By David M. Prager, Esq.

In the last few years, instant delivery and on-demand services business have flooded the startup world, at times, even drawing comparisons to the dot-com bubble.  Many of these companies have grown with tremendous speed behind an army of flexible contract workers; fueling the rise of the “gig economy,” where workers are their own businesses, floating from gig to gig without any particular loyalty, or connection to, their employer.

The rise of the gig economy presents a new twist on an old problem:  how should these “entrepreneurs” be classified for purposes of wage and hour laws?  Is the stylist from Glamsquad who shows up at your house to do your hair and makeup an independent contractor?  Is the masseuse summoned from Zeel an employee?  What about the good-looking personal trainer form Provita?  Surely the Uber driver who took me home last night is an employee–don’t we all learn at a young age not to get into a stranger’s car?

Questions like these can lead to lawsuits.  Indeed, lawsuits against emerging companies that provide on-demand services are becoming more and more commonplace.  In October of last year, a group of housecleaners sued Handy, alleging they are employees, not independent contractors.  Similarly, personal shoppers for Instacart filed a lawsuit claiming the company misclassifies its workers as independent contractors in January.  And in March of this year, two different judges in northern California federal courts ruled in separate cases that a jury would have to decide whether drivers for Uber and Lyft are employees or independent contractors.

Lawsuits by workers claiming that are misclassified as independent contractors are certainly nothing new.  In August of last year, the Ninth Circuit ruled that FedEx misclassified 2,300 drivers from 2000 to 2007.  In 2010, UPS agreed to pay $12.8 million to settle a lawsuit claiming it had misclassified 2,400 drivers.  Certainly, if a large savvy company such as FedEx can misclassify its workers, smaller businesses can as well.

So what’s the takeaway?  The takeaway is no different than before the “gig economy” entered our lexicon:  control.  In most situations, an employer’s control or right to control the worker both as to the work done and the manner and means in which it is performed determines whether the worker is an employee or an independent contractor.  Labels don’t matter.  Contracts don’t necessarily matter.  Generally speaking, the more control a business exercises over a worker, the more likely that worker is appropriately classified as an employee.

Many HR and business professionals know that misclassifying workers could expose a business to large penalties and result in the business being required to pay back wages, overtime, and taxes.  What HR and business professionals may not know, however, is how difficult maintaining a legitimate independent contractor relationship with your workers actually is.  It requires up-to-the-minute independent contractor agreements, policies, and procedures.  It also, and just as importantly, requires strict adherence to the contractual and legal limitations on direction and control over those workers.  Even sophisticated companies with well-drafted contracts and policies (like FedEx, Uber, and Lyft) can find themselves on the wrong side of a lawsuit if they don’t adhere to those policies in practice.

If you have questions regarding your independent contractor agreements, policies, or procedures, contact one of Klinedinst’s employment attorneys.