“Gig” Economy Driving Changes to Distinction Between Independent Contractors and Employees

On Friday, March 4, the Washington State Senate passed a bill granting Uber, Lyft, and other “gig” drivers certain benefits and protections while at the same time preventing them from being classified as employees.

Historically, a distinction has been drawn between employees and independent contractors. Employees usually work for one employer, at the hours set by the employer, at the employer’s place of business, and/or under the control and direction of the employer. Employees receive a net salary after the employer has withheld income tax and other federal withholdings, is eligible to receive unemployment compensation, can receive workers’ compensation benefits for any workplace injury, is covered by federal and state wage and hour laws, has the protection of workplace safety and employment anti-discrimination laws, and may be entitled to join or form a union.

Independent contractors sacrifice those benefits for greater flexibility and control over their work. Independent contractors typically provide consulting services to more than one company, set their own hours, work out of their own office or home, and/or are able to decide how to go about accomplishing tasks without input from others. Independent contractors are paid according to the terms of the contract, pay their own self-employment tax, and do not receive protections afforded to employees, such as unemployment compensation benefits, workers’ compensation benefits, the protections of workplace safety and anti-discrimination laws, or the ability to join or form a union.

This distinction has particular importance in South Dakota. Under South Dakota law, a covenant not-to-compete is only enforceable in an employment relationship – and not in an independent contractor relationship.

The Washington legislation blurs this historical distinction. It represents a compromise between Uber and Lyft and at least one local union on the difficult question whether “gig” drivers are most appropriately classified as employees or independent contractors. Key features of the bill include the following:

  • Under the compromise, drivers would receive benefits like paid sick leave and a minimum pay rate. (While the minimum pay rates only apply to time that drivers spend with a passenger in the car, supporters of the bill say that the rates have been set high enough to compensate drivers fairly for all of their work time after expenses.)
  • As with other independent contractors, drivers must still cover all payroll taxes and cannot unionize under federal law.
  • It would also create a process for drivers to appeal so-called deactivations, which prevent them from finding work through the companies’ acts.
  • The bill is largely silent on unemployment benefits – although Washington has frequently found that “gig” drivers should receive those benefits. The bill does create a task force to study what the “gig” companies’ contributions to an unemployment insurance trust fund should be – an issue that has been contentious in other states.
  • The bill would block local jurisdictions from regulating drivers’ rights. (A similar feature killed the prospects for a bill in New York last year.) This provision is likely a reaction to Seattle’s enactment of a robust minimum wage law for “gig” drivers, which was intended to provide drivers with a hourly pay of roughly $30 before expenses. (The bill approved Friday preserved the current rates in Seattle but disallows similar legislation in the future.)

Uber and Lyft have warned that affording their drivers these and other protections afforded employees would force drastic changes to their business model and could leave them financially exposed.

Washington is not alone. This Washington effort is but the latest in a trend of legislation seeking to give “gig” drivers something than a perceived “second-class” status. In recent years, other states, including New York and California, have considered similar legislation. In fact, after California passed a law in 2019 that effectively classified “gig” workers as employees, Uber, Lyft, and other “gig” companies spent roughly $200 million on a ballot measure that rolled back those protections. The constitutionality of that legislation is still being litigated.

It remains to be seen whether similar legislation will find its way into South Dakota. However, in 2017, statistics provided by the Bureau of Labor showed that there were 55 million “gig” workers in the United States. A more recent Gallup poll revealed that more than a third of all US workers – around 57.3 million people – participated in the “gig” economy before the COVID pandemic struck. And, of course, that number has likely only greatly increased in the last several years. For more information on the growth of the “gig” economy, see this article.

This trend is happening in South Dakota. This article about one “gig” worker’s story in South Dakota really fascinating.

The distinction between employees and independent contractors has always provided some gray area. But the “gig” economy and its workers’ push for greater rights and benefits in Washington and other states has further blurred that distinction and made it more difficult for employers as they strive to ensure that they are fairly and appropriately classifying their workers as employees and independent contractors.

If you have questions or concerns about the classification of your employers, it is wise to speak with your attorney.

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