On November 3, 2020, California voters passed the App-Based Drivers as Contractors and Labor Policies Initiative, also known as Proposition 22, which was backed by rideshare giants Uber and Lyft. With the passage of Proposition 22, app-based transportation and delivery drivers were classified as independent contractors under California law.

This proposition was introduced in light of a lawsuit the California Attorney General brought against Uber and Lyft, alleging violations of state labor laws. According to the UC Berkeley Labor Center, the rideshare companies would have paid $413 million into California’s unemployment benefits system if their drivers had been classified as employees instead of independent contractors. For this reason, Uber and Lyft had both threatened to stop operating in California if they were required to classify their drivers as independent contractors.

The Rise of the “Gig Economy”

No matter your opinion about Proposition 22, the passage of the initiative was a huge win for “gig economy” entrepreneurs. It may also signal a shift in the way we think about employment, a change that has been years in the making. With the rise of the gig economy, both workers and businesses are relying on the industrial-age-based employment model less and less. 

According to the U.S. Bureau of Labor Statistics (BLS), 10.6 million independent contractors were identified in May 2017, representing 6.9% of all workers. By 2019, BLS reported that this number had increased to 10.4%. However, a survey conducted by Intuit QuickBooks at the end of 2019 found that 44 million workers were self-employed at some point during the year, representing 28.2% of all workers, with 14% indicating that working as an independent contractor was their primary job. 

The QuickBooks survey identified several factors that contributed to the rise in self-employment before Coronavirus hit. First, traditional employment model jobs do not provide the same level of compensation as they used to. Even though housing and education costs have skyrocketed, employees have realized minimal wage growth, and employers have also reduced employee benefits in response to healthcare costs. These circumstances have driven many workers to seek non-traditional employment opportunities where they have more control over their income. 

COVID-19-related unemployment has also led to an increase in self-employment as budgetary concerns have forced many hiring managers to rely on freelance workers instead of traditional-model employees. As a result, millions of Americans have started freelancing since 2019, and between 2019 and 2020, the percentage of self-employed workers increased from 10.4% to 10.9%. 

The Existing Worker Classification System

The existing laws related to the classification of workers date back to the Industrial Age, around 1919. Whether a worker is classified as an employee or an independent contractor is an important distinction, as employers generally must withhold federal, state, and local income taxes, withhold and pay social security and Medicare taxes, and pay into the unemployment benefits and workers’ compensation systems for each employee they hire. In some situations, employees may also need to be provided with benefits and healthcare. Usually, employers are not required to do any of this for independent contractors, making the use of independent contractors appealing for many struggling businesses. 

Another critical issue related to worker classification is employee rights. For example, the Fair Labor Standards Act (FLSA) only applies to employees and does not protect independent contractors. The FLSA gives employees rights to minimum wage, overtime pay, the creation of record-keeping, and youth employment standards.

Employees vs. Independent Contractors

Under the Industrial-Age worker classification system, the level of control an employer has over a worker and the way work is completed determines whether they should be legally classified as employees or independent contractors. The IRS identifies three categories that employers should consider to determine whether a worker is an employee or an independent contractor:

• The level of behavioral control over the worker

• The level of financial control over the worker

• The established relationship with the worker

As the gig economy continues to grow, the distinctions between employees and independent contractors have become murkier. With more people viewing self-employment as a viable income source, it may be time to rethink the way employees and independent contractors are classified or to establish a new system entirely. 

As state governments struggle to maintain sufficient funds in their unemployment program in the wake of Coronavirus, the way the American legal system views worker classifications may need to be adjusted in order to keep the system alive. We may also see changes in how workers are classified for FLSA purposes under the Biden Administration. These changes will reflect the President’s campaign position regarding employers misclassifying gig workers as independent contractors to avoid paying employee benefits and circumvent FLSA overtime requirements.

While the future of worker classifications remains uncertain, it is abundantly clear that the traditional industrial-age employment model plays a significantly less central role in today’s economy. As the way we work continues to evolve, legal standards should adapt to reflect the new reality.