The Benefits of Mandatory Binding Arbitration Agreements With Class Action Waivers in the Gig Economy-they Are Not Just for Employees Any More

• Publication year: 2016
• Author: Robert Yonowitz and Danielle Garcia

The Benefits of Mandatory Binding Arbitration Agreements With Class Action Waivers in the Gig Economy-They Are Not Just For Employees Any More

Robert Yonowitz and Danielle Garcia

Robert Yonowitz is a senior partner with the national management side labor and employment law firm of Fisher & Phillips LLP. Mr. Yonowitz has been both actively representing and speaking before companies in the Gig Economy almost since the inception of the Gig Economy.

Danielle Garcia is an associate with the national management side labor and employment law firm of Fisher & Phillips LLP, where she counsels employers on the legality of workplace policies and arbitration agreements.

Introduction

Experts now predict that by 2020, 40% of workers will not fit into the traditional employment model as we currently know it.¹ Many individuals seeking more control or independence from the traditional employer-employee relationship, as well as those individuals who have been economically displaced from the traditional workforce as the result of technology and economic globalization, have now turned to the "Gig Economy" in their search for a long-term, viable alternative to traditional employment models. Gig Economy companies ("Gig companies") have built their entire business models on the expectation that in this new business relationship the individuals providing services to actual customers ("Gig workers") would all be mini-entrepreneurs running their own micro-businesses, much like independent contractors. Gig companies themselves facilitate individual transactions ("Gigs") by providing the means by which customers (sometimes called buyers) could locate, and engage, Gig workers (sometimes called sellers) willing and able to provide the services in question. In the eyes of these Gig companies, Gig workers (as independent contractors) would happily walk away from the protections afforded traditional employees in exchange for the free-dom of not having a boss—or anyone—who controlled how and when they chose to perform the services contracted for through use of the Gig company's platform.

Unfortunately, the traditional concepts of "employee" and "independent contractor" that these Gig companies and many Gig workers had been relying on were created almost one hundred years ago, long before the concept of the Gig Economy had ever been visualized. Moreover, Gig companies' assumption that all Gig workers would happily rid themselves of certain employment protections in favor of independent contractor status has proven not to be the case. Many Gig workers are now claiming, after the fact, that they were never really independent contractors, but instead were employees who should have been, and who are, entitled to employee-style protections relating to matters such as overtime, meal and rest periods, and safety protections.² This has been made crystal clear by the recent $100 million settlement that Uber has agreed to with its drivers who were seeking those protections.³ Uber settled the drivers' claims rather than risk having the presiding court deem all of Uber's drivers—drivers whom Uber considered to be independent contractors—to be employees, thereby undermining Uber's business model, and, potentially, the business model of the entire Gig Economy.⁴

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The authors believe that in time these issues will be resolved by the law's statutory creation of new classifications of workers that have attributes reflecting a hybridization of the characteristics of independent contractors and employees.⁵ However, as is so often the case, the law is slow to react to changing circumstances and technology, and is currently not where Gig companies need it to be to provide the necessary certainty for their business models and their future. This is illustrated particularly well by the demonstrated risk of Gig workers, like those from Uber, coming together as plaintiffs in class actions against Gig companies, seeking wage-hour and workplace protections that until now were believed to have been traditionally reserved solely for employees. To survive these uncharted waters, the authors believe that Gig companies should consider implementing mandatory binding arbitration agreements containing class action waivers with all of their Gig workers.

What is the Gig Economy?

People have undoubtedly heard of Uber and Lyft, and maybe even Handy, Taskrabbit, or Fiverr.⁶ But there are even more: there are platforms that facilitate having food delivered to you⁷ or having people come to your home to do your laundry, for example.⁸ Your children can even utilize a platform to have someone do their homework for them.⁹

The Gig Economy facilitates Gigs on what is intended by the Gig companies to be an independent contractor basis. As such, each Gig worker is considered by the platform to be their own business owner, as well as a "rising entrepreneur."¹⁰

These multiple collaborations between customers and Gig workers make up the massive industry known as the Gig Economy. The Gig Economy is also known as the "on demand" economy, the "platform" economy, or the "sharing" economy.¹¹ No matter what you call it, it is here to stay. And with the Gig Economy come millions of Gig workers who provide their services directly to customers, mediated by one or another Gig Economy platform.

Independent Contractors vs. Employees

There are advantages for a worker to be classified as an independent contractor, which explains why many individuals eagerly enter into these relationships instead of looking for jobs in which they would be considered traditional employees. For example, because the individual is not tied to any specific employer, they can set their own rules for business, and even work for several platforms. This is frequently seen in the ride-sharing arena, in which several drivers will drive for both Uber and Lyft.¹² The advantage can also be something as simple as "being your own boss," in which individuals have to report only to themselves, and are not told how to complete the job for which they have been engaged. At least traditionally, moreover, independent contractors enjoyed higher pay than typical employees, because the company was looking for a unique set of skills for a limited amount of time and would not be required to pay taxes or carry workers' compensation insurance with respect to the persons providing those skills. And, if an independent contractor creates anything tangible—for example, a painting, written work, computer programming, etc.—that work would be the property of the independent contractor instead of the company for whom they provided services.¹³

Of course there are disadvantages with the traditional independent contractor model as well. One is that independent contractors are responsible for their own payroll taxes. Because independent contractors receive only a 1099 form, as opposed to a W-2, the contractors are tasked with setting aside funds to ensure that all of their tax obligations have been met. Further, the lack of a guaranteed long-term position with a company without a guaranteed minimum wage is a large downside to agreeing to become an independent contractor. Nor are independent contractors eligible for workers' compensation or unemployment insurance benefits, and they are not protected under certain civil rights laws, such as Title VII.

To understand the unique impact this tension between being classified as an employee and being classified as an independent contractor has on the Gig Economy, it is important to understand the history of classifying workers as independent contractors instead of as employees, and the tests that courts and the federal government utilize to determine whether a worker has been properly classified.

The distinction between independent contractors and employees arose at common law to limit the vicarious liability that could be imposed on a person hiring someone else to perform a service for the misconduct of the person rendering that service.¹⁴ The amount of control a principal exercised over an individual was deemed to be crucial because "[t]his extent to which the employer had a right to control [work-related] activities was . . . highly relevant to the question whether the employer ought to be legally liable for them. . . ."¹⁵ Because independent contractors are independently responsible for how work is completed and are subject to minimal control, the principal is able to limit their vicarious liability.

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Due to tax implications, the federal government has taken a special interest in drawing a concrete line between independent contractors and employees. Specifically, when companies classify service providers as independent contractors, the companies do not pay employment taxes on said providers.¹⁶ During the 1990s, the Internal Revenue Service ("IRS") noted an increasing trend for companies to classify service providers as independent contractors, instead of as employees—so much so that, over the last several years, worker classification initiatives have been a top priority for the IRS and the Department of Labor.¹⁷ In 2011, the IRS and Department of Labor even signed a memorandum of understanding in an effort to jointly increase worker misclassification audits.¹⁸ The IRS utilized the well-known "20 factor test," which can be categorized into three broad categories: 1) behavioral (does the employer control or have the right to control how the worker completes the job?); 2) financial (does the employer control the business aspects of the worker's job?); and 3) the type of relationship (does the worker receive employee-type benefits?).¹⁹ In terms of federal and state courts, no single standard to distinguish between employee and independent contractor has emerged.²⁰

The IRS 20-factor, right-to-control test is used to assess an employer's tax liability. A similar test is used in most states to determine status under workers' compensation laws.²¹ To determine independent contractor status in other circumstances, courts will...