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Employee or Independent Contractor?

Recently states, like New Jersey, have been cracking down hard on the gig economy, with state regulators and lawmakers both trying to put an end to businesses classifying their workers as independent contractors.

App-based businesses like Uber, Lyft, and Doordash make heavy use of contract workers to perform rides or drop off meals. These companies argue their business model helps them keep costs down, while offering people work opportunities that are far more flexible than traditional employment.

Critics contend that these companies are misclassifying their employees as independent contractors to avoid paying standard benefits like unemployment insurance, overtime, and minimum wage.

Those critics include the New Jersey Department of Labor and Workforce Development, which issued Uber a $649 million fine for unpaid unemployment and disability insurance taxes.

Uber, for its part, argues its drivers are properly considered independent contractors, and that it doesn’t owe the state any back taxes.

“We are challenging this preliminary but incorrect determination, because drivers are independent contractors in New Jersey and elsewhere,” an Uber spokesperson told The New York Times last week.

A bill pending in the state legislature would clear up this dispute by declaring all Garden State workers, baring a few exceptions, to be employees.

In early November New Jersey Senate President Stephen Sweeney (D–Glouchster) introduced legislation that would classify all “individuals who perform services for remuneration” to be employees unless determined otherwise by the state’s Labor Commissioner using a three-part test.

That “ABC” test is closely modeled off of California legislation that passed in September.

In order for someone to be considered an independent contractor, the test requires them to be “free from control or direction over the performance of the service” (meaning they select their own jobs and hours), that they are performing work outside the normal course of business from the entity hiring them, and that they are customarily engaged in the same kind of work they are being hired to do.

This would preclude firms like Uber or Lyft from counting their drivers as independent contractors because performing rides is within those companies’ normal course of business.

New Jersey has technically had an ABC test for several years now, courtesy of a 2015 State Supreme Court decision which replaced a previous, more relaxed six-part balancing test.

This court-created ABC test was a bit laxer than what the legislature is proposing. It allowed workers to be counted as contractors if the work they were performing outside the normal course of business of the hiring entity, or if the work was being “performed outside of all the places of business” of the hiring entity.

Sweeney’s legislation makes the test more rigorous by dropping the latter condition.

Forcing app-based businesses to count their workers as employees could raise their costs as much as 20 percent, according to Bloomberg Law. It could also put an end to flexible employment options many people have come to rely on, says Jarrett Dieterle, a policy analyst at the R Street Institute.

“A lot of workers and independent contractors want to stay independent contractors on purpose because it fits their lifestyle and what they’re able to do work-wise better,” Dieterle told me.

A 2018 Bureau of Labor Statistics survey found 79 percent of independent contractors preferred their current work arrangement to traditional employment.

Reclassifying workers en mass would force these people to find more rigid, traditional employment they might not necessarily want, Dieterle argues.

It’s an argument rideshare companies have made themselves. Lyft drivers “overwhelmingly prefer the freedom of working where, when, and how much they want. Many are moms, students, seniors, or veterans, and 75% of them drive less than 10 hours a week,” the company told Reason when California’s independent contractor bill, AB 5, was still pending. That legislation would “would force ridesharing drivers into shift work, eliminating the control drivers currently have over their own schedules.”

Lyft, Uber, and other app-based businesses are pushing a ballot initiative that would alter AB 5 to exempt their workers from being employees.

It’s not just the gig economy that is balking at these new regulations. The trucking industry has also deemed them too restrictive, arguing that they effectively make it impossible for motor-carrier companies to contract with owner-operator truckers.

This month, California was hit with a lawsuit from the California Trucking Association and two owner-operator truckers who’re arguing that the state’s ABC test is pre-empted by federal law.

New Jersey trucking advocates are making similar claims about Sweeney’s bill.

“This bill will fundamentally change the transportation business model that has existed for over 100 years,” said Salvador Simao, an attorney and former New Jersey Motor Truck Association board member, to Fox Business. “This transformation will make New Jersey the most restrictive state in terms of utilizing owner-operators.”

Dieterle says that there are reasonable concerns about ensuring workers retain certain benefits and protections in a world where fewer and fewer of them have traditional employment. But, he argues, there are less heavy-handed ways of doing that than a wholesale reclassification of workers.

A true free market approach would naturally involve letting the relationship between workers and employers evolve along with the rest of the economy. But the law created generally is not designed to allow employees and employers the freedom to determine their own relationship and pay.  As such the classification of Independent Contractor and Employee is a real issue for many businesses.

Should you find yourself or your business having a question regarding this or any other employment law issue please let us know at Goldfinch Winslow.

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