Risks to Employers in the Growing Gig Economy

Adam Jacobson


May 3, 2021

States, countries and multinational bodies are currently debating whether “gig workers” like drivers for ridesharing or food delivery services actually work for those platforms or are independent contractors. The answer to this question determines whether companies must provide this expanding pool of workers with benefits and other protections. Different jurisdictions vary widely in their conclusions, creating considerable ambiguity around the gig economy. This has resulted in a confusing and sometimes overlapping array of laws and regulations, creating potential risks for both companies and workers.

In February, the United Kingdom’s Supreme Court decided that Uber drivers should be classified as “workers.” The U.K. has three employment classifications: “workers,” “self-employed” and “employee.” Workers receive more benefits and protections than the self-employed, but not as many as employees.

After the court decision, Uber stated that U.K. drivers will now be paid a minimum wage, receive paid holiday time and, if eligible, be enrolled in a pension program to which the company will also contribute. However, these benefits will only count against the time that drivers are actually transporting customers, not the time that they are waiting for fares.

In September 2020, Spain’s Supreme Court ruled that food delivery people are employees of the app companies they deliver for. According to El Pais, the court found that the food delivery app Glovo was “not a mere intermediary” between restaurants and delivery drivers, but rather “a business that fixes the conditions for the provision of its services, and owns the assets essential to carrying out its services.” In March, the Spanish government (in agreement with trade unions and business groups) passed a law classifying gig workers as employees and giving them corresponding rights, including the right to unionize and access to the algorithms that decide their work assignments, a transparency measure that may nominally help prevent discrimination. The law must be approved by the country’s cabinet before going into effect.

As countries individually decide how to handle the issue, the European Union began the first of a two-part deliberation process in February. The initial stage involves consulting workers and platforms to help determine a potential solution. Expected to take place before the summer, the second stage will focus more on the “content of the initiative,” according to Margrethe Vestager, the EU’s top official overseeing the digital economy.

To date, the United States has not enacted any official national regulation or law regarding gig worker classification. In 2019, the Trump administration’s Department of Labor issued a non-binding opinion letter stating that gig workers were independent contractors because they “set their own hours, were free to find work on competing platforms, and were not an integral part of the business because they merely used the software the company creates.” While not legally binding, such opinion letters can be used as evidence in lawsuits as a stand-in for a formal court decision or law.

During the 2020 presidential campaign, Joe Biden indicated that he believes gig workers should be classified as employees, but has not expressly pursued the issue since taking office. Potentially indicating future movement on the issue, however, the Biden administration rescinded the Department of Labor letter in February 2021. 

Absent national regulatory action, U.S. states are handling the question in their own ways. Building on a 2018 state court ruling, California passed AB 5 in May 2019. The legislation implemented a stricter standard for gig work companies and uses a three-part “ABC” test to determine whether a worker is an independent contractor:

A. The person is free from the control and direction of the hiring entity in connection with the performance of the work, both under the contract for the performance of the work and in fact.

B. The person performs work that is outside the usual course of the hiring entity’s business.

C. The person is customarily engaged in an independently established trade, occupation or business of the same nature as that involved in the work performed.

Rideshare companies like Uber and Lyft essentially ignored AB 5, however, and subsequent regulations intended to clarify ultimately weakened its impact. In November 2020, California voters passed Proposition 22, which created an exemption for app-based drivers, classifying them as independent contractors.

Overruling Uber’s objections, a Massachusetts court recently ruled to allow a lawsuit by the state’s attorney general challenging the classification of gig workers as independent contractors to proceed.

In March, the U.S. House of Representatives attempted to rectify the lack of federal guidance, passing the Protect the Right to Organize Act (or PRO Act). Including the same ABC test used in California, the PRO Act would reclassify many gig workers as employees and pave the way for them to potentially unionize. It is unclear whether the bill will pass a divided Senate, however.

Risk Management Concerns

“For gig economy employers trying to navigate the myriad laws and changing regulations regarding employee classification, a good rule of thumb would be to follow the most restrictive test in the given jurisdiction,” said Lara Shortz, head of the labor and employment practice group at Michelman & Robinson, LLP.  Further, she recommended that employers “regularly conduct audits of the workforce to ensure that workers are properly classified either as employees or independent contractors.” Given the shifting regulatory landscape, this will help employers avoid misclassifying workers, running afoul of government enforcement actions, and facing penalties by the Internal Revenue Service for unpaid taxes. 

Other penalties could include class actions for unpaid benefits, overtime, and meal and rest breaks. Specifically in California, “misclassification claims can also result in lawsuits brought under the Private Attorneys General Act, which also involves hefty penalties,” Shortz said. “We’ve seen certain companies try to take very creative approaches to classification, and this can tend to backfire in the face of litigation.” 

For example, in January 2020, the attorney general of Washington, D.C., announced that contractor Power Design Inc. had agreed to pay $2.5 million for misclassifying 500 workers as independent contractors rather than employees.

Because misclassification claims are considered wage and hour matters, insurance may not be an option to defray these risks. “Typically, and at best, employers can attempt to negotiate separate riders with their insurance carriers to cover defense costs in the event of a misclassification lawsuit, but even if successful, covered defense costs are often limited,” Shortz said.

The shifts in classification and corresponding regulations may push gig workers to pursue unionization. In a 2020 survey of 1,115 gig workers, freelancers and contractors from human resources software provider Ceridian, while 79% of respondents were somewhat or extremely satisfied with their gig or contract work situation, 56% still favored unionizing. The top reasons cited included “to negotiate higher wages” (69%), “to negotiate better benefits (e.g., health, dental, pension)” (59%), “to ensure greater equality (e.g., more equitable compensation across companies)” (55%), “better workplace health and safety” (39%) and “better job security” (34%). As these issues develop, companies can consult with legal counsel to prepare for the possibility of unionization.

Aside from classification and the resulting liabilities, these companies also face potential liability for gig worker safety issues. Traditional employees receive safety training, including instructions on how to avoid and communicate safety concerns, while gig workers may not. This not only puts workers in more danger, it also exposes companies to lawsuits from injured workers or people injured by them, and may blind companies to operational hazards that could cost money to address later. The gig economy often forces workers to try to complete as many orders or rides or other services as quickly as possible, which can lead to reckless driving and potential accidents. In turn, this may create additional liability for companies. Lawmakers may tackle these issues in future regulations clarifying worker classifications.

To address these problems in the meantime, Gallagher’s workplace risk team recommended companies build risk management into their operations by introducing risk assessment, pathways for workers to report concerns and mechanisms for response. Some insurance lines may be available to cover related risks, such as D&O liability and workers compensation.

Adam Jacobson is associate editor of Risk Management.