The Gig is Up: Employer Pitfalls in the Gig Economy

Freelance word collage with related terms like independent worker, consultant, entrepreneur, free agent, project, assignment and profession

Do you work with independent contractors? If you’ve taken an Uber or stayed in an AirBnB rental, then you certainly have. But what about in your business?

In the medical and dental office setting, independent contractors allow for specialized services to be offered to patients. They can fill in gaps in your current team’s skill set, alleviate overwhelmed employees by taking on special projects, and generally allow you to get more done with less employee overhead cost. Independent contractor classification – or freelancer status – can be great for the workforce, too, as it allows independence, flexibility, and the opportunity for self-management and entrepreneurship without huge initial investments.

It’s no wonder, then, that the so-called “gig economy” is thriving across the globe, not only in the US. The gig or “freedom” economy, as dubbed by the media, now makes up around 40% of our US workforce, making the sector a critical part of our evolving labor market, responsible for generating more than a trillion dollars each year. No longer reserved for traveling musicians and struggling artists, gig workers are now spreading across all industries and professions, and across all generations, from millennials to boomers. But while this may sound ideal for employers and employees alike, it isn’t the entire picture.

The Dark Side of the Gig

Before you start reaching for your 1099 forms, employers need to carefully consider the dark side of the gig, one that should make you think twice before using gig workers in your practice. The problem? Misclassification. When workers who actually should be treated as employees are misclassified as independent contractors, the would-be employer will eventually pay a steep price.

The Department of Labor has focused mighty efforts and resources on fighting misclassification since 2011, launching a broad scale initiative and partnering with the IRS and 35 individual states to investigate, share information, and ultimately recover hundreds of millions of dollars in back wages. Though the DOL recognizes the value and importance of “legitimate” contract workers, their position is that deliberate misclassification deprives employees of benefits, protections, and fair pay. Notably, misclassification also deprives their departments of tax revenue—so they’re highly incentivized to penalize and collect from employers who get this wrong.

The problem with this is that there is no distinction based on the employer’s intent. Whether you deliberately misclassify a worker to avoid employment taxes, or mistakenly do it because it makes sense and both parties seem to want it, makes no difference if you are audited or sued.

We are seeing the DOL’s mission to seek out and destroy employee misclassification play out on a large scale with businesses like Uber, Lyft, and Homejoy, the latter of which is now defunct, due in part to these labor lawsuits. Serious consequences are not reserved for bigger businesses, however. At CEDR, we see this play out on a small scale every day in our HR Solution Center. Members call in with a simple question about a “temp,” not even realizing the underlying problems that need to be addressed.

Misclassification via Temp Agency

Typically, we see two misclassification scenarios. The first is when a practice uses a so-called temp agency, which is really just a placement firm that collects a huge fee for sending you a fill-in worker, without taking any of the employer responsibility. The practice thinks they are contracting with the agency, who acts as the employer, but they then pay the employee directly, usually by manual check. As a result, the worker is never on-boarded to payroll and is never registered as a new hire with the state, let alone signing an employee handbook acknowledgment or confidentiality agreement. There’s also been no background check, no workers’ compensation insurance applied, and no verification of eligibility for employment in the US. Most importantly, no one is paying employment taxes. And the “temp” agency has offloaded ALL the liability onto the practice, including the very high risk that the person may eventually file for unemployment and get benefits on the practice’s dime, not to mention the problem if the employee is injured on the job or claims some type of discrimination.

The risks here are huge, so be clear: If a temp’s performance of duties is subject to your control, on a schedule you set, and is providing a primary service that your business provides, then the temp is your employee, not an independent contractor – no matter how short the gig.

What About Associate Doctors?

The second scenario we see a lot is where an associate doctor wishes to be classified as an independent contractor. This is common and perfectly fine under some circumstances, like if the person has their own company, offers their services to other offices as well, directs the methods of their own work, sets their own schedule for the most part, and performs a specialty service not in your primary line of business. However, all of this is usually not true, so even though the associate assures you that it is their preference to be a contractor, that they only want to work on a temporary or part-time basis, and/or that their accountant signed off on it, they are still technically misclassified, and you incur almost all of the risk.

So how can you protect your business interests when considering using an independent contractor or gig worker?

  1. Analyze the relationship at the outset. Defining the relationship with the worker from the outset is your first layer of protection. Realizing too late that you’ve misclassified someone as an independent contractor can be difficult and risky to correct. Consult with an experienced HR professional, as there are many nuances and state-specific variables.
  1. Have an agreement for services. Once you’ve determined that the worker is properly classified as an independent contractor, consider memorializing the details of the relationship with an independent contractor agreement. Again, this is not a safe place to DIY!
  1. Take advantage of added protections. When establishing an independent contractor relationship, the more clarity you can provide, the better. An example of added clarity is seen in Arizona, which recently passed a new law that allows contractors to execute a Declaration of Independent Business Status (DIBS). This document allows the contractor to “declare” certain key pieces of information to verify their independent contractor status. The DIBS creates a rebuttable presumption that the worker has been properly classified as an independent contractor (in other words, courts will assume that the worker is an independent contractor, absent evidence to the contrary). Even if your state does not provide a DIBS as an option, ensuring that you have documented a complete and clear analysis of each independent contractor relationship can guard against costly litigation or help you in the event of an audit.

In today’s legal environment, misclassification is not likely to go unnoticed. With so many states having signed agreements with the U.S. DOL to crack down on independent contractor misclassification, it is more important than ever that employers classify each and every gig worker correctly.

Before you hire for your next gig, be sure you consider the three steps above, and call an employment law or HR professional.

Friendly Disclaimer: This information is general in nature, and is not intended to replace good counsel about a specific issue with either your attorney or your favorite HR expert.

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