by Cynthia Waddell

FedEx, Comcast, Macy’s, Uber, UPS.  Every day it seems like another company has been named in a new worker misclassification lawsuit.  In this post, we’ll try to sort out some of the reasons this type of litigation is on the rise and in the headlines.

Lawsuits over misclassification are on the rise because the use of independent contractors is on the rise.  The overall labor force in the U.S. has experienced an extensive shift from the traditional employer-employee relationships to non-traditional, non-employee arrangements.  In 2005, the Bureau of Labor Statistics (BLS) placed the percent of workers who were independent contractors at 7.4% of the total workforce.   A recent study released by Upwork placed the number of independent contractors at 40% of the contingent workforce, or 21.1 million workers.   Because these non-traditional, non-employee engagements typically do not include worker benefits such as workers’ compensation, unemployment, retirement, health care, profit sharing or other standard employee protections, it follows that workers who believe they were erroneously denied these benefits will sue.  Lawsuits under the Fair Labor Standards Act (FLSA) could be brought by the Department of Justice or by an individual, and are increasing.

Rise of the Gig economy. Many well established businesses, as well as newly formed “peer-to-peer” startups such as Lyft and Homejoy, have embraced the independent contractor model as a way to engage a flexible workforce and to reduce labor costs.  However, how the engagement of workers via software platforms and “on demand” apps is currently being sorted out in cases such as Uber and Lyft.  Both the Uber and Lyft cases will be set for jury trials to determine the correct status of these workers. 

Many businesses misclassify independent contractors. Based on findings by state task forces, the rate of misclassification is very high.  For example, New York’s Joint Enforcement Task Force on Employee Misclassification (JETF) released its 2014 findings in February that  it identified nearly 26,000 instances of employee misclassification.   It is understandable how businesses misclassify workers because there is no single test.  Federal and state  labor, unemployment, and workers’ compensation laws governing who is an employee and who is not are far from uniform.   

Litigation costs are high, in many ways.  Court Statistics Project, Caseload Highlights, illustrates that employment litigation is one of the most expensive types of civil litigation, averaging a cost of $88,000 per case.  Although it has become more difficult in some instances for class action suits to be certified, they are still very possible and can cost companies millions of dollars.  If a company is found to have misclassified its workers, this could open the door for state and federal agencies to conduct compliance audits.   Often, the “average” cost of a case can be misleading.  Litigation costs can rise exponentially if there is a need for discovery, experts, or higher-level,  senior counsel.   Companies who are the subject of high profile litigation also suffer in non-monetary ways, such as damage to their business reputation, even if they ultimately prevail.

Conclusion: 

Lawsuits are time consuming, costly, and can do great damage to a firm’s brand or reputation.  They are also very avoidable if the employer takes a few simple precautions:

  • Don’t take your workers’ status for granted.  There is no “bright line” test to determine a worker’s status. 
  • Don’t rely just on the fact the worker has agreed in writing they are an independent contractor.  The courts will look at the actual working arrangement, especially direction and control of the worker.
  • Don’t rely on the worker’s formation of a corporation or Limited Liability Company.  If you are engaging a small, one person firm, even if they are incorporated, it does not prevent the worker from filing suit.
  • Do ask your tax or legal adviser if you are at all unsure if a worker should be considered an independent contractor.