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The Case For The “Dependent Contractor”

Business owners excepted, workers in America fall into one of two categories: W – 2 employees and independent contractors. We all know the basic differences that flow from these labels. In return for guaranteed wages and wage-and-hour protections, as well as workers’ compensation and unemployment compensation benefits, employees work set hours and must fully comply with employer demands as to both work product and the manner in which that work is done. On the other hand, independent contractors can work when and how they wish (at least in theory), and in exchange, give up their rights to the safety net of wage-and-hour protections, anti-discrimination laws, workers’ compensation, and unemployment compensation benefits.

The legal distinction between employees and independent contractors has been part of American law since the New Deal. The concept of the “independent contractor” still makes sense in the context of a true freelance worker. Anyone working freelance is free to work for any company or any number of companies he or she chooses, and is free to stop working for a particular company whose demands are unusually high or whose pay is unusually low. That worker can then focus his or her energies on other clients who provide greater compensation and less grief. The concept of independent contractors also continues to make sense in the context of doctors, lawyers, accountants, IT professionals, electricians, plumbers, and other professionals and tradesmen with special expertise, who serve multiple clients or customers. In each of these cases, the professionals or tradesmen can turn down unprofitable work for better-paying gigs.

But economic realities have changed since the New Deal. The now quaint notion of lifelong employment has been replaced by downsizings and reorganizations. At the same time, employees now routinely jump from one employer to the next in effort to accelerate their career advancement. On top of these developments, companies increasingly rely on contract workers to work on specialized projects, with projects lasting anywhere from a few months to a few years, all without the necessity of withholding payroll taxes and having to deal with potential discrimination claims when the project ends. And in the past decade, these trends have met up with a post-recession economy in which employers are increasingly wary of the responsibility of taking on the many obligations that flow from the hiring of a new W-2 employee.

All of these developments have led to dramatic changes for the American worker. Many workers now work multiple part-time jobs, typically with no benefits. But we also now see a proliferation of delivery drivers ( a market fueled by our increasing taste for online purchases), Uber drivers (a market fueled by our increasing distaste for traditional taxi services), and Handy cleaners and tradespeople ( a market fueled by our increasing insistence upon service on demand).

The one thing that the delivery drivers, Uber drivers, Handy tradespeople, and other similarly situated workers have in common is that they are all dependent upon a particular company’s business model, and completely vulnerable to (1) any collapse in that business or (2) any change in that business model. Theoretically, Uber drivers, and Handy tradespeople can choose when and where they work, but they lack control over the amount of their wages and the timing of their payments, and they cannot negotiate better contracts. If they do not like the work or the terms of work, there are plenty of other workers to take their place. Nevertheless, these workers are often not considered “employees.” By default then, all of these workers are presumptively considered to be “independent contractors.” The economic reality, however, is that none of these workers are “independent ” in any meaningful sense of the word. They are all entirely dependent upon a single employer or, rather, a single non-employer.

With increasing recognition that the employee / independent contractor distinction now baked into the law of all 50 states does not always match the economic reality, there has been a push in the United States to legally recognize a third category of worker – the “dependent contractor.” This trend follows the lead of Canada and Germany, which have already enacted legal protections for workers who are economically dependent on just one company.

But what would “dependent contractor” status look like in the United States? Presumably, the worker would be treated the same as an independent contractor in most respects – the worker would still receive no wage-and-hour protections, and would still have no entitlement to most other employee benefits or legal safety nets.

However, for the company to engage that worker, there would be at least one very significant difference. Under the current state of the law, a company that treats a more or less full-time worker as an independent contractor does so at a substantial risk that the IRS, a court or other tribunal will someday rule that the worker should have been treated as an employee. When that occurs, the financial consequences for the company can be dire. The newly labeled “employer” can be tagged with large wage-and-hour liabilities and legal fee claims, unemployment compensation penalties, and personal liability on workers’ compensation claims. But if the company is instead able to pay the worker under a more realistic dependent contractor model from the outset, that company will be at much less risk of penalties for improper classification of its workers.

What then is the upside of dependent contractor status for the worker? The answer is much less clear in the United States than it is in Canada. In Canada, employees have long had rights to notice and/or severance pay upon termination, and those rights are now being extended to dependent contractors. But in most of our United States, the more draconian system of “at-will” employment still prevails. So extending to dependent contractors the same non-existent notice and severance rights of employees would accomplish precisely nothing.

So the question remains – if states are to recognize dependent contractor status, what rights would that status bestow? What rights should a worker have upon involuntary termination from the company that has been his or her source of income? Should that worker receive some limited form of unemployment compensation benefits? And what if that worker is injured in the course of his or her work? Should the non-employer have some obligation to provide medical or wage benefits akin to workers’ compensation coverage? Or should the burden fall upon the worker’s private insurance coverage or, failing that, upon governmental welfare and Medicaid systems?

The answers to these questions are far from clear. But the debate on independent contractor status is now underway, and it may not be long before the law recognizes a third classification of worker.

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