Recent headlines have featured independent contractors challenging their classification through litigation. In some cases, this has highlighted the issues presented by online staffing tools that we have been covering quite extensively.
Make no mistake: Online staffing applications can be part of the future. Through an online staffing tool, companies can engage contractors to perform a task on a work order, all in a simple, seamless, online manner. Companies can procure talent as easily as they would order a book, sometimes in far-away countries. Costs are minimized. In many cases, the independent contractor status of the worker is never challenged; nor should it be challenged — the worker has no more connection to the client company than a series of clicks, a transfer to the client of some work product, and a corresponding transfer to the contractor of a payment.
Many people involved in the industry rightly ask how can this possibly create an employment relationship? In many cases, the transaction would not create an employment relationship. But sometimes it does. For example, in recent cases, these models sometimes do not engage in any IC classification vetting. The worker clicking through to bid on the project might or might not really be an independent contractor. Whether the worker is an independent contractor, or not, is indiscernible to the buyer. The buyer may not be gathering enough data to make an IC classification determination. In some cases, the buyer is not gathering much data at all that would be useful in making this determination. In many cases, a buyer will contractually delegate worker classification to a vendor. This is normal and lawful; but it does not solve the problem if the vendor is not gathering much data, either.
An aggravating factor is a lack of a single rule or test for determining whether an individual is an independent contractor or employee. One of many tests employed by courts is the “economic realities” test, which considers factors such as:
- The extent to which the services rendered are an integral part of the principal’s business.
- The permanency of the relationship.
- The amount of the alleged contractor’s investment in facilities and equipment.
- The nature and degree of control by the principal.
- The alleged contractor’s opportunities for profit and loss.
- The amount of initiative, judgment or foresight in open market competition with others required for the success of the claimed independent contractor.
- The degree of independent business organization and operation.
When an independent contractor is engaged through an online tool, how does the vendor/contractor fare under the economic realities test? In many cases, the buyer cannot know. One of the benefits of the online engagement model is nobody (or virtually nobody) in the process is spending very much time (if any time at all) looking at/considering each engagement. The transaction time for each engagement is cut down to near-zero. This is an enormous efficiency benefit. But, this very benefit can prevent actual consideration of the factors that bear on IC status.
Two factors merit particular attention. “Opportunity for profit or loss,” while phrased differently, is part of many employee/IC status tests. Other tests ask about fixed costs or recurring costs, or who supplies tools or equipment. This is a difficult and nuanced factor to determine without interviewing the worker and understanding their business. Sometimes this is difficult to assess even after interviewing the worker.
“Nature and degree of control” is also phrased in different ways, but is a key element of basically all tests. Courts and government agencies come to conflicting conclusions regarding what types of contact are considered “control” or “direction” which are indicia of an employment relationship. “Control” exists in all business-to-business relationships, and assessing which control is really a sign of “employment” is a nuanced matter. Online engagement tools, in this regard, are limited by the data they receive.
The sheer efficiency of automated, online engagement tools makes their widespread use both attractive and inevitable. Businesses employing such tools should be aware, however, that the same worker classification tests are used whether the worker is engaged traditionally or online. In some cases, online tools must be provided with worker classification tools in order to adequately manage classification risk.
Online staffing platforms can be an effective way to source talent to get your tasks done. Regardless of how you source and procure your contractors, though, companies should make sure they audit their IC systems regularly, or at the least, consult with counsel.