Saturday, March 2, 2019

The legal loophole that lets companies like Doordash steal tips

  Popular courier services such as Instacart, Doordash, and Amazon Fresh have been making headlines recently with the news that they’re meeting minimum pay promises to drivers by cutting compensation and using tips to make up the difference. In other words, customers were tipping under the impression that drivers got tips on top of the delivery fee earned per trip, but instead, the companies subtracted the value of those “tips” from the payments that they had promised to workers — saving the company money but cheating drivers. (Under pressure, Instacart recently reversed its policy.)

  Why can these companies get away with such behavior, especially in states like Washington where the tipped minimum wage is illegal? The answer is that these workers aren’t employees. They’re independent contractors, and labor law for independent contractors is very different than it is for employees. As self-employed workers, they are entitled to fewer protections, but also, in theory, have a greater degree of freedom and control.

  Some of those same workers argue they’re being misclassified by their employers and should actually be considered employees. This issue has been the subject of substantial litigation, as in 2016 when Uber was dinged for misclassifying workers in California and Massachusetts, and again in California in 2018, where workers won a suit against the delivery company Dynamex. Now some states, including California, are trying to fix the problem with new legislation.

  Misclassification occurs when companies improperly categorize someone who functions as an employee as an independent contractor. Individual states and agencies have their own standards — as, for example, when deciding employment status for workers’ compensation purposes — and the IRS has its own 11-point standard. A much simpler rule was applied in the Dynamex case, though: The ABC test. The court found that to be considered an independent contractor, an employee must meet three criteria.

  The first is freedom from control: Independent contractors decide how, when, and where they work, set the terms of their employment, and do not receive highly specific direction in the course of their work. The second is performance of work outside the company’s scope of business. In addition, the work reflects an established and independent trade or specialty in which the worker is “customarily engaged.” For example, a plumber is “customarily engaged” in work pertaining to installing, maintaining, and fixing plumbing.

  In another example, a florist’s shop might hire a tax preparer as an independent contractor, relying on an expert who sets their own terms and schedule to do work that isn’t within the florist’s normal parameters of business. But if the florist hired someone to work in the store arranging flowers, that person would likely be considered an employee.

  The rise of the “gig economy,” sometimes known as the 1099 economy in a reference to the tax forms used to report “miscellaneous” income for independent contractors, has highlighted the misclassification issue, but it’s not new. Misclassification has been a huge, historic problem in the construction industry, as well as for domestic workers, janitors, truckers, and many others. Nearly 24 million workers labored as independent contractors in 2015, and only a small slice, around 1 percent, were “gig economy” workers.

  For companies, there’s a clear advantage to relying on independent contractors: They’re much less expensive to maintain. Companies don’t have to pay unemployment insurance, workers’ comp, or payroll taxes. Overtime and minimum wage don’t apply, nor do state and local requirements around paid family or sick leave. Nor do they need to provide benefits such as paid time off, retirement funds, or health insurance.

  Independent contractors assume all the risks of operating a business, which is sometimes by desire and design. Tax preparers and freelance journalists, for example, may prefer the flexibility of independent contracting, and companies with periodic specific needs that fall outside their normal work, like a company hiring experts for diversity and inclusion consulting, benefit from these kinds of independent contractors.

  However, corporations also label workers who function like regular employees as contractors: If you’re delivering packages for Big Package Company in a BPC shirt, reporting for an hourly schedule, following specific routes, and having other aspects of your day-to-day work life dictated by BPC, you are an employee — as a court determined in 2015 in the case of a very real package company: FedEx. Even if you also moonlight for Rival Package Company doing similar work, you’re still an employee.

  “Misclassifying limits people’s ability to negotiate while companies are acting as employers and controlling the way work happens,” explained Erica Smiley of Jobs With Justice.

  Workers aren’t the only ones concerned about misclassification. The practice is also anti-competitive, harming companies that comply with the law by treating employees as employees, taking on the added responsibility and cost that comes with it. “This is just another way that companies shift burdens onto workers and taxpayers,” says Steve Smith of the California Labor Federation.

  Gig economy jobs often come with lofty promises of profit and are marketed with language used to describe independent contracting, such as the ability to set your own hours and select your customers. Earners aren’t paid by the hour in many cases, but by the job; the more jobs they can rack up, the higher the pay.

  On the ground, the reality is very different, whether you’re a cleaner with Handy or a courier with Postmates. Companies dictate the terms of employment quite extensively, and in some cases have even created their version of the company store, as with companies like Uber and Swift, which have gotten into the vehicle sales and leasing business for their “contractors.”

  States such as Massachusetts, New Jersey, and now California are trying to solve this with laws that clearly define the distinctions between employees and independent contractors. California’s AB5, for instance, would codify the Dynamex decision. These laws do not, of course, magically eliminate the practice of misclassification or instantly reclassify workers, but they add further guidance around the topic and create tools for workers and labor organizers to use in negotiations with employers.

  In other regions, worker-organizers have focused on issues around working conditions themselves, such as pay and access to benefits, rather than the question of misclassification. That has happened in New York, Washington State and elsewhere — though it should be noted that many of these focus on the gig economy specifically.

  The push to clarify the definition of independent contractors could benefit workers and employers alike, and it may also be very disruptive to the tech industry. While the gig economy makes up a relatively small percentage of misclassified workers, Smith said, “What you do see with the gig economy is businesses building an entire business model around misclassification.”

  Even as lawmakers consider codifying protections, the National Employment Law Project finds these companies are a driving force behind a wave of “marketplace platform” legislation across the U.S. that explicitly defines gig economy workers as independent contractors, not employees. One venture capitalist shamelessly told CNN: “What is ultimately a better business decision? To try to change the law in a way that you think works for your platform, or to make sure your platform fits into the existing law?”

  Building an industry on normalizing misclassification, and sometimes pushing workers to advocate against their own rights, as seen with smiling gig economy workers shilling for their bosses, is a dangerous and troubling trend. Companies are quick to claim that codifying independent contractor status would be “ruinous,” but they also said the same thing about minimum wages, protecting the right to collective bargaining, and other measures designed to improve worker health and safety, and yet somehow, capitalism prevails. Companies that cannot meet their operating costs fall and others rise to replace them.

  “Some businesses,” commented Smiley, “may not deserve to exist in a modern society.”

  About the author: S.E. Smith is the deputy editor at

  This article was published by

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