Managing Workforces in the Era of the 'Gig' Economy


New Jersey Law Journal

May 1, 2017

The “gig” economy—that is, the business environment in which goods and services are provided on an “as needed” or “on demand” basis—has indisputably changed the American workforce, sparking vigorous debate about its impact, as well as governmental and legal activity. Critics argue that the demise of “traditional” employment is bad for businesses and that non-employee workers suffer from a lack of benefits, stability, consistency in their work, and security for their professional and financial futures. On the other hand, advocates assert this new paradigm reaps significant benefits to workers, businesses and the national economy.

For example, “gig” workers have flexibility, working when they are able or desire, with the ability to better balance personal and professional lives and pursue new career interests. Businesses, in turn, can be agile in adapting to the changing and competitive workplace and economy, as well as client and customer needs, by engaging workers to perform only on a project or task basis, allowing the business to manage cash flow and projects without full-time labor and the attendant costs or the need to reduce an overstaffed workforce in times of business downturn. Both sides of the debate agree, though, that engaging workers as independent contractors, freelancers, vendors or through third parties, sometimes leads to boundaries blurring.

Of primary concern is misclassification of employees as independent contractors, as well as the potential of a joint employment relationship with third-party entities providing workers. Independent contractor tests evaluate whether workers should be classified as employees, while the concept of joint employment considers whether two companies share or codetermine the essential terms and conditions of employment for the same worker, becoming equally responsible for any claims or legal issues. Both misclassification and joint employment have become enforcement targets for government agencies. The impetus for these efforts has been clearly articulated by the Department of Labor (DOL): “Misclassified employees often are denied access to critical benefits and protections they are entitled to by law, such as the minimum wage, overtime compensation, family and medical leave, unemployment insurance, and safe workplaces. Employee misclassification generates substantial losses to the federal government and state governments in the form of lower tax revenues, as well as to state unemployment insurance and workers’ compensation funds.”

But even employers working hard to properly classify their workers can face confusion, as definitions vary depending on which law is applied. For example, at the federal level, the Fair Labor Standards Act (FLSA) and the Internal Revenue Service (IRS) apply different tests for independent contractor status, while in New Jersey, employers face at least five tests. Despite differences in applicable laws, the DOL is working with the IRS and 37 states “to combat employee misclassification and to ensure that workers get the wages, benefits, and protections to which they are entitled.” In addition to its alliance with the DOL, the IRS has targeted programs to scrutinize employment relationships. One allows individual workers to file a Form SS-8 to initiate reviews of their independent contractor status. The other involves an increase in IRS corporate audits of S corporations, under the premise that many are misclassifying workers.

The joint employer standards are equally challenging from a compliance perspective. Like the independent contractor analyses, the assessment of whether two entities are joint employers will depend first on the jurisdiction and law applied. Recent activity on a federal level is illustrative. In August 2015, the National Labor Relations Board (NLRB) revisited and greatly expanded its long-standing test for determining when an organization will be deemed a “joint employer,” declaring that two or more entities are joint employers of a single workforce if they are both employers under the common law agency test and “share or codetermine those matters governing the essential terms and conditions of employment.” See Browning Ferris Indus. of California, 362 NLRB No. 186 (2015). Then, in January 2016, the DOL, relying on the FLSA’s general, broad definition of “employment” (“to suffer or permit to work”), despite the fact that tests applied under the FLSA differ among circuit courts, published a broad interpretation of the joint employer doctrine. See Administrator’s Interpretation 2016-1 (January 20, 2016). The EEOC’s Strategic Enforcement Plan for fiscal years 2017-2021 specifically asserts that its focus on emerging or developing issues encompasses “[c]larifying the employment relationship and the application of workplace civil rights protections in light of the increasing complexity of employment relationships and structures, including temporary workers, staffing agencies, independent contractor relationships, and the on-demand economy.” State courts have considered joint employment as well, including in New Jersey, where the courts have issued interpretations under the Law Against Discrimination, Wage and Hour Law and Workers’ Compensation Law.

In addition, claims filed by individuals or groups in recent years challenge the legal relationships between individuals and entities providing services for companies. Across the country, single plaintiff or class or collective actions against entities such as Amazon, Grubhub, Lyft and Uber have become cautionary tales for employers willing or needing to engage in the “gig” economy. See, e.g., Bradley v. Silverstar, No. 1:16-cv-10259 (N.D. Ill. 2016); Cavallo v. Uber Technologies, No. 3:16-cv-04364 (D.N.J. 2016); Cotter v. Lyft, No 3:13-cv-04065 (N.D. Cal. 2013); O’Connor v. Uber Technologies, No. 3:13-cv-03826 (N.D. Cal. 2013); and Souran v. Grubhub Holdings, No. 1:16-cv-06720 (N.D. Ill. 2016).

The potential for a misclassification or joint employer designation is more than simply an academic issue, as myriad employment-related claims also arise when a worker is in actuality an employee. Eligibility for benefits such as paid sick leave, health insurance, workers’ compensation coverage and unemployment benefits, as well as application of employer policies, standing under fair employment practice laws, and protection under the wage and hour laws vis-à-vis minimum wage and overtime eligibility are just some areas where employers are not accountable to non-employee workers. In addition, as the DOL recognized, state and federal governments and agencies have decreased revenue when companies are not paying payroll taxes and contributing to benefits funds, and the trickle-down impact of those losses could be significant. Employers failing to properly classify worker relationships could face liability on many fronts.

Avoiding the risks associated with misclassification or joint employment requires an honest assessment of your workforce and diligence in contracting and managing relationships. When deciding how to classify a worker relationship, a business should consider all aspects of the worker’s engagement, from hiring through work location, scheduling and supervision, compensation and benefits, and the duration and potential conclusion of the relationship, whether predetermined or not. How the relationships will actually work is a crucial consideration. Formalities, such as contractual provisions, will be disregarded if the real nature of the relationship is not accurately reflected. However, if a company is satisfied that the relationship will truly meet the applicable test(s) for independent contractor status or will not create a joint employer relationship, setting forth terms in a comprehensive agreement should be the next step.

For an independent contractor relationship, such an agreement should include terms that divest the company of as much control as possible. The contractor should control how, when and where the work is done, and what resources he or she needs to perform the work, including employees or subcontractors. The contractor should waive entitlement to all employee benefits and assume liability and responsibility for all tax payments, and the company should specify that it will not withhold or pay payroll taxes or make contributions to disability funds, workers’ compensation programs or the like. Companies should also require insurance and proof of same and indemnification in favor of the entity. The agreement should permit the contractor to conduct similar activities for another business or person, while prohibiting use of any confidential or proprietary information to which he or she may be privy while performing services for the company. Interactions with company employees, reporting of any nature, and company policies applicable to the contractor must also be addressed.

Similarly, when engaging a third party to provide workers, a company should evaluate carefully the terms of engagement. A protective agreement should place limits on the relationship; that is, specifically disclaim joint employer status. An agreement should also clearly delineate responsibility between a third party such as a staffing agency and the company receiving the workers. Work location, duration of projects, skill level, tools and schedule must also be addressed. Supervision and interactions with company employees should also be considered, with a requirement for an on-site manager incorporated if feasible and appropriate, or, at a minimum, an agency representative designated as the staffed workers’ liaison. The third party providing workers should maintain personnel files, conduct evaluations, maintain responsibility for discipline and discharge, and handle personnel and human resources functions. The third party agency should also warrant compliance with all applicable employment laws, including, but not limited to, wage and hour laws, and assume liability for its acts or omissions, with indemnification of the business. If any employer policies apply to staffing agency workers, those should be identified and provisions made for conveying them to the workers, with an explanation as to why those policies apply and a disclaimer that they do not impart employee status. Finally, the agreement should specify how much about the relationship is communicated to the worker. At a minimum, each worker should know which entity employs him or her and controls his or her work, and to which person at which entity reports of various types should be directed. Some employers require an acknowledgment of certain salient terms by the workers.

Once the analysis is conducted and the agreement is in place, the company should periodically audit the relationships and determine whether they are functioning as written. And if they are not, or if the laws or regulations change, the company should begin anew. As the “gig” economy evolves, so must our approach to our workforces.

Reprinted with permission from the May 1, 2017 issue of the New Jersey Law Journal. © 2017 ALM Media Properties, LLC. Further duplication without permission is prohibited. All rights reserved. For information, contact 877-257-3382 or or visit