In the past few years, the American workforce has shifted dramatically. By some estimates, as many as 53 million Americans are now self-employed. Many of them work in the “gig” or “on demand” economy, which has emerged as the new norm for doing business. In general, the gig economy offers traditional services, such as transportation, food delivery, and housing, in a more efficient way by connecting consumers directly to service providers. But, as with many innovations, gig economy companies face challenges from multiple fronts due to mounting legal pressures. Employment laws written in the 1930s haven’t kept up with the pace of innovation, and trying to apply them to the way services are delivered today is like trying to fit a square peg into a round hole.
Areas of Potential Legal Risk
Currently, two of the greatest areas of legal exposure for gig economy companies center on alleged worker misclassification and the enforceability of arbitration clauses. Many gig economy companies have grown at a rapid rate thanks in part to the use of a workforce that consists primarily of independent contractors. While many workers are attracted to the flexibility of being in business for one’s self, with the ability to control whether, when, and how they work, some workers have pushed back with a series of misclassification suits.
In 2015, the U.S. Department of Labor seemed to provide support for these workers when it issued an Administrator’s Interpretation stating broadly that “most workers are employees under the FLSA’s broad definitions.” Notably absent from its guidance, however, was any specific reference to workers who provide services through “on demand” companies. And the DOL recently withdrew this guidance, effective June 7, 2017.
Recent federal cases have also thrown roadblocks up for these types of lawsuits. For example, in April 2017, the Second Circuit affirmed the dismissal of a class action of New York City “black car” drivers who alleged they were misclassified as independent contractors by their dispatchers after concluding that multiple factors of the “economic realities test” weighed against employee status. Similarly, the Ninth Circuit held, in an unpublished opinion, that Phoenix, AZ, airport cab drivers are independent contractors under the FLSA because they were sufficiently independent in running their businesses and the cab companies did not exert significant control over the drivers.
With so many cases pending before the courts and regulatory bodies around the country, many gig economy companies face inconsistent rulings, creating uncertainty and ongoing compliance challenges. The picture is likely to become clearer in the next few years as the appeal courts weigh in and provide precedent.
Courts have also demonstrated a renewed acceptance of arbitration clauses. For example, courts in Florida, Illinois, Maryland, Michigan, New Jersey, Ohio, and Texas have enforced Uber’s arbitration agreement in independent contractor misclassification lawsuits. The Department of Justice just changed its stance on the enforceability of class action waivers, now taking the position that enforcing arbitration agreements with class waivers does not deprive employees of their rights under the NLRA and enforcement of these provisions is required under the FAA unless an exception applies. And the U.S. Supreme Court agreed to review conflicting decisions regarding the enforceability of class action waivers in arbitration agreements. Given that the Supreme Court recently reaffirmed that the FAA preempts state rules that discriminate against arbitration, reversing a Kentucky Supreme Court decision that required individuals with powers of attorney to explicitly authorize arbitration agreements, hopes are high that the Court will agree with the DOL that enforcing arbitration agreements with class waivers does not deprive employees of their rights under the NLRA and enforcement is required under the FAA.
Repercussions From Legal Exposure
These emerging legal issues lead to increased legal costs, and for many gig economy companies, funding can be extremely tight. Moreover, high litigation costs can hamper research and development budgets that the company needs to remain competitive. In fact, a series of four worker misclassification suits against cleaning services provider Homejoy ultimately forced the company to cease operations in 2015. Rather than try to use 20th century laws to combat a 21st century problem, some observers urge a new portable benefits model, which would create a basic set of universal set of portable benefits and protections to workers regardless of where they source income opportunities.
The minefield for gig economy companies are many, but partnering with outside counsel early to make labor and employment decisions, and conduct periodic audits to ensure compliance with all laws and regulation, can avoid doom. In particular, gig economy companies with cross-border operations should be mindful of the differences in the laws of many states and municipalities when making decisions. Finally, gig economy companies will need to take all measures necessary to protect their IP and trade secrets, which are the lifeline of every emerging company.
For more information, an Orrick attorney is happy to advise.