In January 2018, David Shadpour started the new year off by authoring an article for Forbes entitled, “The Gig Economy:  Pioneering the Future.” Based on his own experiences using Uber and Lyft after giving up his car, Shadpour quickly noticed that today’s economy is rapidly shifting away from the traditional models that have defined the workplace for a very long time. Much of the motivation for this evolution is based on the fact that successor generations of employees are putting an extraordinary emphasis on flexibility and work-life balance in a way that has never been experienced until now.  And technology is driving and enabling the progress!

Workers Demand Independence and Flexibility

As a result, today’s employees are not defined in the conventional sense but rather are considered independent contractors and they no longer have a “boss” in the conventional sense either.  Instead, a new, disruptive pattern is becoming commonplace where up to 162 million people in the US and Europe are now  working as independent contractors versus employees as reported by the McKinsey Global Institute.  There is a term that is used to describe this situation: the gig economy.  According to online dictionary sources, a gig economy is an environment in which temporary positions are common and organizations contract with independent workers for short-term engagements.

The trend to embrace a gig economy has begun. But what will this mean for employers who will now have to make determinations at the federal and state levels regarding which workers are functioning as employees and which are considered independent contractors.  The answer to this question has never been easy before, but now it is rapidly becoming complicate and will only grow more critical if the study by Intuit predicting that 40% of American workers would be independent contractors by 2020 is accurate. That is nearly one-half of the work force – and the speed of growth is accelerating. In 2015 there were 160,000 active Uber drivers and one year later, in 2016, that number had exploded to 650,000!

With the gig economy supporting and actually enabling the call from workers for increasingly greater independence, business owners and leaders are going to have to be very careful as they attempt to accurately classify their team members.

Tax Implications

The pressure on the government to ensure proper classification will continue to intensify as the number of workers participating in the gig economy continues to rise. The difference can have a major impact on the employer’s profits and especially on tax obligations. The employee versus independent contractor debate also has a tremendous influence the issues of unemployment compensation, workers’ compensation, and other benefits that employees enjoy. 

The tests that federal and state governments use to decide if the worker is an employee or a contractor include these factors:

  • The extent to which the work performed is integral to the employer’s business
  • Whether the workers’ managerial skills affect his or her opportunity loss
  • The relative investments in facilities and equipment by the worker and employer
  • The worker’s skill and initiative
  • The permanency of the worker’s relationship with the employer
  • The nature and degree of control by the employer

Additionally, states often asses these issues when determining the correct classification:

  • Is the worker free from directions and controls?
  • Is the work performed outside the usual course of business?
  • Is the individual customarily engaged in independently established trade, occupation, profession or business as the involved service performed?

Conclusion

As employers continue to watch the trend toward more independent contractors and fewer employees in the business marketplace, they will need to be in close contact with their CPA and other advisors in order to remain in compliance with federal and state rulings. They need to be clear on the definitions and differences,  and most importantly classify their workers appropriately based on their job descriptions and responsibilities they assume on a regular basis for the company.

This distinction matters to business owners now more than ever before!

Of all the defining factors that have been relied previously upon in determining the employee vs. independent contractor status, the most significant is usually the emphasis on the employer’s “control” over the worker.   The concept of control has always been at the center of the debate. But the difference today is that we are in a changing economic environment. All of the data being gathered is emphasizing that we have already moved into a new world economy where workers are increasingly placing a value on less employer control.  There is a unique correlation between the rise in worker’s desire for self-control and the need to adjust the company infrastructure. As that shift occurs, based on the growing number of independent contractors the challenge to employers will become even more intense as they seek to remain successful while utilizing a nontraditional workforce.