The Contingent Worker Classification Challenge and Why It’s Not Going Away Anytime Soon

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Worker classification continues to be a challenge for companies that engage independent and freelance talent. The challenge is only becoming more widespread, too, as more organizations use contract labor. It’s also not a problem going away anytime soon, according to Spend Matters Analyst Andrew Karpie, our in-house expert on contingent workforce management. I spoke with Andrew about this rising worker classification challenge, asking just why it’s so complicated and how the current government regulations aimed at clarifying this issue are falling short.

Kaitlyn McAvoy: How complicated is worker classification for companies when it comes to the contingent workforce?  

Andrew Karpie: It’s quite complicated, and companies have become very circumspect about engaging workers as independent contractors (ICs). In fact, doing so has been kept to the bare minimum.

KM: Why is it so complicated? And why are so many companies struggling with classification?

AK: First of all, worker classification rules remain difficult to apply correctly. And there can be different criteria among various governmental agencies and across different levels of government (federal, state, local). Just at the federal level there are different rules promulgated by the Internal Revenue Service (IRS) and the Office of Workers’ Compensation Programs (OWCP). The Department of Labor (DOL) issued a set of guidelines last year that was supposed to clarify classification. However, it did not.  

Secondly, the costs of misclassification lawsuits can be high. Sometimes a worker that was classified at an IC turns around and sues the company claiming he or she was actually legally an employee and entitled to certain monetary compensation — say, overtime, for example. A lawsuit can also easily turn into a class action suit, in which case the cost, including legal fees, can become very burdensome.

KM: Is there also a lack of awareness among contingent workers — do they know how to classify themselves? Or is the responsibility solely on the companies hiring them?

AK: Workers are typically not too concerned about the legal quagmire around classification. In fact, there is no real downside for them — if they are already accustomed to foregoing the benefits of being an employee. Some workers get started as ICs but then come to the conclusion that they should have been classified as an employee and should be entitled to those benefits. Finally, there is now an increase in workers who want to act as independents, and the current legal framework does not qualify them to be ICs. There is the possibility of using third-party payrollers, but this tends to be reserved for higher-level professionals. In any case, it’s the companies that have all the exposure, including if they are deliberately misclassifying workers as ICs just to save costs. Because of this, companies need to look after themselves.

KM: Why does it seem this is becoming a more widespread issue? Is it just that the rise of the “gig economy” and the growing number of independent workers is making this a more present, pressing issue?

AK: Well, the issue really goes back to the early 1990s. Companies were using a lot of ICs, but then the IRS realized that there was leakage of tax revenues — ICs were not paying all their taxes — and it clamped down on compliance and enforcement. Companies quickly moved away from using ICs to engaging contingent workers though temp staffing firms (as “employers of record”) or just hiring them as employees for short-term engagements. And by the way, for a long time there have been industries that rely heavily on ICs and freelancers — journalism, trucking, real estate — either because they really are ICs or because laws have been passed to legalize the arrangement in those industries.  

The classification problem got really stirred up again, because (1) after the Great Recession, more workers started to turn away from employment and look for an independent path and take control of their own destinies and (2) new kinds of platform-based businesses emerged and rapidly scaled to act as a new type of intermediary; many viewed themselves as simple technology businesses that allowed two parties to arrange work, and they seemed to have thought that classification and co-employment issues would not arise. As we know, this did not turn out to be the case. Uber became the great lightning rod, and classification controversy became very visible.

KM: Lyft recently settled a class action independent contractor lawsuit for California drivers. XPO Logistics was also recently sued over classification of its drivers. Are you surprised when you hear about companies being sued by contingent workers for alleged misclassification?

AK: No, not at all. These big misclassification suits have been going on for a long time — long before the advent of the on-demand or gig economy. But the on-demand or gig economy made these suits more visible to the general public. And while everyone seems to know about those suits and the whole controversy in that on-demand context, most people are unaware of most suits brought against large enterprises like the FedEx case last summer.

KM: What about government regulations regarding independent worker classification? Do you think these regulations are clear to companies? Or does our government still have work to do here?

AK: No, they are not clear. The framework dates back to the New Deal and really has become obsolete. In just the past year or year-and-a-half, these questions have started to bubble up into the policy-making arena. This is a complete subject in itself.

KM: The Department of Labor recently issued new guidance on “joint employment” — when two entities, say a staffing firm and a construction company, have ties to one one worker. The goal is to clarify what entity should be held accountable for possible labor violations. What are your thoughts on this DOL announcement? Do you think the new guidance is helpful?

AK: No, this guidance seems to just leave everyone scratching their heads. And the guidance came from judgment in a case of the National Labor Relations Board (NLRB), which is not a law-making body, and some say it is a politicized body as well.

KM: The DOL also said recently it would reinstate its Contingent Worker Supplement in the annual Current Population Survey. The DOL discontinued the survey in 2005. Is this a smart move by the DOL?

AK: It definitely is! It was a travesty when Congress cut funding in 2005, resulting in the discontinuation of this Bureau of Labor Statistics (BLS) survey supplement, and even more of a travesty that it took 10 years to reinstate it, given what has been going on in past years. The survey will likely be redesigned, but what the result will be in terms of what will be measured is open. In any case, something is better than nothing.

KM: What advice would you give contingent workforce managers to tackle the ongoing classification challenge?

AK: Today, contingent workforce managers have the enterprise fortress well defended, and this made sense for many years. But now they are entering a phase where their organizations’ demand for much-needed talent, delivered faster and with lower transaction costs, will begin to force contingent workforce managers to start searching for alternatives to that status quo. So, at this stage, it’s important they have continuous monitoring of shifts toward worker independence, evolution of classification frameworks and the emergence of new platform intermediaries.

KM: Do you think this will continue to be a challenge for CW managers? Will it get any easier?

AK: No, it will not get easier in the foreseeable future. Moving forward trying to meet the demands of their organizations for talent and deal with the ongoing risks of evolving classification requirements, plus digital platforms in the middle — it’s going to be very challenging, very hard work.

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