The New Gig Economy and the Worker Classification Conundrum

Wonolo Jacob Kearns/Adobe Stock

The independent workforce is growing and becoming an important source of labor and talent for businesses. But this increase, from Uber drivers to online web developers to expert consultants, has unleashed a worker classification firestorm, spreading through businesses, government and the courts. The related ambiguity, uncertainty and risk, often driven by technology, is increasing, as well, even as new demographics are giving rise to a growing portion of the much in demand skilled talent population that prefers independent (non-employee) work.

This contradiction is at the heart of the worker classification conundrum.

Worker classification challenges are not new. But something different seems to be happening now. In addition to enterprises needing to source critical talent from the pool of independent workers, technology-based “work arrangement intermediation platforms” (WIPs) have emerged that spawn many new and (sometimes radically) different ways of organizing work and structuring how businesses engage workers.

Over the past two decades, businesses have been able to truncate misclassification risk by stepping back from ("just saying no"to) using independent workers (often erroneously equated to only those workers classified as IC/1099). But now, when enterprises are unable to find the right talent and are also seeking greater sourcing efficiency and flexibility, simply retreating and restricting the use of independent workers is no longer a viable strategy. The strategy of simple, one-size-fits all avoidance is like throwing the baby out with the bath water.  But changing sourcing behaviors and confronting heightened risk is difficult and scary.

To move forward, three initial steps will be necessary.

1. Understand Classification Risk

First get a better grasp of what the classification risk really is. Presumably, worker misclassification suits have been increasing; however, it appears (based on DOL wage and hour suits) it has been a linear trend dating back to the year 2000, suggesting that many factors are driving the increase, not just recent ones.  And such suits are largely associated with low-skill wage workers, not highly skilled independents.  Therefore, might the current misclassification firestorm be overhyped?  What may lie ahead in terms of court decisions and government policy changes? More level-setting and understanding of misclassification will be important.

2. Bone Up on New Technologies

After establishing a fundamental understanding of classification risk, it will be necessary to start to understand the different kinds of technology-based work intermediation platforms and their risk profiles. Such platforms will be a big part of sourcing and engaging independent talent going forward. For example, is the risk profile of a platform that enables collaboration between businesses and workers different from one that separates businesses and workers by delivering service outputs (similar to an outsourcing relationship). Do some platforms apply classification tests, or do they routinely W2 their affiliated workers using third-party payrolling employers of record?  When these platforms first appeared in the contingent workforce management world a few years ago, there were expectations that labor compliance hazards would be their downfall. But in the segment of platforms that serve businesses (versus consumers), the number of suits that have arisen could be counted on one hand. It seems that somehow perception and reality are not aligned.

3. Know the Market

Finally, it will be necessary to understand what resources, services and solutions are available that can be assembled to address classification risk. These and their applications may vary depending upon the nature of the work and the way in which workers are engaged, all of which changes in an environment more and more saturated with digital platforms, networks and other technologies. To what extent can existing services and solutions (such as third-party payrollers) provide adequate remediation? To what extent are new services and solutions necessary, and are any emerging?  

It is important for contingent workforce management and services procurement practitioners to understand that significant changes are emerging in the contingent workforce and services sourcing landscape. These are not just in technology and sourcing channels but also in the rising imperative to shift from simply avoiding misclassification risk to actively addressing and managing it in order to open up new sources of talent and services for which enterprises will be starving.  

Today, dealing with the worker classification conundrum is a bit like defusing a ticking time-bomb planted in your organization. The risk of doing so may or may not be high, but the alternative of not doing so could be disastrous.

Please follow Andrew Karpie on Twitter @andrewkarpie. Read more of our contingent workforce and services procurement coverage.

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