uber and Grubhub) to contribute to a portable benefits fund that would provide health insurance, time off, workers’ compensation, and other benefits. On the Federal level, in May 2017, Senator Mark Warner (D-VA) and Representative Suzan DelBene (D-WA) introduced legislation to test and evaluate innovative portable benefit designs for freelance workers to give independent contractors access to benefits that to date have only been available for employees.  But where the co-sponsors of this bill are Democrats in a Republican-controlled Congress, it is unlikely that this bill will gain any real traction before the 2018 election cycle.

It appears that additional initiatives in Europe would continue its seemingly more-protective stance. A July 2017 report commissioned by the U.K. Prime Minister on gig economy working practices sets forth a series of recommendations to improve working conditions for on-demand workers, including the proposal to create a new classification for workers on tech platforms, like Lyft and Postmates. In November 2017, the European Pillar of Social Rights, a set of policy priorities, was jointly signed by the European Parliament (the EU’s legislative body), the European Council (which sets EU policies), and the European Commission (the EU’s executive body) which sets forth 20 key principles, structured around three categories: (1) equal opportunities and access to the labor market; (2) fair working conditions; and (3) social protection and inclusion. These key principles will be implemented over time through legislation across the EU member states.

While Massachusetts’ strict “ABC test” to determine whether a worker is an employee or an independent contractor remains one of the toughest in the nation, other states that use similar tests are finding ways to determine that on-demand workers are independent contractors. However, there is presently no evidence Massachusetts courts are currently prepared to move in that direction.

Currently, the only new legislation in Massachusetts that impacts any on-demand companies involves the 2016 regulations on ridesharing companies that imposed a fee on ride-sharing services and established requirements for background checks, inspections, and insurance. Another new development impacting on-demand companies in Massachusetts occurred in  2017, when Uber introduced a pilot program that allows Massachusetts drivers to purchase workers’ compensation coverage that offers $1 million maximum coverage for medical costs and lost earnings due to a work-related accident.

The on-demand economy shows no sign of slowing down. As a result, innovative legislation or company-led initiatives that will protect these workers by providing new worker benefit programs are essential for the growing freelance workforce’s health and stability.  Under the Trump administration, the Department of Labor rolled back Obama era guidance of the “economic realities test” leaving more room for independent-contractor classification than the prior administration. However, the outcome of still pending litigations will likely force changes in policies and the practices of on-demand businesses that will result in additional worker protection. As freelance work continues to grow, Massachusetts may follow other states in finding new ways to provide benefits and protections for these workers. Regardless, when guiding your clients in Massachusetts, the safest bet is still providing full employment benefits to all workers they retain.

[i] The 11-factor Borello “economic realities” test sets forth the following factors used to determine whether an individual is properly classified as an independent contractor:

1. Whether the person performing services is engaged in an occupation or business distinct from that of the principal;
2. Whether or not the work is a part of the regular business of the principal or alleged employer;
3. Whether the principal or the worker supplies the instrumentalities, tools, and the place for the person doing the work;
4. The alleged employee’s investment in the equipment or materials required by his or her task or his or her employment of helpers;
5. Whether the service rendered requires a special skill;
6. The kind of occupation, with reference to whether, in the locality, the work is usually done under the direction of the principal or by a specialist without supervision;
7. The alleged employee’s opportunity for profit or loss depending on his or her managerial skill;
8. The length of time for which the services are to be performed;
9. The degree of permanence of the working relationship;
10. The method of payment, whether by time or by the job; and
11. Whether or not the parties believe they are creating an employer-employee relationship may have some bearing on the question, but is not determinative since this is a question of law based on objective tests.

[ii] Massachusetts applies a strict “ABC test” for properly classifying an independent contractor. Specifically, “[a]n employer who wants to treat someone as an independent contractor rather than an employee has to show that the work:

1. is done without the direction and control of the employer; and
2. is performed outside the usual course of the employer’s business; and
3. is done by someone who has their own, independent business or trade doing that kind of work.” Massachusetts Attorney General’s Fair Labor Division on M.G.L. c. 149, s.148B

[iii] The long-standing Borello test is also undergoing scrutiny in California. Currently, in Dynamex Operations West, Inc. v. Superior Court of Los Angeles County, the California high court is considering whether to adopt a revised test to determine whether an individual is an employee or independent contractor. The California Supreme Court requested briefs addressing whether California law should use an “ABC” test similar to the one used in Massachusetts.  Plaintiff’s counsel in the Grubhub case filed a Notice of Supplemental Authority with the District Court regarding the Dynamex matter, however, the court did not delay its decision in Gruhub instead opting to apply the current Borello test in its decision.

[iv] The EU’s Working Time Directive (2003/88/EC) requires EU countries to guarantee the certain minimum rights for all workers and regulates the amount of time people can spend at work in order to protect the health and safety of the European workforce.

Nancy Cremins is the Chief Administrative Officer & General Counsel of Globalization Partners, an International Professional Employer Organization helping companies expand in 150+ countries without the pain of setting up an entity.

This article was updated on March 8, 2018 to reflect the latest development in the case ofaweson v. Grubhub.