President Biden’s labor secretary said recently that he thinks many gig workers should be classified as employees who deserve work benefits such as health care, sick leave and overtime pay. This will have far-reaching implications for the gig economy, the workforce and workplace laws in general. The administration has been vocal about their interest in regulating gig worker classification. While it’s just talk for now, these most recent comments imply they may follow through with those plans sooner rather than later.
The question of how to classify gig workers isn’t new. It’s been in the news a lot the last several years as the gig economy has grown. In California, the state legislature passed AB5, which would require companies to classify many independent contractors as employees unless the job is on the AB5 exemptions list. The continues to be challenged in court, the opposition backed by tech firms that have embraced the gig model and other industries that rely heavily on contractors.
Bottom line: This issue of gig worker classification isn’t going away, so it’s best to understand now how it could impact your business.
What is a gig worker?
A gig worker is typically someone who does not have long term employment with one company, but rather works at different companies or through an app for short periods of time, such as a delivery driver or grocery shopper.
What is the gig economy?
The gig economy is a term that means people who work as freelancers, independent contractors or temporary workers. For many, the gig economy is a new way of working. It’s an environment where the traditional 9-5 workdays and 40 hour weeks are replaced by short-term, project-based employment. Workers can pick up gigs on apps like Uber or Task Rabbit to earn money when they need it.
The gig economy has seen rapid growth in recent years as more workers look for flexible arrangements that allow them to balance their personal and professional lives with ease. The rapid increase in freelance and contract work can be attributed to the internet and its ability to connect businesses and consumers with talent. As of 2017, it was projected that 55 million Americans – or 34% of the workforce – were working as independent contractors or gig workers. That percentage was expected to reach 43% last year.
With so many people switching from regular employment to gig work, it’s not surprising that the government has begun questioning the classification of these workers.
How is worker classification determined?
Worker classification is important because the type of worker determines how much money is withheld from a paycheck for taxes and social security. Workers are given different tax treatment depending on their status (employers pay more than employees or self-employed contractors). The IRS, Department of Labor and state governments all audit for worker classification discrepancies.
The IRS looks to three areas of control in order to determine the relationship between an employer and employee/contractor: behavioral, financial and relationship.
Behavioral control refers to how much a boss can dictate what, how and when their workers do on the job. Financial control relates to how much an employer can control a workers’ job opportunities and what they get paid. For instance, contractors often set their pay rate and an employee is usually reimbursed for expenses required to do their job whereas contractors aren’t. Contractors are also generally free to work for multiple companies. The last area of control is relationship, which includes how the employer and worker have come to an agreement related to their expectations. For instance, is the work expected to go on indefinitely or for a period of time until a project is complete?
How could gig worker classification impact your business?
There are several ways reclassifying gig workers would require you to change operational processes and incur additional expenses.
Tax compliance
Businesses must pay and withhold taxes for employees but not for independent contractors. This is because as an employer, you are required to make sure employees have the proper paperwork they need in order to file their own tax returns at the end of every year. Employers have to withhold income, Social Security and Medicare taxes, as well as pay unemployment insurance taxes to the state.
Overtime and labor law compliance
It is unclear whether or not employers would still need to track hours worked by gig economy workers if they are classified as W-2 workers instead of independent contractors. More likely than not, though, businesses will have to track work hours in order to pay them overtime, which could increase overall payroll expenses. You’d also likely have to comply with other labor and wage laws, such as a offering a leave policy and using a minimum wage, that are represented in the Fair Labor Standards Act.
Benefits administration
Gig workers may become eligible for things like paid leave, health insurance and retirement benefits under federal law. Health insurance benefits alone typically cost an employer over $1,500 per year for each worker.
What’s the process for changing worker classification?
The first step is to run various classifications tests to determine what type of workers you have. All of them help you dive deeper into the three controls (behavioral, financial, relationship) mentioned above. There are several tests you can use to determine worker status. California’s AB5 law, for instance, uses the ABC test. The IRS has the 20 Factor Test and most states have their own tests or criteria to follow.
It might be wise to consult an attorney to review the results of these tests. They can help you conduct a careful examination of the facts and determine if an employer-employee relationship exists. Some gig workers may be classified correctly but it’s difficult to know for sure unless an examination with a qualified professional takes place. An attorney can help you understand how much exposure you have and what programs are available in your state and federally to reduce penalties.
One such program is the Classification Settlement Program from the IRS, which allows businesses to resolve worker classification issue and reduce penalties on taxes owed due to improper classifications.
How could this impact how you pay workers?
A lot of businesses pay contractors using tools like Stripe or Venmo, which aren’t designed to withhold taxes, and they lack reporting and W-2 and 1099 compliance. This means you may need to re-evaluate how you pay workers if they’re reclassified as employees. Many payroll platforms only support employee payments vs. contractor payments, so if some of your workforce will remain classified as 1099s, look for solutions that support both. Some payroll platforms also charge per contractor, which can be cost prohibitive, especially if you want to pay your contractors frequently or even daily to compete with gig giants like Uber and retain your contractors. Instead, find a provider like Everee that charges per-transaction for contractor payments and can process payments daily.
Get your gig worker classification questions answered
As the U.S. government considers changing the classification of gig workers, it’s important to understand what a change would mean for your business. If you have classified your employees as independent contractors and are concerned that might be wrong, you can learn more about by watching our webinar on gig worker classification.