The Gig Economy Controversy: Changing the Face of Employment

The gig economy—where independent contractors perform tasks for companies or individuals—has grown significantly in recent years. According to a poll published by TIME magazine, nearly 22 percent of Americans, that's 45 million people, have offered services of some kind in this gig economy.

But the growth in per-assignment work and the freelance workforce has raised some new challenges for the companies who take advantage of this economy.

One looming issue is the amount of control companies have over their independent contractors. Many companies that hire a large pool of freelance or contract workers often find themselves confronting issues laid out by agencies such as the Department of Labor (DOL) and the Internal Revenue Service (IRS).

Understanding Federal Guidelines

The DOL lays out several criteria (or "economic realities factors") to help employers determine whether their workers should be classified as employees or contractors. Among the factors employers should consider include how much control the company exerts over how the worker's job is performed and whether the job the worker performs in integral to the business. "Ultimately, the goal is not simply to tally which factors are met, but to determine whether the worker is economically dependent on the employer (and thus its employee) or is really in business for him or herself (and thus its independent contractor)," the Labor Department said in Administrators Interpretation AI-2015, put out last summer. "The factors are a guide to make this ultimate determination of economic dependence or independence."

The Internal Revenue Service also provides guidance to help employers determine whether someone should be considered to be an employee or contractor for tax purposes, indicating that all information that provides evidence of the degree of control and independence must be considered. According to the IRS, facts that provide evidence of the degree of control and independence fall into three categories – behavioral, financial, and type of relationship.

An employer's classification of a worker as an employee versus a contractor is important. If someone is classified as an employee, the employer is required to follow certain federal employment laws and regulations, including providing those workers with overtime pay for hours worked over 40 in a workweek, unemployment insurance and workers' compensation insurance. They also must deduct Social Security, Medicare, and withhold income taxes from the employees' paychecks. (Read more about best practices for hiring freelance or contract workers.)

Amending Federal Employment Laws

The meteoric growth of the gig economy is posing some major hurdles for companies and their independent contractors, and some experts think it's time for the U.S. government to accommodate them by amending federal employment laws.

In a recent report from think tank the Hamilton Project, Seth Harris of Cornell University and Alan Krueger of Princeton propose that the federal government should create a new legal category of worker called the "independent worker" to accommodate the rise of gig-economy companies.

The authors propose that businesses that take on independent workers would have to contribute to the individuals' payroll taxes. However, the businesses would not be subject to federal minimum wage and overtime rules for those workers. The workers would also not need to be covered by workers' compensation or unemployment insurance, but they would be protected by federal anti-discrimination laws, and could organize and receive group health insurance options through the company.

"By extending many of the legal benefits and protections found in employment relationships to independent workers, our proposal would protect and extend the social compact between workers and employers, and reduce the legal uncertainty and legal costs that currently beset many independent worker relationships," the authors write.

While such an idea is still in its early stages, not everyone thinks creating a new category of worker for the gig economy makes sense. Rebecca Smith, deputy director of the National Employment Law Project, says such new classification could prompt more companies to reduce their on-staff headcount and rely more on independent workers.

"We think developing a whole new category of workers, especially to respond to what is a tiny part of the labor market, would engender a race by other businesses to reclassify their workers in order to avoid accountability," Smith told The Washington Post.

Your Thoughts on the Gig Economy

One thing is for certain, the gig economy will continue to be an important part of the U.S. job picture for the foreseeable future. Does your business participate in the gig economy? Follow Paychex on Twitter, Facebook, and LinkedIn and let us know where you stand on the use of freelance and contract workers. Would a new "independent worker" category make sense in the current job market?