abstract. This Essay explores the rich history of flexible employment
models from union hiring halls to alternative compensation structures. It
explains how gig companies are responsible for popularizing the narrative that
employment is inherently inflexible, unlike independent contracting, through
corporate public-relations campaigns and lobbying. Grounded in this history,
the Essay argues that “third-category” laws, which purport to resolve the
tension between gig work and employment, simply reinforce existing labor market
inequalities, undermine longstanding frameworks of employment and labor law,
and legitimize misclassification as a form of wealth transfer from working
people to corporations. Instead, it advocates for legislation that secures for
employees the putative benefits of contracting. Finally, the Essay offers
guidance for labor enforcers on avoiding the third-category trap in negotiated
misclassification settlements.
Introduction
The popular origin story of the gig economy goes like this.
New technology has effected a fundamental change in our labor economy,
facilitating flexible, autonomous work. That work takes the form of “gigs” that
cannot be accommodated by the rigid legal frameworks of traditional employment
and labor law. Platform companies aggressively propagate this narrative, and
many legislators, enforcers, courts, and workers accept it. Amid a growing
ethos of employee dissatisfaction and ennui, the promise of flexible and
independent labor has mass appeal. But multiple historical revisionisms
underlie this understanding.
This Essay explores the rich history of flexible employment
models, from union hiring halls to alternative compensation structures, to
expose the fiction of inflexibility in the employment regime. In exploring this
history, the Essay explains how gig-company lobbying and public-relations
campaigns over recent decades are responsible for convincing so many that
employment is inherently inflexible, while independent contracting is
inherently flexible. Grounded in this history, the Essay builds on existing
literature to show that “third-category” laws—which purport to resolve the
tension between gig work and employment—simply reinforce existing labor market
inequalities by conceding the classification question, regardless of the
economic reality of the working relationship, and granting massive corporate
subsidies from primarily minority workers to shareholders. Instead, this Essay
advocates for legislation that secures for employees the putative benefits of
contracting, like flexible scheduling laws. Finally, this Essay quantifies the
billion-dollar price for workers and the state when labor enforcers accept the
third-category sham in negotiated misclassification settlements.
I. the
misclassification pandemic
A quick glance
at the labor economy might inspire optimism: most workers who left the labor
market during the Covid-19 pandemic have returned, the
unemployment rate is low, and there are more jobs than
workers. But closer inspection
tells a different story. Workers’ compensation relative to economic output has
declined over the past seventy years. Since the 1970s, a confluence of factors
combined to stymie worker power and relative income: among them, steady
de-unionization, globalization, and technological change. These factors
have compounded the false promise of trickle-down economics, which further
amassed corporate wealth at the expense of the working class. And the recent
pandemic only amplified these bleak trends for working people, leaving many
unemployed, underemployed, or unsafe at work.
Post-2020,
while the employment rate has rebounded, worker morale has not. Many attribute this to macroeconomic
conditions: while wages have generally kept pace with inflation, prices remain
high and housing affordability is at an all-time low. But several
structural features of the American labor market itself, taken together, easily
account for persistent worker disempowerment. Most American employees are
at-will and can be fired at any time. Many workers,
especially low-wage workers, have nonstandard work schedules or need multiple
jobs to get by. Around twenty percent of the
workforce is subject to noncompetes, which limit worker mobility and wages. Mandatory
arbitration contracts and class-action waivers, which preclude workers from
enforcing their rights in court or as a class, now bind more than half of the
private-sector workforce. And despite recent high-profile
union victories, union
membership has declined to just six percent of the private workforce, compared
to one-third of the private workforce in the 1950s.
Within this
bleak labor landscape, the misclassification of workers as independent
contractors has exploded to crisis levels. Unlike
employees, independent contractors are not entitled to federal or state labor
protections, including minimum-wage pay for all time “suffer[ed] or permit[ed]
to work” under the Fair Labor Standards Act (FLSA), overtime pay, sick leave, workers’
compensation, and protections from discrimination under Title VII, the
Americans with Disabilities Act, the Age Discrimination in Employment Act, and
more. Independent
contractors have no right to collective bargaining under the National Labor
Relations Act (NLRA). Only employers must pay
payroll taxes, including Federal Insurance Contributions Act taxes that fund
Social Security and Medicare, as well as unemployment insurance, workers’
compensation, and, in some jurisdictions, paid sick leave. Whereas
employers must pay or reimburse employees for business expenses, independent
contractors bear all of their work-related costs and expenses. And whereas
most employees have a right to know their rate of pay and any changes to it, independent
contractors do not, and many platform companies secretly and algorithmically
adjust worker pay.
The logic of
the employee/contractor distinction is that employees are economically dependent
on and controlled by their employers and are thereby vulnerable to
exploitation. In turn, they require benefits and protections that countervail
corporate power, like the FLSA and the NLRA. In contrast,
bona fide independent contractors are economically independent and not subject
to corporate control—that is, they are independent businesses—so they do not
need comparable protections from exploitation. For this
reason, both the FLSA and the NLRA interrogate the true nature of the working
relationship (what the FLSA calls the “economic reality”) in determining
whether workers are employees or contractors. But when
employers misclassify workers, they get the benefit of control over their
workforce without any of the costs or liability of employment. And by shirking
employment liability, misclassification begets wage theft.
In the absence
of robust misclassification enforcement, it should be no surprise that
misclassification is on the rise. Fewer benefits and protections for workers
means lower costs and less liability for firms, allowing them to reap up to
thirty percent cost savings on labor. On the flip side, misclassification reduces
individual-worker earnings by tens of thousands of dollars on average annually. It also
exacerbates existing inequities because women and people of color are
overrepresented in occupations at the highest risk for misclassification. In addition to
hurting workers, misclassification harms compliant businesses that cannot
compete with the artificially low cost of misclassified labor. And more
generally, misclassification hurts the economy by allowing companies to achieve
significant cost savings through artificially depressed labor costs, rather
than a legitimate competitive advantage like those gained from superior
services or investment in research and development. All of these
trends have distributional consequences: when labor is fissured, corporate
gains are increasingly shared with and concentrated in the investor class,
rather than the working class.
The state of
misclassification is changing rapidly. In 2014, David Weil documented decades
of increased workplace fissuring, including misclassification, subcontracting,
temp work, and offshoring. In the decade since,
through the proliferation of gig companies that engage workers as contractors,
fissures in the labor economy have only deepened. While the application-based
gig model was previously associated primarily with transportation and delivery
services like Uber and Instacart, it has now expanded to industries
traditionally composed of employees, like nursing and elder care, as well as
restaurant and bar-service work.
To begin making
sense of this crisis, the next Part explores a popular narrative about gig work
from a historical and legal perspective.
II. the
flexibility myth
One popular
understanding of the gig economy, widely accepted by workers, is that new technology facilitates
flexible, independent work that cannot be accommodated by historical legal
frameworks for employment. As Uber’s CEO wrote in The New York Times, “Our current
employment system is outdated and unfair. It forces every worker to choose
between being an employee with more benefits but less flexibility, or an
independent contractor with more flexibility but almost no safety net.” The conclusion follows that the unique benefits of contracting, like
scheduling flexibility, are important enough for workers to forgo the
traditional benefits and protections of employment. This perspective has even
surfaced in judicial opinions. But multiple historical
revisionisms underlie this narrative. In reality, there exists a rich history
of flexible models of employment for seasonal, short-term, and gig work.
Consider union
hiring halls. Historically, hiring halls—a type of union-run employment
agency—facilitated gigs for workers in industries with a consistent demand for
labor on a seasonal or short-term basis, like job-by-job or project-by-project
work, especially in construction and shipping. Hiring halls
operated either exclusively—that is, with exclusive contracts to provide labor
to employers—or nonexclusively, where the hall would be one of multiple sources
of workers. Employers
seeking hiring halls’ services would need to enter a collective-bargaining
relationship with the union operating the hall. While hiring halls functioned
as intermediaries between employees and employers rather than as employers
themselves, they were nonetheless subject to stringent rules regarding fairness
in staffing decisions, recordkeeping, and transparency. For decades,
union hiring halls performed a critical staffing function in industries with
seasonal or project-based work and provided workers with all the attendant
employment benefits, protections, and collective-bargaining rights.
Notably, union
hiring halls have not entirely disappeared. They persist in part in unions and
guilds throughout the entertainment and service industry, where short-term,
project-based work remains common. For example, the Actors Equity Association
and the American Federation of Musicians (AFM) negotiate contracts and provide
some staffing functions for professional theater employees and musicians,
respectively. Both unions
negotiate collective-bargaining agreements with union venues on behalf of
member performers, who in turn are able to take gigs as employees with
attendant benefits. Under this system, performers frequently retain significant
flexibility. For example, AFM musicians who attain a chair in a Broadway show
can retain their contracts while using substitutes for up to fifty percent of
the time, and even
performer substitutes are covered by the union agreement and treated as employees. A few strong
service-industry unions—for instance, Las Vegas’s Culinary Workers Union, UNITE
HERE Local 226—also maintain “training halls” that, like hiring halls, offer
training and job placement in sometimes-seasonal industries like hospitality.
Counterintuitively, as Sanjukta M. Paul observed, “Uber purports to perform
exactly the same functions as a hiring hall: it brings together buyers and
sellers in time and space, and it also sets the price of the ride.” But while hiring halls are granted
an exemption from antitrust law in recognition of their unique pro-employee
function, Paul argues firms like Uber that set prices for independent
contractors should be subject to antitrust scrutiny for price fixing.
Since the FLSA was
passed, commission-based, piecework, and flat-rate compensation have also
afforded flexible employment in many industries. In a commission system,
workers are compensated for some unit of productivity, like items sold by a
salesperson. In order for commissions to be bona fide, they must provide some
sales or productivity incentive linked to compensation in a manner that
decouples employees’ time worked and pay. Historically,
commissioned employees typically worked in retail environments with seasonal variations
in productivity. Many contemporary sales workers, particularly in real estate,
remain compensated by commission. Similarly, under piecework or piece-rate pay,
employees are compensated per “piece,” that is, per some unit produced. From
the mid-nineteenth through mid-twentieth century, piecework proliferated in the
agricultural, textile, and manufacturing industries. Piecework was commonly used by large
companies to create “home work” for employees that could be completed
off-premises, like garment, jewelry, or toy assembly. But early- and mid-century piecework
was far from flexible or empowering: in particular, many women worked full-time
hours from home for starvation wages in addition to shouldering domestic
responsibilities. This plight motivated, in
part, the passage of the FLSA and more stringent protections for piecework and
home work in particular. Contemporary employees
compensated through piece-rate pay typically work in construction, medical
transcription, artisan production, and satellite installation. Finally, a variation of piecework is
flat-rate pay, where employees are paid a flat rate per task regardless of how
long the task takes to complete. Historically, mechanics
were (and in some states still are) paid flat rates for standard services.
Because
employers do not compensate commissioned, piecework, or flat-rate employees
strictly per hour, these compensation structures may afford employees greater
flexibility to choose when and how much they work and respond to seasonal or
other variations in demand for their services. But critically, under the FLSA,
piecework, flat-rate, and commission compensation structures have never been
excuses to pay workers exploitation wages: employers nonetheless must abide by
minimum-wage laws. State wage laws
also do not exempt commissioned, piece-rate, or flat-rate workers from
employment protections, with the limited, misguided exception of New Mexico. Notably, the
FLSA does exempt some commissioned employees from overtime pay, but only where
the commission does not “offend[] the purposes of the FLSA” to protect
vulnerable workers in positions where long hours could lead to accidents and
injuries. (The irony of
this rule is that many gig workers, like drivers and delivery workers, are
precisely the type of vulnerable worker in a dangerous industry that the FLSA’s
drafters recognized a need to protect, and yet they remain de facto exempt from
overtime by virtue of misclassification.)
Piecework,
flat-rate, and commission-based pay are not inherently superior or fairer
methods of compensation; workers paid under these untraditional structures may
also be misclassified as independent contractors or exploited like any others. Non-hourly
pay can also be less predictable. But these untraditional structures reflect
the historical and legal reality that the employment framework is robust enough
to tolerate diverse work schedules and wage structures, without sacrificing employment
law’s protection of minimum wages and standards for all time worked. And even
within these untraditional wage structures, employees retain the right to
bargain collectively under the NLRA, regardless of how much or little they
work.
It would be shortsighted
to reject the myth of inflexible employment without addressing the companion
myth of flexible contracting. To start, at least half the work on gig platforms
is done by full-time workers, so most gig company profit is actually driven by
workers with regular routines, not flexible ones. And in reality, gig workers’
schedules are far from flexible. Gig drivers report that there are better and
worse times to drive, so picking the hours that work best for them often means
earning less. More perniciously,
many gig companies offer modest “bonuses” to induce drivers to sign up for
times or batches of jobs when forecasted demand is high but then decrease the
number and quality of offerings to drivers over time, effectively “locking in”
workers by creating expectations of future bonuses that never materialize. Gig companies routinely use
“steering” tactics to drive workers towards longer shifts that effectively
prevent workers from “multi-apping,” operating as de facto noncompetes. And critically, most gig workers do
not choose gig work as a preference, but rather as a last resort in addition to another low-paying job.
In short, gig
work is not a new phenomenon. Historically, gig work has been, and in many
industries remains, perfectly consistent with employment and its attendant
benefits and protections through union hiring halls, guild clearinghouses, and
piecework, flat-rate, or commission-based employment. Flexibility does not
fundamentally inure to either employment or contracting. Rather, in the
American labor economy, profit-motivated firms are incentivized to reduce the
scheduling flexibility of workers—employees and misclassified contractors
alike—wherever possible, to guarantee consistent productivity or match consumer
demand. And, in the absence of effective misclassification enforcement, gig
companies have a financial incentive to classify workers as contractors rather
than competing for employees through wages and benefits.
III. the
propaganda machine
This rich
history of gig employment raises the question: what has led to the consensus
among so many workers, scholars, enforcers, legislators, and even judges that
contemporary gig work is irreconcilable with employment? Two answers emerge.
First, while flexibility and employment are theoretically and historically
compatible, the opportunities for flexible employment are decreasing,
especially for low-wage workers. Part IV discusses
legislative responses to this phenomenon. Second, as this Part describes, gig
companies have for the past decade mounted aggressive legislative and
public-relations campaigns to advance the narrative that second-class
contractor status is the only way for workers to attain flexibility.
Since their
origin, gig companies have churned out television and web advertisements for
workers and consumers with slogans like “Flexibility Works.” Lyft has
produced and promoted blogs and web series espousing the virtue of “flexibility
so there’s time to pursue other passions.” Gig executives
have penned op-eds regurgitating this logic. Not content
to tell their own story, gig companies have repeatedly—and sometimes
secretly—placed op-eds from gig workers celebrating flexibility and, on that
basis, expressing a preference for contractor status. And gig
companies have donated to local organizations that are purportedly progressive
or pro-worker, and those organizations have in turn published articles that
cynically tout the flexibility of gig work as a boon to minority workers.
Behind the
scenes, gig companies work together. Uber, Lyft, DoorDash, and Instacart formed
a corporate lobby group called “Flex” that now includes Shipt, Grubhub, and
HopSkipDrive as “corporate members.” Flex
proselytizes: “Today’s flex work is inherently different from traditional
employment. It’s an entrepreneurial opportunity facilitated by technology
platforms . . . allowing workers to use their time on their
own terms.” Through Flex,
gig companies have commissioned surveys to demonstrate gig workers’ purported
preference for flexible work and independent-contractor status. In turn,
these same companies cite these survey results in their promotional materials. Flex has
lobbied against pro-worker measures, including the new federal Department of Labor
(DOL) independent-contractor rule, the
Protecting the Right to Organize Act (PRO Act), and state
anti-misclassification measures, all on the basis of protecting workers’
flexibility.
Flex is hardly
the only lobbying organization with multiple gig-company members. Amazon,
DoorDash, Instacart, Lyft, Uber, Shipt, TaskRabbit, Rover, GrubHub, and
GetAround are just some of the gig-company members of the lobbying organization
TechNet, which spent almost $4.5 million in 2017 and 2018 on advocacy for the federal
New Economy Works to Guarantee Independence and Growth Act. The Act would
solidify gig workers as contractors, yet again in the name of worker choice and
flexibility. Likewise, the
Coalition for Workforce Innovation (CWI)—a corporate lobby group that includes
Uber, Lyft, Shipt, and a wide variety of gig companies in the
healthcare-staffing industry—claims its “coalition supports policy proposals
that protect, empower, and enhance the choice, flexibility, and economic
opportunity of individuals that choose nontraditional work arrangements.” CWI has
lobbied aggressively in support of the Workforce Flexibility and Choice Act,
which would formalize gig workers as nonemployees. Several gig
companies have resisted efforts to increase transparency regarding their
lobbying efforts.
In addition to
forming corporate lobby guilds, gig companies have retained credentialed
economists and former political appointees to author favorable, seemingly
independent studies touting the gospel of flexibility (and occasionally,
failing to disclose their financial support for these studies).For example, soon after its launch, Uber engaged
Alan B. Krueger, economist and former Assistant Secretary of the Treasury for
Economic Policy to President Obama, as a consultant. Krueger teamed up with then-employee
and Uber shareholder Jonathan Hall to publish a paper under the reputable
auspices of the National Bureau of Economic Research. The paper summarized the
findings of a survey—the methodology and interpretation of which have since
been rebuked—to report
that drivers were by and large “very satisfied,” were motivated by a preference
for flexible work, and preferred to be independent contractors rather than
employees. Krueger subsequently
partnered with Seth D. Harris, former United States Deputy Secretary of Labor
under President Obama, to author a paper insisting that “emerging work
relationships arising in the ‘online gig economy’ do not fit easily into the
existing legal definitions of ‘employee’ and ‘independent contractor’ status,”
which laid the groundwork for laws that enshrine gig workers as contractors.
When
legislators and enforcers attempt to regulate gig companies in progressive
states, gig companies escalate the conflict. The starkest example exists in
California. In 2020, the state legislature passed Assembly Bill 5 (AB 5)—a law
containing the worker-friendly ABC test for determining employee status, which
would have likely resulted in liability for many gig companies as employers. In response, gig companies spent a
combined $220 million to mount a successful ballot initiative, Proposition 22
(Prop 22), to reverse AB 5—an initiative that gig companies styled as
“[p]rotecting the ability of Californians to work as independent
contractors . . . so [they] can continue to choose which
jobs they take, to work as often or as little as they like, and to work with
multiple platforms or companies.” To pass Prop 22, gig
companies bombarded voters with (occasionally dishonest) advertising centering
flexibility and worker choice. Ironically, after Prop 22
passed with 58% of the vote, the companies began to reduce incentive
compensation to drivers, resulting in overall lower driver pay statewide
compared to pre-Prop 22 ($5.64/hour, compared to the $15.60/hour promised under
Prop 22); only 15% of
California drivers were able to claim any benefits like healthcare stipends; and many
voters expressed remorse.
Following the Prop
22 playbook, after the Massachusetts Office of the Attorney General (MA OAG)
sued Uber and Lyft, a coalition of companies led by Uber, Lyft, DoorDash, and
Instacart called “Flexibility and Benefits for Massachusetts Drivers” broke
state campaign-spending records in lobbying for multiple
third-category-reform ballot initiatives for November 2024; if successful, the
initiatives would enshrine drivers’ status as contractors and provide some
minimum pay for driving time. The same companies, through
Flex, mounted expensive advertisements in Washington, touting gig workers’
enviable “work life balance,” in support of an eventually successful
third-category law, avoiding the companies’ need for a referendum in that
state.
These
gig-company tactics are not new but rather borrow from companies in other
industries seeking deregulation, like oil, tobacco, and guns. Just like these companies before,
gig companies now use self-serving legislative advocacy and downright deceptive
advertising campaigns to insist that individual workers’ preferences for
flexibility justify predatory business models—ignoring the reality that, for
many workers, gig work is not a preference but a last resort.
IV. the
third-category sham
The
increasingly popular approach to regulating gig work is “third-category”
legislation, which purports to resolve the fictional tension between gig work
and employment. Under third-category laws, gig workers are neither employees or
standard independent contractors, but a “third category” of worker who forfeits
employment in exchange for narrow benefits like minimum-pay protections, paid
sick leave, or healthcare stipends. Despite the
name, third-category laws universally enshrine gig workers as independent
contractors. Armed with the understanding that, legally and historically, gig
work and employment cohere, worker advocates should be skeptical.
While the
limited benefits afforded by third-category laws may appeal to some gig
workers, there is a straightforward reason why the gig industry embraces them:
third-category workers are dramatically cheaper than employees. While
third-category laws purport to set minimum-pay standards, they only compensate
workers for active time, like time that Uber/Lyft drivers spend driving a
passenger or Instacart/DoorDash workers spend completing a delivery. While
employers must pay minimum wage for any time an employee spends engaged for the
benefit of the employer, including time
spent waiting to be assigned a
ride or a delivery job, gig companies shirk these costs with impunity under
third-category laws. Unsurprisingly, lobbying organizations like Flex, TechNet,
and CWI have spent millions of dollars in support of third-category proposals.
While
third-category laws offer immediate, limited support to gig workers, they
ignore the central dilemma of misclassification: firms retain extreme control
over working conditions while shirking the responsibility of employment. In
other words, under the FLSA, the economic reality of the relationship between a
worker and a company determines whether the relationship is one of employment, but under
third-category laws, the economic reality of the relationship is irrelevant. By
exempting employers or industries from scrutiny under the economic reality
framework and by formalizing companies’ ability to shirk labor costs,
third-category laws amount to a victory for corporations in their ongoing fight
for deregulation and wealth transfer from workers to corporations and their
shareholders. And as scholars like Veena Dubal have noted, third-category laws
reinforce existing labor-market inequalities by conceding the classification
question and solidifying independent contractors—most of whom are Black or
brown—as low-status workers.
The experience
of California gig workers post-Prop 22 highlights the ultimate third-category
scam: Prop 22 promised California gig workers higher minimum wages and
healthcare stipends rather than employment, but many California gig workers
report that their companies are not meeting even these limited promises. Without the
ability to sue in court (due to arbitration clauses), the protections of
employment (including the ability to appeal to state employment authorities),
or the right organize, California gig workers have virtually no recourse to
demand even their paltry promised benefits under Prop 22. Likewise, in New York City, local
legislation promised drivers a fluctuating minimum pay rate tied to all time
worked (including time spent waiting for riders). But rather
than actually paying for waiting time, the companies have instead starting
locking drivers out of their platforms altogether at sporadic hours to limit
recorded (and therefore compensable) waiting time. Without
employment, New York City drivers have no recourse against lock-outs. For gig
companies, that promises of minimum pay and benefits are virtually
unenforceable without employment, is a feature—not a bug—of third-category
laws.
But
surprisingly, organized labor has also supported third-category laws in many
instances. For example,
in Massachusetts, the Service Employees International Union (SEIU) backed
multiple November 2024 third-category ballot initiatives, including a
successful initiative, Question 3, that gives drivers limited bargaining
rights. (Of course, unions are not a
monolith: the Teamsters opposed this referendum and any measures short of
reclassification.) The most straightforward
and charitable explanation for SEIU’s support is the lack of viable
alternatives. Most gig workers have been forced to waive their right to
challenge classification in court or in a class. While in
rare cases, workers may successfully challenge classification and win individual
relief in arbitration, these decisions are not precedential, are secret, and
only affect one worker. Where individual or class
action is barred, workers’ only hope for reclassification is an enforcement
suit by the federal DOL or a state attorney general. Given that a
minority of states have dedicated worker-protection resources, this is cold
comfort. And even where state attorneys general have brought misclassification
suits, gig companies have stalled litigation to a crawl by attempting to compel
arbitration, launching protracted procedural challenges, and mounting decisive
ballot initiatives like Prop 22. In light of this
defeat, some unions have decided to take what they can get, including
third-category reforms, particularly if they come with
quasi-collective-bargaining benefits. For example,
Question 3 grants gig drivers sectoral-bargaining power. Specifically, it
authorizes a driver organization to become the exclusive bargaining
representative for gig drivers after collecting signatures from twenty-five
percent of active drivers, and it permits a state Employment Relations Board
(but not the NLRB) to hear unfair work practice allegations. On
the one hand, it is reasonable to believe that limited organizing rights, like
those under Question 3, could improve some workers’ circumstances, at least in
the short term, even without reclassification.
But this piecemeal approach is ultimately ill-fated: as
drafters of the FLSA recognized, wage-and-hour protections and
collective-bargaining rights are both necessary to protect and empower workers,
but neither is sufficient on its own. With
wage-and-hour standards but no collective bargaining, employers would have a
financial incentive to pay minimum wages without the deterrence of a
protected-employee strike. On the flip side, collective-bargaining rights with
no wage-and-hour standards means negotiations would proceed without any
objective baseline for pay or conditions, likely leading to more contracts with
sub-minimum living wages and working conditions. (Not
to mention that bargaining rights under third-category initiatives like
Question 3 do actually entail the threat of NLRA-protected strikes.) Moreover, even where third-category
legislation extends some bargaining rights to gig workers, it typically only
extends to workers who perform a minimum amount of work on the platform,
leading to the ironic result that workers who use the platform sparingly—that
is, flexibly—are categorically excluded from even the limited benefits.
To be sure, there are even more cynical explanations for
labor’s support of Question 3 and similar initiatives: namely, unions—but not
necessarily workers—stand to benefit from increased membership and dues under
sectoral bargaining.As
critics of sectoral (industry-wide) bargaining point out, these unions are less
dependent on a strong, engaged base and do not require organizing to grow, leading
to weaker solidarity and fewer pro-worker outcomes.
Given that
legislative efforts like AB 5 in California have not succeeded in the face of
corporate third-category countermeasures like Prop 22, it is reasonable for
legislatures to be pessimistic about their ability to improve gig work
directly. (And if a Prop 22-style referendum is inevitable, perhaps an AB
5-style law is not advisable). But this does not mean legislatures should wash
their hands of gig workers. Unlike third-category laws that identify limited
benefits of employment and extend them to gig workers, an alternative paradigm
is preferable: securing for employees the perceived benefits of
contracting, namely, flexibility. After all, contractors and employees do not
exist in separate labor markets—the very same worker may move in and out of
employment and contracting throughout their career—so creating better work
experiences requires thinking holistically. And many employees, especially
low-wage employees, face increasingly variable and unpredictable schedules, which creates flexibility for
employers at the expense of employees. All of these
practices shift business risk from firms onto employees.
Some states and
cities have already passed laws that guarantee employees’ flexibility, like
part-time pay parity, the right not to have to
find coverage, schedule transparency and
notice requirements, compensation for schedule
changes, the right to
request scheduling accommodations, first right
of refusal for existing employees, breaks
between shifts, split-shift pay, protections
from reduced hours, reporting pay, and paid
time off. Like any
pro-worker measure, flexible employment laws will face industry pushback. But
many progressive jurisdictions have already succeeded in passing some of these
laws, which cannot
be said of states’ and cities’ legislative efforts to reclassify gig workers,
which pose a more existential threat to gig companies. And if a number of
progressive states and cities passed comprehensive flexible-employment laws, at
least some gig workers would surely opt for traditional employment. Likewise,
some of the frustration that drives workers into the informal gig economy would
be diminished.
V. the
enforcer’s prerogative
When legislative
attempts to combat misclassification are defeated decisively, we would hope to
see enforcers and courts, perhaps less susceptible to corporate influence, curb
misclassification. But so far, we have not. Ideally, the solution to the
misclassification crisis would be robust federal enforcement but, to date, the
federal DOL has been far from a leader here: DOL has yet to take on any of the
largest platform companies. On a modest positive note,
in January 2024, DOL issued a final rule that reinstated a worker-friendly
version of the economic-realities test for determining whether a worker is an
employee under the FLSA. But, while the rule stands, its
impact is limited given that most gig workers never see a day in court due to
forced arbitration and class-action waivers. Further,
outcomes of misclassification litigation are stochastic, regardless of the
legal standard applied. In fairness, federal
resources are grossly insufficient. But for over
a year, DOL has had the strongest pro-worker rule likely to exist anytime
soon—which the current Trump administration is likely to roll back entirely—yet it still
has not taken any significant action to combat misclassification. So, in reality,
DOL’s lack of recent leadership is more likely a reflection of political
priorities or industry capture, rather than pragmatic considerations.
In the absence
of federal anti-misclassification action under democratic leadership, and under
the certainty of inaction by the current republican leadership, states and
cities must move the needle. A handful of jurisdictions have begun to take on
the gig economy through litigation: offices of attorneys general in
Massachusetts, Minnesota, California, and Washington, D.C., have all filed
misclassification lawsuits against gig companies, but none have yet been
litigated to their merits. Attorneys general in other
states like New York and New Jersey have commenced formal misclassification
investigations or issued administrative assessments regarding
misclassification. But as revealed by the
experience of the Office of the Attorney General of California—which has been
in litigation against Uber and Lyft since 2020 and endured
the whiplash of AB 5 and Prop 22—litigating misclassification cases to their
merits is extraordinarily time-consuming and resource-intensive. While slow
litigation can be an artifact of civil procedure, it is also a strategy adopted
by gig companies that stand to benefit from delays: in the time that litigation
is pending (like in California), they can lobby for legislative changes (like
Prop 22) that eliminate litigation risk.
For all these
reasons, misclassification settlements may be a more realistic or desirable
avenue for change from the perspective of enforcers, as compared with judicial
merits decisions. But just as legislators’ choices about gig work have
distributional consequences, so too do settlements. By reviewing recent gig
misclassification settlements, this Part offers a taxonomy of settlement types,
which primarily vary in terms of injunctive relief (i.e., what changes they
require of companies). These range from no injunctive relief to
prospective reclassification of contractors as employees to eviction
of the company from a jurisdiction altogether. And in the middle of this
spectrum rests an alternative that entails some alternative transformation
of the business relationship or the firm’s treatment of workers.
A. No Injunctive Relief
Parties could
settle with no injunctive relief, that is, no change to workers’
classification, but with backwards-looking monetary relief for workers or the
state. As an example, in 2022, Uber paid $100 million, representing
unemployment taxes and penalties for a five-year period, to resolve an
administrative assessment from the New Jersey DOL. The assessment implicated
misclassification in all but name because only employers are obligated to
withhold and remit unemployment taxes from employee paychecks, which fund
unemployment benefits for workers that lose employment. Effectively, the
resolution required Uber to pay its unemployment tax bill for a short
backwards-looking period, but it did not require Uber to pay for any of the
other harms of misclassification (like wages owed workers) or require Uber to
do anything differently moving forward, including with respect to
unemployment-insurance taxes.
The benefits of
this resolution are obvious: it provided an immediate and significant influx of
cash for the state unemployment fund. Equally obvious are its limitations: it
put nothing directly into workers’ pockets, changed nothing about Uber’s
ongoing treatment of drivers, and merely reset the clock on any
misclassification investigation. Critically, because the resolution did not
require any conduct changes or release Uber from any claims outside the period
of 2014 to 2018, it fully preserved the misclassification question and offered
the company no prospective peace. As a result, the New Jersey DOL could sue
Uber again today for the same conduct postdating 2018 and achieve the exact
same result, while suing for misclassification-related remedies for drivers in
the meantime. This approach may appeal to states and workers insofar as it
provides immediate relief. But pursuing repeat settlements without
systematically changing firm behavior is obviously inefficient: here, the
investigation leading to settlement spanned more than three years.
B. Reclassification
Perhaps most
simply, settlements could require prospective reclassification of workers as
employees. As one example, in February 2024, the San Francisco City Attorney’s
Office announced a settlement with Qwick to resolve a lawsuit alleging
misclassification. Pre-settlement, Qwick
provided on-demand staffing to the hospitality industry through
independent-contractor servers, bussers, bartenders, and dishwashers.
Post-settlement, Qwick will convert its workers to full employees and function
as a traditional staffing firm in the restaurant industry.
While this may
be an ideal outcome from an enforcer’s perspective—and may be their default
starting position in negotiations—it is naturally the hardest sell to companies
given the increased costs of employment. And, realistically, because many gig
companies’ entire business model is based on misclassification,
reclassification would be a death knell. But where gig companies participate in
an industry with existing and profitable employment business models, like the
restaurant industry, this approach may be feasible.
C. Eviction
An alternative
simple approach is to require the firm to dissolve within the relevant
jurisdiction—that is, to stop doing business there. As one example, in April
2024, the D.C. Attorney General reached a settlement with Arise Virtual
Solutions, Inc. (Arise), a gig company that engages independent-contractor
“agents” who perform customer-service calls for client companies. Under the settlement, Arise must
cease all business in D.C. (Notably, Arise has been tactically pulling out of
states with the most progressive labor laws for years in a game of whack-a-mole
with enforcers.)
This settlement
outcome might be unappealing to firms and enforcers alike: eliminating an
entire market is bad business for firms and, on the flip side, eliminating any
form of economic activity may be undesirable optics for a political official,
especially an elected attorney general with business-community constituencies.
But where reclassification is economically impossible for the firm and no
viable alternative short of reclassification would render the business model
compliant, this may be the only way to avoid lengthy litigation with a
functionally equivalent result.
D. Transformation
Lastly, a
settlement could require the company to make changes to its business short of
reclassification. This split-the-difference option may initially be the most
appealing for targets and enforcers, but it is by far the most distributionally
significant and should be approached cautiously. Transformation settlements
fall into two categories: (1) transforming the nature of the business
relationship or (2) transforming workers’ wages or working conditions.
Consider a
recent example in the first category. In May 2023, the San Francisco City
Attorney announced a settlement with Handy, a gig-economy company that offers
in-home domestic services. Under the settlement, in
addition to providing restitution for workers, called “pros,” Handy agreed to
let pros set their own minimum hourly rates and negotiate hours and pay with
customers. Handy also
agreed to relinquish certain forms of technical surveillance and control over
pros, including real-time geolocation information. Handy is
also barred from penalizing pros for being selective about which jobs to take. All things
considered, the Handy settlement effectively requires business-model changes
that bolster pros’ classification as bona fide independent contractors. While
the settlement does not set minimum wages for pros or offer any sick leave (the
domain of employment), its terms are clearly geared toward providing genuine
independence to pros, evidenced by pros’ new ability to negotiate prices, their
unrestricted ability to choose jobs and hours, and their freedom from company
surveillance.
Compare this to
two other recent high-profile settlements in the latter category (i.e.,
requiring changes to workers’ wages or working conditions). In November 2023,
the New York Office of the Attorney General (NY OAG) announced a settlement
with Uber and Lyft for $328 million combined to resolve its misclassification
investigation of the companies. Most recently, in July 2024, MA OAG
also reached a settlement with Uber and Lyft for a combined $175 million, after finishing the vast majority of
its misclassification trial against both companies. Both settlements require a minimum
pay for drivers—$26 per hour in New York and $32.50 per hour in
Massachusetts—but only contemplate payment for “engaged time,” that is, time driving to pick up a
rider or completing a ride, not the substantial time spent waiting to be offered
jobs. Both settlements provide paid sick leave that
accrues at a rate of one hour of leave per 30 hours of active time (up to 56
hours per year in New York and 40 hours per year in Massachusetts). Under the MA
OAG settlement (but not that of NY OAG), the companies also must obtain
occupational accident insurance for drivers and contribute to a “portable
health fund,” which will provide cash stipends for healthcare plans for drivers
who average enough weekly engaged time.
Unlike the
Handy settlement, the NY OAG and MA OAG settlements do nothing to bolster
drivers’ statuses as independent contractors: they do not offer drivers the
ability to negotiate rates, choose jobs without restriction or influence, or be
free from company surveillance. But both settlements nonetheless offer the
companies a broad release from misclassification liability. In other words, the settlements
concede classification in exchange for modest driver protections and benefits
that fall far short of employment, all without increasing drivers’ independence
in any way. While the settlements offer minimum-pay standards that may appear
generous (above minimum wage) on their face, the settlement terms do not
compensate drivers for all time worked (unlike pay protections for employees)
and do not require the companies (unlike employers) to reimburse business
expenses like gas and auto insurance. As a result, considering all time worked
and all expenses incurred by drivers, drivers will almost certainly continue to
earn subminimum wages, notwithstanding the settlement. Ironically, while the
settlements offer drivers some benefits like sick leave, these benefits accrue
slowly based on engaged time, and therefore likely do not inure to drivers who
work sporadically and infrequently—the very workers whose “flexibility” the
companies claim to promote. (Even those drivers who work enough to accrue these
benefits will not be eligible for overtime pay.) And, unlike employees, drivers
impacted by these settlements still do not have collective-bargaining rights, are not
covered by workers’ compensation, and are not presumptively covered by
other state employment protections.
Quantifying how
much these settlements left on the table is difficult because neither
jurisdiction has published comprehensive data on the companies. But helpfully,
Massachusetts has conducted enough public research to facilitate some
estimates. First, consider damages owed to workers for waiting time. According to
a study conducted by the state, Massachusetts ride-hail drivers were paid
$1,428,574,247 in 2023. While studies differ
somewhat, ride-hail
drivers spend about 34% of their working time waiting for a ride offer. Combining
these statistics, if employees, Massachusetts drivers are owed $735,932,188 in
damages for waiting time for 2023. Given that
MA OAG releases Uber for all backwards-looking conduct, this number should be
multiplied by at least three years, the statute of limitations: $2,207,796,560. And Massachusetts
has mandatory treble damages where an employer fails to timely pay wages, so in
litigation, the companies’ exposure for waiting time is more than $6.6
billion. Consider just one other category of damages available to
misclassified workers: business expenses. According to one study, drivers’
business expenses equal 49 cents on the dollar earned. Using the
estimate of drivers’ dollars earned, including waiting time ($2,164,506,430),
we can estimate an additional $1,060,608,150 per year in liability—another $9.5
billion in exposure for three years with treble damages.
Finally,
consider damages left on the table for the state—unpaid workers’ compensation
payments and unemployment insurance contributions. The same Massachusetts
study, using the estimated $1,428,574,247 in driver earnings (excluding
waiting time), estimates $52,285,817 in lost workers’ compensation payments and
$20,714,327 in lost unemployment insurance payments for 2023. Considering all time worked (including
waiting time), this methodology yields $79,220,935.30 in lost workers’
compensation payments and $31,385,343.20 in
unemployment-insurance payments for 2023. Multiplying by
three years yields exposure of $237,662,806 for workers’ compensation and
$94,156,029.60 for unemployment insurance.
Economically,
the MA OAG settlement was by no means a good deal for drivers or the state:
combining the above estimates, it left a minimum of $16.5 billion dollars
on the table. While no public estimates of New York drivers’ time exist, it is
safe to assume the math works out similarly badly for the NY OAG settlement. So
why would the states agree to such a bad deal—particularly the MA OAG, which
not only was at the conclusion of years-long litigation and a trial, but also
proclaimed at the end of trial that it was sure to win the case on its merits?
The MA OAG
offered one limited explanation: after the MA OAG sued the companies, a
coalition including Uber and Lyft backed a third-category ballot initiative for
November 2024 to enshrine drivers’ status as contractors. As a
condition of the MA OAG settlement, the companies agreed to cease all support
for the initiative. The Massachusetts Attorney
General explained: “A win in court might have given drivers restitution for pay
they were owed in the past, but a successful ballot initiative would have wiped
out its impact . . . . Our deal with Uber and Lyft
made sure that drivers can have both.”
Yet on its
face, the Attorney General’s explanation falls far short. Under the settlement,
drivers receive neither complete restitution nor forward-looking protections
and benefits equal to employment. And while a
successful Prop 22-style initiative would be devastating, a misclassification
determination on the merits would have been the first of its kind, sending a
clear message that Uber and Lyft’s labor model defies longstanding law. It
would also expose the companies to billions of dollars in liability, a
price tag that might actually impact their bottom line, unlike a mere
multi-million dollar deal. And even if these
settlements were the best attainable result for Uber and Lyft drivers under the
gun of ballot initiatives, the agreements nevertheless negatively impact the
fight for employment protections for gig workers more broadly, by conceding
that corporate power—not economic reality—determines which workers get the
protections of employment. Here, in a surprisingly
antidemocratic move, the MA OAG made the political determination that its
settlement terms, under which drivers remain contractors and are shorted billions
of dollars, are more desirable than a merits decision and subsequent ballot
initiative, under which drivers would also remain contractors.
Put simply, the
New York and Massachusetts Uber/Lyft settlements fall for the third-category
sham. Given NY OAG’s and MA OAG’s positions that drivers are misclassified—the
premise of the enforcement actions—and given that neither settlement
substantively changes the relationship between the companies and drivers, the
agreements effectively bless ongoing labor violations. (Tellingly, nowhere in
the Massachusetts Attorney General’s justification of the settlement did she
express that the companies persuaded her on the merits; quite the opposite, she
expressed confidence that her office would prevail on the merits.) So while
the settlements will cost a modest one-time sum, they permit the companies to
continue shirking the costs and responsibilities of employment while
maintaining control over their drivers—an overwhelming win for the companies.
And Massachusetts drivers, like California drivers post-Prop 22, will have
little to no recourse if the companies fail to abide by the settlement, which some
drivers have already complained about. Meanwhile,
Uber has already imposed a new fee on riders in Massachusetts, called a
“Drivers Benefits Surcharge,” to recoup the costs of the settlement. And Uber has
released multiple nationwide advertisements touting its “agreement” to pay
higher wages, as if it was purely voluntary, and proclaiming the terms of the
settlement “good for drivers, good for Massachusetts.”
Just as
legislatures should avoid the third-category sham and be wary of its
ahistorical justification and industry origins, so too must enforcers. If
states are not prepared to fight for merits decisions on misclassification, or
hold the line on principled settlements that avoid the third-category trap,
then they should not take on gig companies at all. Because when
even progressive attorneys general concede that some workers do not need to be
paid and protected for all time worked, regardless of the economic realities of
the working relationship, employment protections like the FLSA, the NLRA, and
their state equivalents virtually lose all meaning, and the result is billions
of dollars in corporate subsidies at the expense of primarily minority working
people.
Conclusion
The NLRA and
the FLSA were hard-won legislative responses to a national crisis of
overworked, underpaid, and endangered workers. Just under a century after their
passage, a new economy of exploited workers has emerged in some of the most
dangerous contemporary industries, outside the protections of the NLRA and the
FLSA. With the proliferation of contract gig work and the advent of
third-category laws, workers’ right law is at an inflection point—an
existential crisis for employment as a framework. When the protections
of employment do not cover all people working for a company’s benefit and under
its control, we legally cede to corporations the power to decide which workers deserve
protection. Course
correcting will require reckoning with multiple realities: employment and
flexibility are theoretically and historically compatible, and the purported
flexibility of contracting is illusory. Workers’ rights will never be won at
the expense of employment, the FLSA, or the NLRA through third-category
legislation or settlements. And protecting vulnerable workers will require both
challenging misclassification and legislating better flexible-employment
options.
Assistant Attorney General, Workers’ Rights and Antifraud Section,
Office of the Attorney General of the District of Columbia. All opinions and
errors are strictly my own. Many thanks to Jesse Tripathi, Sejal Singh, Charlie
Sinks, Jessica Micciolo, Taylor Cranor, and the Yale Law Journal Forum
editors, especially Yang Shao.