A Third Classification of Worker? Don’t Count On It

Of late, there’s been a steady drumbeat of accusations that on-demand startups are unfairly wringing profits out of independent contractors. The concern: No one is withholding their taxable wages for them, they aren’t being given health care, and they have almost none of the same protections as full-time employees. In fact, one of the only protections independent contractors are provided under federal law is from race discrimination. In 2008, California’s Fair Housing and Employment Act was amended to give independent contractors protection against sexual discrimination, but many states don’t even go that far.

Maybe it’s no wonder that, to deflect such criticisms, a growing number of on-demand management teams and investors have begun suggesting that a third classification of worker – one poised to enjoy both flexibility and greater worker protections – is around the corner.

During a panel I recently moderated, for example, Simon Rothman of Greylock Partners, whose bets include the food-delivery startup Sprig, told attendees, “I personally think the 1099 [tax classification] framework is broken. It existed in a world of monolithic, centralized corporations, not in a world of distributed companies, so I think there needs to be a third class of worker [and that we’ll eventually have one], though it will take a while.”

Don’t count on it, say longtime employment attorneys.

While some politicians are beginning to heed the call of some for a new solution — Senator Mark Warner, a former Virginia governor, has begun banging his drum over the issue – the reality, say these attorneys, is that “brighter line” guidelines regarding who is an independent contractor versus a full-time employee are far more likely to materialize, for a long list of reasons.

Just one of the challenges on the path to new regulations is the somewhat ambiguous need for a third way. According to a recent survey of 201 on-demand workers by the on-demand analytics platform SherpaShare, just 7 people – or 3.5 percent – said they’d prefer a new classification that both preserves the flexibility they currently enjoy while giving them some protections.

Even if more contract workers decide they want more out of their current situations, the creation of a third worker classification is all but impossible owing to the limited capacity of many legislators, says  Joseph Sellers, a partner at Cohen Milstein in Washington, D.C., who heads up the law firm’s employment practice group.

“With all due respect to legislators, I’m skeptical,” he says. “I think it will require a good deal of talking, and on more frequent occasions, to see the need for this kind of legislation. Efforts to enact some kind of quasi-employee status somewhere in the country wouldn’t surprise me. But I haven’t seen any evidence of it occurring.”

San Francisco-based employment and civil rights attorney Cliff Palefsky isn’t aware of any real movement toward a third classification, either.

While Palefsky notes that “people are discussing this Uber case” — referring to the California Labor Commissioner’s recent ruling that an Uber driver should be classified as an employee and not an independent contractor —  he says he has “never heard of a third category or know what it would mean. It would require changing ERISA laws [among a host of others], which would be really, really complicated.”

Some on-demand companies are deciding not see how things play out in this wider debate.

Yesterday, the shipping services company Shyp announced that its independent contractors will soon be offered employment contracts. Instacart, the grocery delivery company, has similarly been reclassifying some of its workers as employees.

Both companies suggest quality control is one factor driving their respective decisions.

Sellers anticipates that more on-demand companies will adopt the same tactic, given their apparent control over the manner in which these workers do their jobs — a trademark of employer-employee relationships.

Pointing to Uber, he asks: “Do drivers have to maintain cars of a certain quality and cleanliness to reflect the company’s brand favorably? Do they have to be on call when asked to be and do they need to respond promptly?” As Sellers puts it, the “quintessential” independent contractor can “wear whatever he or she likes” and “work whenever they want as they long as that person delivers the product in a timely way and at a quality level that’s acceptable.”

Palefsky, meanwhile, seems to think Uber’s drivers are exactly what Uber claims they are: independent contractors.

“You can work or not work,” he notes. “You can use your car and you can work for a competitor at the same time.” Palefsky continues, “If you’re using someone else’s technology or marketing, they have the right to maintain the brand for quality control, including to [insist] that a car be neat and clean and meet certain standards. The way franchises operate is the same.”

Either way, both attorneys very much agree: New tests that better distinguish independent contractors are becoming necessary.

A new worker classification? It’s not nearly so likely.