The Rise and Risks of IC Misclassification
Studies have estimated that the U.S. government is losing billions of dollars in lost taxes a year due to the misclassification of workers, not to mention what is lost due to off-the-books cash payments.
For an employer, classifying a worker as an independent contractor, versus an employee, can have considerable cost advantages; primarily associated with avoiding providing worker benefits and insurances.
How has the risk of misclassifying workers risen over the years in the U.S.?
The U.S. Government has continued to clamp down on bad misclassification practices over the years meaning the repercussions of misclassifying workers are rapidly beginning to outstrip the benefits.
FLSA introduced to protect workers rights
In a bid to protect workers rights the U.S implemented The Fair Labor Standards Act (FLSA) to protect worker rights and ensure employees had the right to a minimum wage, overtime pay, record keeping, and youth employment standards in the private sector and in federal, state and local governments.
Despite the implementation of FLSA, misclassification continued and the U.S. Department of Labor estimated that 10-30% of employers misclassified workers in the early 2000s. The most high-profile of these cases involved two giant US companies – Microsoft and Time Warner, Inc.
Misclassification cases have grown over the years
In December 2000, Microsoft agreed to pay $96.6 million to end an eight-year legal battle. The payment was made to approximately 8,000-12,000 temporary workers who claimed they should have been entitled to benefits under Microsoft benefits plans only to find that they had been misclassified as IC’s.
In the same year Time Warner, Inc. was made to pay-out a $5.5 million settlement to the Department of Labor (DOL), due to the misclassification of workers, meaning they were excluded from welfare and pension plans.
Undeterred by these high-profile lawsuits, the misclassification issue persisted. Between 2000-2005, U.S. payroll employment grew by 2.4%, but non-employer growth was at 23.6% - a near 50% increase in annual absolute growth. This disparity in growth rates likely reflects an increase in misclassification.
The growing stance against worker misclassification in the U.S.
In 2013, the Obama Administration estimated that provisions to reduce misclassification would bring in $8.32 billion in federal revenue over the next 10 years. At this point, it was clear that greater control was needed to ensure that fewer companies misclassified workers.
The risk of misclassifying workers within the U.S. has been intensifying further in 2020. For example, New Jersey’s stance on misclassification has increased evidently through the six new bills they released in 2020 to target the issue.
Additionally, California’s misclassification lawsuit against Uber and Lyft has been making headlines. The growing risk of worker misclassification over the years emphasizes the necessity of reviewing how your workers are classified as more states begin cracking down.
The rise and impact of the gig economy
With the rise of the gig economy and a growing number of businesses based on a model that engages independent contractors, the risk of worker misclassification is higher than ever.
The U.S. has approximately 16.8 million contract workers and in a study by the Freelancers Union and freelance platform Upwork, predicted that by 2027 50.9% of the US population will be freelancers. Commenting on these finds, Upwork CEO, Stephane Kasriel noted that ‘the growth of the freelance workforce is three times faster than the traditional workforce’.
Gig economy misclassification cases
Large companies leading the gig economy trend have brought misclassification cases and into the public eye. In 2016, Lyft and Uber were both embroiled in high-profile cases. Lyft paid a settlement of $27 million and agreed to settlement terms whereby drivers remained contractors but were able to reimburse expenses such as gas and vehicle maintenance.
The debate of Uber and Lyft’s worker misclassification is still ongoing in 2020, especially in California where Lyft is suspending service in response to a court requirement to reclassify their drivers as employees rather than independent contractors.
The largest misclassification case to date came in June 2015 involving FedEx, and it resulted in a $228 million settlement. FedEx had been classifying and paying 2,300 Californian drivers as independent contractors, with some claims dating back as far as 2000.
The Prosecuting Attorney for the case, summed up the impact misclassification can have on a business, “The $228 million settlement sends a powerful message to employers in California and elsewhere that the cost of independent contractor misclassification can be financially punishing, if not catastrophic, to a business.” By the end of 2016, FedEx had paid $500 million in misclassification settlement payments.
These cases highlight how the gig economy has grown over the years and is expected to expand further, however, those operating in that space should take note of these worker misclassification mistakes to avoid paying similar penalties.
The risk of misclassification for staffing and workforce solutions companies
The risk of misclassification also extends to staffing agencies when they are tasked with sourcing contract workers by their client, only then to be found liable when those workers have been misclassified. For example, in January 2013, a New York staffing agency faced 35 cases involving claimants who sought unemployment benefits despite being independent contractors.
The New York State Unemployment Insurance Appeal Board made identical decisions on the 35 separate cases. They stated that the workers supplied by the staffing agency to perform promotional work were employees, not independent contractors.
As a result of this decision, the staffing company was held liable for contributions for all similarly situated workers. In the same month in 2013, Apple and AT&T settled their misclassification lawsuit with Arise Virtual Solutions for a $1.25 million settlement to resolve accusations that their workers were misclassified as independent contractors.
Arise, a virtual business process outsourcing and contact center services company, misclassified over 200 workers as independent contractors instead of employees. Originally, Apple & AT&T had also been accused of wrongdoing, however, after multiple rounds of motions, and the filing of new complaints against Arise, the parties settled.
As these case studies show, irrespective of a company’s size if its workers are classified incorrectly, they should expect state or federal sanctions. This is why at PGC we have introduced our own independent contractor program as part of our workforce management platform service.
It’s an independent assessment process that assesses various aspects of engagement to determine if it is suitable for IC status or whether it should be employed. We’ll also indemnify this determination, meaning our clients are protected from the risk of IC’s being misclassified.
Classify your workers correctly
It is crucial to remain compliant and classify your workers correctly as either an employee or an independent contractor. If you have any questions on how to engage workers correctly in the U.S., get in touch!
Disclaimer: The information provided here does not, and is not intended to, constitute legal advice. Instead, the information and content available are for general informational purposes only.