States Cracking Down on Employee Misclassification

By FOCUS, a Leonine Business

Over the past decade, the rise of the so-called “gig economy,” which includes services such as Uber and Lyft, has transformed the American economy and everyday life, making it significantly easier to book a hotel, find a cab ride or get any type of food delivered directly to your door. However, the business practices of many of these companies has come under fire over the past several years, specifically relating to their classification, or misclassification, of employees.

The misclassifying of employees as independent contractors holds a significant amount of harm to both the federal and state governments. Classifying a worker as an independent contractor, as opposed to a traditional employee results in lower tax revenues for the state, lower contributions to workers’ compensation funds and prevents workers from obtaining benefits that employees would traditionally receive, such as health care or retirement savings plans.

States and the federal government naturally want to collect what is rightfully owed to them. Federal action has already been taken on the issue with the Fair Labor Standards Act, which provides minimum wage and overtime protection to nearly all workers in the U.S., according to the Department of Labor.

California dropped a bombshell last year as one of the most significant states to pass employee misclassification legislation in 2019 with AB 5/Chapter 296. The new law, which took effect in January, expands on a 2018 decision by the Supreme Court, Dynamex Operations West, Inc. v. Superior Court of Los Angeles, which created a presumption that all workers are employees. The state law codified the earlier decision, placing the burden on employers to prove that an individual is an independent contractor and not an employee.

Virginia is also moving quickly with a bill to prohibit employee misclassification. HB 1047 and SB 744, already approved by their respective chambers, will go to Democratic Gov. Ralph Northam once the differences between the two bills are reconciled.

According to FOCUS research other such bills are pending in at least 24 states across the nation, Puerto Rico and the U.S. Congress.

While Democrats, who have traditionally been supportive of workers’ rights, have backed these bills nationwide, Republican lawmakers have taken the opposite track, viewing them with hostility and fearing their effects on local economies. Some companies, such as Uber, Lyft and Postmates, have announced that they will refuse to comply and have taken California to court over the issue, though with little success so far. The state’sDemocratic Attorney General Xavier Becerra has predicted that the suits will ultimately fail, as the state has a the right to protect workers from exploitation.

All-in-all, eyes will remain on California and likely Virginia in the coming years. Should their bold moves prove successful for both the economy and workers, other states will have incentive to follow suit with similar legislation. If the bills prove to be a boondoggle, expect a lot of “I told you so’s” from red states. For the time being, except to see more of these bills in states where Democrats control the House, Senate and governor’s mansion – where they have the best chance to become law.