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Regulators and Lawyers Race to Respond to Thriving Gig Economy

Drivers hailed by apps. Housecleaners and dog walkers solicited online. Runners who bring food to your doorstep. Cities across the country have seen a surge in workers who set their own schedules and don't answer to any boss.

As more people flock to opportunities in the gig economy and more companies press into this space, it's become increasingly apparent that novel workplace schemes don't fit into the existing labor structure that balances power between employers and their workers. Business models for most on-demand companies are built on the backs of independent contractors rather than employees, revealing a blurry line with wide consequences.

Battle lines have been drawn in Seattle, where the city's effort to serve as a self-described gig economy "laboratory" saw pushback from companies who say the measure to unionize workers for ride-hailing companies, such as Uber Technologies Inc. and Lyft Inc., would crush their business. The U.S. Chamber of Commerce has sued to block the law. The right to collectively bargain, as well as have benefits such as minimum wage, overtime and workers' compensation protection is reserved for employees under federal labor law.

Consumer Protections

Sharing economy companies have insisted industry regulations do not apply to their innovative models, which inspired legislation to create additional regulations to protect customers. Requiring background checks blew up into a full-scale battle in Austin, Texas, eventually resulting in Uber and Lyft leaving the city. The ride sharing apps have returned to the city. This session, Texas state lawmakers passed a measure that rendered void all local ordinances governing such transportation companies, which requirements for fingerprint-based background checks. They would be required to conduct local, state, and national criminal background checks for prospective drivers that includes the use of a multi-jurisdiction criminal records locator and the national sex offender website maintained by the U.S. Department of Justice. Such efforts are common in lawmakers regulations. Airbnb, which has faced claims of discrimination, also have done internal work to attempt to prevent their hosts from weeding out guests based on race. The California Department of Fair Employment and Housing reached an agreement with the couch-surfing company that allows it to audit and enforce fair housing laws.

Seattle isn't alone. And it isn't just about drivers. A rising mountain of court battles from California to New York and a flurry of statewide legislation now put the unresolved consequences of the on-demand economy in greater focus and threaten the corporate bottom line.

"As we see more of these platforms develop, more people will be looking for ways to have rights," said Dawn Gearhart with Teamsters Local 117, which organized the drivers in Seattle. "What we have built in 40 or 50 years in labor law does not apply. The structures in place are not going to hold up this new type of work."

The conflicts crystallize the paradox of the gig economy: How to balance innovative business models with workers' rights. The city's effort, and other initiatives, identify the key questions: What price do workers pay for flexibility and freedom? How much power can they wield without the safety net afforded under traditional business models? Can the companies survive the mountain of legal challenges?

General counsels at gig-economy companies are on the front lines of these issues, defending business models that disrupted traditional services and made their companies successful. Many in-house lawyers support legislation that would provide portable benefits or a create a new classification of worker.

"The beauty of the gig economy is that the labor supply is very flexible. That's the whole point," said Paul Oyer, economics professor and senior fellow at the Stanford Institute for Economic Policy Research. "There is no doubt the policy implications of the growth of the gig economy is a big issue. It's a funny gray area, and we've limped along and ignored it for many years. The policy needs to catch up."

'A Lot of Room for Interpretation'

Gig-economy companies have paid out millions of dollars in settlements over how to classify workers. Transportation, delivery and home service companies have paid back pay and wages but are reluctant to change how they label workers. Uber and Lyft, the housecleaning services Handy and Homejoy, and the delivery services Postmates Inc., TryCaviar and Amazon Prime Now all are or have been the subjects of litigation over employee status.

"With the gig economy, the sky's the limit," said Kristin Sverchek, general counsel to Lyft. She said the supplemental income earned by Lyft drivers lets them pursue other passions. "When it comes to classification of employees versus independent contractors, it's less about the company making a decision but rather the practical realities of the situation."

Sverchek said there are no work shifts rather, drivers sign in and out when they want and the users vary greatly. This creates a nontraditional employer-employee relationship, she said.

"In our case, that degree of freedom and on the flip side, the lack of control exercised by the company, is exactly why they are independent contractors. They don't operate the way employees do," she said adding,"It's fundamental to the business model."

Lyft, not unlike other gig companies, faces classification battles in states including California and Massachusetts. Yet, Sverchek said gig companies don't necessarily see more litigation than others, but, rather, they are more in the spotlight.

Postmates Inc. general counsel Rob Rieders insisted the independent contractor model "makes sense" and allows workers to set their own hours and allow workers to supplement incomes or make extra cash.

"There is still a lot of unknown in the on-demand space," Rieders said in a recent interview. "There is a lot of room for interpretation of laws and policies. And many of the laws are outdated as far as new technologies apply."

Rieders also acknowledged that the model attracts challenges.

"Of course plaintiffs' attorneys are going to take advantage of all the unchartered territory," he said. "Postmates, like other on-demand companies, is at the forefront. It's going to be interesting to see how we will shape the legal landscape but building a body of law through precedent-setting outcomes will be important to defining the future of the landscape."

Defining the Terms

Tech industry lobbyists have also pushed to include language that carves out definitions for on-demand workers and attempt to specify the independent contractor status of on-demand workers. In recent years, states have passed special labor law exemptions for transportation network companies, such as Uber and Lyft, including Alabama, Arkansas, Idaho, Indiana, Iowa, Kansas, Maine, Michigan, Mississippi, Missouri, New Hampshire, New Mexico, Nevada, North Carolina, North Dakota, Ohio, Oklahoma, Rhode Island, South Dakota, Tennessee, Texas, Utah and West Virginia.

Workers' rights attorney Shannon Liss-Riordan of Lichten & Liss-Riordan has waged high-profile battles with on-demand companies. She won a $100 million settlement against Uber over worker classification, but the dispute remains tied up in the courts.

Her case in California federal court against GrubHub, set for trial in September, will consider whether the company's workers should be considered independent contractors or employees.

The California case against the Chicago-based food delivery app company resembles those against Uber and Lyft in recent years, both of which ultimately settled. The trial could represent the first time a judge rules on what a California judge once called being handed "a square peg and choosing between two round holes."

Liss-Riordan has faced roadblocks to systemic adjudication against company labor and benefits practices because of arbitration clauses that prevent or restrict class actions. The U.S. Supreme Court is set to consider a case this fall that would settle an issue divided in lower appeals courts over whether class waivers are allowed in employment agreements.

Gig-economy companies built their business models on evading employee protections, Liss-Riordan said. She wants workers to get unemployment, workers' compensation and collective bargaining rights she believes they deserve.

"When the actual law is applied to these relationships, the companies won't be able to prove they are independent contractors," she said. "You have entire companies that are built on workers who they deny are their employees."

What States and the Feds Are Thinking

States and local municipalities have begun adopting laws to address some of these questions, thus creating a national patchwork of regulations.

Such laws could have broader implications for the emerging sharing economy and establish precedent for other companies. At least 45 states, including California, Georgia and Texas, as well as the District of Columbia, have established some sort of regulatory framework for such companies, according to the National Conference of State Legislatures.

U.S. Sen. Mark Warner, D-Virginia, introduced a bill that pushes for portable benefits for gig-economy workers. The measure would provide $20 million in grants for states, localities and nonprofit organizations to experiment with portable benefit models for gig-economy workers. A companion measure in the U.S. House of Representatives has also been filed.

Portable Benefits

Some states have been leading the charge with creating legislation that provides independent contractors benefits. A proposal that was considered by the Washington legislature would require companies who use independent contractors to put money toward benefits. Similar measures have been floated in New York and California by both local and state lawmakers. Many of these efforts, however, differ in whether they also define how these workers should be categorized. Federal legislation for a portable benefit program has also been floated. Pension plans that can follow workers from job to job have been enacted in California, Oregon and Illinois and proposed in at least 12 other states.

Some companies have been proactive in this area. In 2015, Shyp Inc., an on-demand package delivery service, decided to change its couriers to employees from independent contractors.

Last year, Care.com Inc., a Waltham, Massachusetts-based company that provides an online platform that connects people to caregivers, announced a portable benefits program that would create "a social safety net for millions of care workers in the on-demand gig economy."

The platform allows families to contribute to their caregiver's benefits like a corporate employer would do, distributing a percentage of the transaction to fund a benefits program pooled from other household employers.

Lyft's Sverchek, when she joined the company five years ago, said the ride-sharing industry was not regulated. Now, nearly every state regulates the industry to some extent. She said the founders of the company were thoughtful about the safety parameters of the platform.

"We don't have this allergic reaction to regulation," Sverchek said. "It's sort of a quirk of our employment system that a lot of these benefits are tied to employment. There is no inherent reason that has to be the case. Things like 401(k) or health insurance, there is no reason that has to be tied to full-time employment."

Grappling With Categories

Tracking gig-economy workers has proven elusive, but statistics and studies in recent years show that it is a rapidly growing sector. According to Intuit Inc., about one-third of all tax filings between 2010 and 2014 were filed by 2.1 million independent workers in the United States. Intuit forecasted in 2015 that the gig economy will reach 7.6 million people by 2020 and that it will grow by nearly one-fifth 18.5 percent in the next five years.

Census data show that "nonemployers" grew across all sectors from 2003 to 2013. Many occupations that would be considered on-demand services grew at the quickest rate during that time. But both the U.S. Bureau of Labor Statistics and the U.S. Census Bureau have been working to categorize the workers.

In recent years, economists who study this area have called for tax reform, a third classification or worker category and portable benefits. A 2016 study by Alan Krueger of Princeton University and Lawrence Katz of Harvard University found a significant rise of "alternative work arrangements in the economy from 2005 to 2015.

According to the study, the percentage of workers engaged in alternative work arrangements defined as temporary help agency workers, on-call workers, contract workers and independent contractors or freelancers rose from 10.1 percent in 2005 to 15.8 percent in 2015. The percentage of workers hired out through contract companies showed the sharpest rise: from 0.6 percent in 2005 to 3.1 percent in 2015. They also found that workers who provide services through online intermediaries, such as Uber or TaskRabbit, grew twice as fast as many workers selling goods or services directly to customers.

Lawmakers are paying attention. The GOP national platform released last year included several references to the gig economy and called for a "comprehensive regulatory reform." High-profile congressional leaders, such as Warner and U.S. Rep. Virginia Foxx, R-North Carolina, chair of the House Education and the Workforce Committee, have called for an updated structure.

"The gig economy brings into question terms we have in law, what is an employee? What is an independent contractor?" said U.S. Rep. Bradley Byrne, R-Alabama, who serves on the House Education and Workforce Committee. "It has caused us to rethink what our terminology and policies are. We are having to rethink just about everything because [the] nature of the workforce has changed on us."

Byrne said he would normally defer to states on such issues but he believes the challenges need to be addressed through federal law.

Labor Secretary Alexander Acosta has acknowledged the need for a solution, as well, including ideas such as portable benefits or a third class of worker, during his confirmation hearing.

In many ways, these are old questions but now powerful players, such as Uber, are working to shape the debate. Liss-Riordan said efforts to provide portable benefits in states are troubling. She said the companies are fighting to carve out protections. A more valuable solution, she suggests, is to enforce existing laws and not water down these protections.

"The gig economy has exacerbated many companies and industries pulling this scam for years," she said. "[We saw] this in trucking, cleaning industries, a lot of work-at-home scams, call centers, adult entertainment and cable companies. Uber came along and more of the same."

Uber, for example, increased federal lobbying spending from $470,000 in 2015 to $1,360,000 in 2016. These companies have continued to hire lobbyists in states that have considered proposals, as well.

"These companies are providing a new form of technology but not providing new ideas," said Nayantara Mehta with the National Employment Law Project. "It isn't so much a change of misclassifying workers. That's been happening for a long time. What's concerning for us and workers' rights advocates is that Uber and other companies are spending a lot of money to shape the laws to make it easier to continue this model we haven't seen before."

Where this battle is most likely to play out in is the courts.

Recent rulings in New York and California suggested on-demand workers should be considered employees. Other boards and agencies have ruled otherwise. The U.S. Court of Appeals for the Second Circuit in April said "black car" drivers are contractors, not employees. At the time, the U.S. Department of Labor previously backed the drivers, arguing they should be considered employees.

The Labor Department under Acosta, however, recently rescinded its guidance on independent contractors, which essentially said the department considered most workers to be employees under the Fair Labor Standards Act and that it would apply broad definition of employee when investigating company's practices.

Richard Meneghello of Fisher & Phillips, a Portland-based attorney who helps lead the firm's new gig-economy practice, said there hasn't yet been a magic bullet solution.

"There has been a lot of momentum this year for local and federal governments realizing they need to solve this problem," Meneghello said. "The uncertainty of these laws in some ways is stunting the industry's growth. We are dealing with a 21st century problem with 20th century regulations."