Welcome to the gig economy

It's estimated that in just about three years, contingent workers will comprise about 40 percent of the entire U.S. workforce. That's more people than ever before working in the big gray area between "employee" and "self-employed."

We've all seen headlines about companies being sued over their use of independent contractors: Uber, Lyft, FedEx, Amazon, Airbnb, Dave's Killer Breads, Grubhub, Comcast, Pepperidge Farms. Among the businesses that Classaction.org considers target-rich occupations: drivers, janitors, technology, insurance, banking, education, hospitality, media and entertainment - even exotic dancers. It's an eye-popping list, for certain.

And misclassification claims continue to mount up from the work of both federal and state government watchdogs. These include the Employment Development Department, the Division of Labor Standards Enforcement, the Internal Revenue Service and the Department of Labor. Add to that collective and class actions, and others brought against employers under PAGA, the Private Attorneys General Act.

So buckle your seatbelts as the crackdown on independent contractors continues in 2017. Or does it? President-elect Donald Trump's pro-business, anti-regulation sentiments promise to revise the tax code, and his nominee for the federal Department of Labor could upend everything at the federal level. However, even if that changes, enforcement by state agencies and through class action and PAGA claims will continue unabated.

Many companies and workers prefer the independent contractor relationship, particularly in the new economy. If properly classified, companies using a liquid workforce can save on labor costs, avoid providing mandatory leaves and benefits, and avoid potential employment related claims. Workers have much greater flexibility and can take tax deductions.

As it stands, the consequences of worker misclassification can be extremely costly from both employment and tax law standpoints. Both the EDD and DOL have been cracking down on who can be classified as an independent contractor.

Recent court cases, particularly those involving Uber and other "gig" enterprises, create unsettling trends for employers. There was a belief that Uber and Lyft drivers fit the classic definition of an independent contractor. That's because the drivers made their own hours, worked as little or as much as they wanted, used their own vehicles, could work for others, and so on.

However, the federal EDD and DLSE disagreed. Lawsuits were filed across the country. In California, a class action was certified. Ultimately, the U.S. District Court for the Northern District of California rejected a $100 million settlement just before the case was scheduled to go to trial. O'Connor v. Uber Technologies, Inc., 13-cv-03826-EMC.

However, the test for independent contractor has little to do with how the parties themselves desire to characterize their relationship. In fact, common fallacies about classification include "the worker wanted to be an independent contractor," "we have a written agreement," and the "worker is only providing services for a short time."

The primary test to determine employee status is whether the company has the right to control the worker while he or she is performing services for the company. S.G. Borello & Sons, Inc. v. Dept. of Industrial Relations, 48 Cal. 3d 341 (1989); Ayala v. Antelope Valley Newspapers Inc., 59 Cal. 4th 522 (2014).

"At-will" clauses contained in independent contractor agreements signal control and employee status. In certifying a class, the district court in the Uber case found Uber disciplined and terminated drivers if, based on customer feedback, they fell to low within a star-rating system.

Uber also exercised significant control over qualifications and selection of their drivers, Uber provided "suggestions" to the drivers, including how to handle riders and calls, and Uber set the fares with little or no input from the drivers, among other things.

Another factor that is heavily looked at is whether the work performed is an integral part of the company's business.

For example, in the O'Connor case, the district court noted that Uber could not exist without drivers. The EDD, Labor Commission and several courts interpret that factor broadly. If the worker does the same or similar services to those provided by the company, it is more likely that he or she will be found to be an employee.

Other factors include the skill required in the particular occupation, the method of payment to the worker (by the job or time spent), the length of time for which the services are to be performed, and whether the worker is engaged in a distinct occupation or business.

At the federal level, the DOL had issued guidelines suggesting that most workers are employees. As the New Year approaches, the DOL is forming partnerships with 35 states, including California, to coordinate enforcement. This includes conducting joint investigations and sharing information and resources.

The DOL, the Equal Employment Opportunity Commission and the National Labor Relations Board are in the midst of trying to expand the definition of "joint employer" to remove protections that allow some businesses, such as staffing agencies, from following laws on wages and hours, leaves and benefits.

But a sea change could be coming as Trump makes his appointments. The current nominee for the DOL, Andrew Puzder, is the head of CKE Restaurants, Inc., which franchises Carl's Jr., Green Burrito and Hardee's fast food restaurants. Puzder is reported to be against the new overtime rule (which was recently put on hold) and other restrictions, and may very well put the brakes on misclassification investigations.

However, in California, there is no end in sight for a crackdown on employee misclassification.

Penalties alone can cost a business between $5,000 and $25,000 per misclassified worker. But the penalties do not end there. If found to have misclassified workers, an employer may face stiff damages and penalties for overtime, missed meal periods and rest breaks, minimum wage violations, pay stub violations, waiting time penalties, failure to timely pay, failure to reimburse business expenses, failure to provide mandatory sick leave, and more. Plus, taxes, interest and attorneys' fees.