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Hiring Independent Contractors vs. Employees:  The Legal and Ethical Dilemma in the “Gig Economy”

Self-employed, independent contractors (IC) have always had a place as a part-time resource for companies, and that appears to be expanding as innovative startups look to contractors to be a core part of their business.  Previously, IC work was for short term projects or interim roles as needed, but now that is changing as contractors are now filling roles in place of full-time employees.

There has been a lot of press about the on demand “gig economy” and how more businesses are now relying on independent contractors or freelancers for long term work.  Despite the popularity of the services offered by companies such as Uber, there is growing controversy surrounding employment rights and control of independent contractors, who have little recourse to improve their status or assert any rights within a hiring company.

What is the “Gig” Economy and Why is it Growing?

Although the term “gig” indicates an individual performing short term or temporary services for a variety of clients, many of these new ICs are actually engaged for months or years with a single company, one hallmark of traditional employment.  What is most interesting about these new companies is that they are engaging ICs to provide services that are designed to fill an on-demand ‘time-saving’ niche, that used to rely on one’s personal network.

Now, instead of calling a friend for a ride to the airport, you call Uber; and food or grocery shopping is offered via delivery services and taken care of by third party apps that incur a charge.  People who could never afford a house maid can now hire someone to clean for a few hours, instead of asking a family member to help out.  At first glance, it just seems like a good business idea that has gained popularity in our busy modern life.

Obviously, these companies are a filling a need for convenient, cheaper services in some sectors, but the question is who absorbs the human resources burden in the on-demand labor model?  One common complaint is that the ICs doing the actual work are taking on a great deal of traditional business risk, as companies shift away from the expense of full-time employment of staff.  This emerging business strategy sidesteps the need to hire formal employees, while retaining a ready and available team of self-employed workers.

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Why Do Companies Like Uber and Deliveroo Rely on Independent Contractors?

The short answer to this question is cost savings.  It can be up to 40% cheaper to use an IC to perform the same work as a full-time employee, since no benefits are offered and no employer tax payments are required.  Employment-related expenses such as health insurance, pension contributions and employment taxes are all shouldered by the IC, since they are technically self-employed business people.

Contractors Take on the Risk of On Demand Services

ICs also take on the risk of market and seasonal fluctuations for services, and if no work is available they don’t get paid.  The company has no obligation or commitment to these contractors, and can allow simple supply and demand to create the optimal available labor pool.  Likewise, compensation and commissions can be altered at any time by the company, and the IC must take it or leave it, with no labor union or government entity to advocate for their position.

Companies that use ICs to fulfill services to customers claim that this arrangement also benefits the contractor by giving them the flexibility, schedule and compensation that they choose.  In some cases that may be true, but this supposed advantage gets blurred when ICs are actively managed in their work performance, and the company attempts to exercise some control over them.  Control is a primarily element in the legal definition of an employee-employer relationship in most countries, and is now at the center of resolving the employee vs. IC dilemma.

Impact on the Workers:  What are Their Expectations?

All of this does bring up the fact of an individual’s responsibility for their own original choice to be self-employed.  Perhaps they were attracted by allure of setting their own hours and not going through an arduous job search and interview process.  They just signed up and started working, maybe without thinking about the implications of their new role.

From the outset, these new service providers are self-employed in every sense, and responsible for all withholding, tax and other registrations required of any independent business.  The problem is that many of these independent contractors probably do not see themselves as a proprietary business owner, and may not even declare the full amount of income or make required statutory payments.

An Economic and Labor Grey Area

Used in this way, independent contractors occupy a ‘grey’ area within a country’s economic and labor structures; neither treated as employees nor operating as valid independent enterprises.  It is no wonder that after some time the ICs begin to assert their employee-like status, seeking benefits, insurance coverage, expense reimbursement and even unpaid overtime.

This of course, has the potential to undermine the business model of the companies that use ICs en masse, and has polarized the debate over worker classification, protection of labor laws and lost tax revenues for governments.  It is already costing these companies hundreds of millions of dollars in lawsuit settlements to their ICs, specifically by Uber, Lyft and Door Dash.

Reputation of the Company and Ethical Implications

As this practice continues of slotting long term workers as self-employed (regardless of the position, control or longevity of service), it does bring up some issues for a company’s reputation and business ethics.

There are two fronts where the largest “gig” companies are treading on uncertain ethical ground:

These methods clearly dehumanize and disempower ICs, and have eroded the reputation of companies that are going to great lengths to retain a self-employed workforce.  When a business must resort to these types of measures, it brings up the question of whether the IC relationship is truly agreed to, or in some way coerced and imposed simply to maintain a cost reduction strategy.

Of course, the contractors have a choice of whether to continue working, but many are recently unemployed, lack education or are otherwise without many options for full-time employment.  If a company is viewed as taking advantage of this stark reality solely to support the bottom line, then there could be lasting damage to their business potential and customer loyalty.

Why Risk Using Independent Contractors: Legal Implications

Not every country in the world is as pro-business as the US, and indeed many foreign locales default to enforcing labor and employment protections for all types of workers.  This can create a conflict for any business that is used to lax labor laws in their home country, but now face a different level of legal rights when using ICs in foreign markets.

While there have been legal challenges in several jurisdictions by ICs asserting employment rights,  there has been no roll back to date of the IC strategy by “gig” economy companies.  Paying lawsuit settlements is still cheaper than giving ICs employee status.

They are now taking steps to assert that self-employed workers do not have any legal or contractual basis to claim employee status or rights to union representation, but the courts are beginning to push back on behalf of the ICs.

How to Minimize Misclassifications Risk by Outsourcing Employment

There is risk in this broad-based strategy applied globally, and reclassification of ICs as employees is a distinct possibility that is gaining momentum.  This outcome brings potential penalties, back-payment of overtime and missed statutory withholding by the employer.  

While the examples of Uber and Deliveroo are widely known, any company that uses ICs regularly in pro-labor countries runs the risk of misclassification.  For this reason, many multinationals are turning to third party outsourced employment solutions such as Shield GEO.  For companies operating in various foreign markets, the best solution is to legally employ workers through a GEO local employer of record and avoid potentially costly legal battles, settlements and even restriction on business activity.

Get in touch to find out how an Employer of Record solution can help your company

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