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Construction Workers and the Gig Economy

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Construction Workers and the Gig Economy

Misclassification is a business model that depends on tax, insurance, and payroll fraud. It is an assault on a century of hard-won workers’ rights.



Construction workers in New York City in 2017 (Gordon Zheng/Wikimedia Commons)

Last September, California Governor Gavin Newsom signed Assembly Bill 5, which imposes stringent criteria to determine whether a worker is an employee or an independent contractor. What may seem like an arcane definition of employment law generated enormous controversy. The California Chamber of Commerce, business associations, and gig economy employers strenuously opposed the bill. Uber, Lyft, DoorDash, and other similar companies argued that AB 5 posed a fundamental threat to their business model, one that relies on drivers to operate as independent contractors.

The outsized nature of the California economy and the pervasive influence of Silicon Valley drew national attention to the legislative battle. Prior to the attention focused on AB 5, the debate over the legitimacy and legality of independent contracting had been limited to employment professionals, union activists, academics, attorneys, and federal and state wage enforcement agencies. But the misclassification of employees as independent contractors is not a new issue, nor is it restricted to ride sharing and gig firms. Silicon Valley executives may justify the status in terms of work schedule flexibility and the opportunity to “be your own boss,” but in reality, employers misclassify workers simply to save money and minimize accountability. A firm that designates its workforce as independent contractors evades responsibility for the payment of state and federal taxes as well as workers’ compensation insurance premiums, resulting in up to 30 percent savings in labor costs. Workers lose basic rights including legal entitlements to minimum wage and overtime payments, paid sick leave, unemployment insurance in case of layoff, workers’ compensation benefits in case of an on-the-job injury, anti-discrimination protections, and the right to form a union and collectively bargain. Misclassification is a business model that depends on tax, insurance, and payroll fraud. It is an assault on a century of hard-won workers’ rights.

On December 30, Uber and Postmates filed suit to block the law, claiming that is was a “thinly veiled attempt” to harm gig economy businesses. In February, a federal judge denied the companies’ request for a preliminary injunction to prevent enforcement but the underlying suit is still on the docket. The CEOs of Uber, Lyft, and DoorDash have threatened to spend hundreds of millions of dollars on a referendum campaign to undo AB 5. The litigation and threats garnered headlines, but the bill may have just as large an impact on more traditional industries, such as construction, trucking, hospitality, and janitorial services. In particular, non-union construction employers have misclassified their workers for decades in order to lower costs, largely motivated by the desire to avoid the high workers’ compensation premiums that accompany work in a dangerous industry. They now have a well-established system in which workers function as employees in every respect but are classified as independent contractors. The practice has been one of the principal elements underlying the loss of union market share and the inexorable decline of wage and safety standards in the U.S. construction industry.

 

Misclassification was an integral part of the broader abandonment of the post–Second World War social contract, the fissuring of the economy, and the business community’s strategy of shedding obligations for employees through the increasing use of outsourcing, subcontracting, and franchising. In many ways, misclassification was an easy stratagem to use in construction, an industry with large numbers of legitimate sole proprietors and independent contractors.

Federal and state laws contain a variety of definitions of what constitutes an employee versus an independent contractor, but the simplest common-sense distinction is that if workers operate under the direction and control of another, they are employees. The solo plumbers who install or repair toilets or water heaters at a residence may well work on their own, scheduling appointments, ordering materials, performing the work, and collecting payments. But the thousands of drywall carpenters, wood framers, painters, roofers, and other trades workers who show up every day at multi-million-dollar project jobsites working under the direction of a foreman with company-provided power tools and materials are no more independent contractors than any conventional employee. Today, there are an estimated 300,000 construction workers in the United States who are improperly classified as independent contractors and another 1.2 million construction workers who are paid off the books in cash.

The legal sanction for misclassification can be traced back to 1978, when Congress granted a “safe harbor” in the tax code to employers that operated in industries where the use of independent contractors was a “long-standing recognized practice.” Decades later, in 2014, a high-level Internal Revenue Service officer argued that the safe-harbor provision served as a green light for construction contractors to transform the industry into what he termed the “Wild West.” In 1987, a Q&A fact sheet at the largest national construction employers’ convention posed the question: “What if I decide just to give up and have no one in my business other than independent contractors and leased employees?” The very existence of the question provided its own answer. The wide acceptance of misclassification created a cottage industry of lawyers, accountants, and consultants that advised contractors how to increase profits by moving their workforce off payrolls. In 2001, the American Bar Association’s Construction Lawyers Guide included a five-page boilerplate independent contractor agreement for construction employers to use with their workers.

Two important changes happened to the role of misclassification in the economy around the turn of the twenty-first century. The first was driven again by developments in construction. The growing participation of immigrant workers—in particular, undocumented workers—in construction eliminated much of the need for legally sophisticated independent contractor agreements with individual trades workers. Between 1990 and 2000, Pew reported that the proportion of Hispanic male workers in construction increased four times as fast as the increase of white male workers. By 2006, nearly one-third of recently arrived foreign-born Hispanic workers were in construction. By 2014, undocumented immigrants made up 15 percent of the total national construction workforce, actually outnumbering immigrant workers with valid working papers. These vulnerable workers received low wages and feared reprisals in the face of all-too-common instances of wage theft. High-priced lawyers and accountants were replaced by labor brokers who trafficked workers from Mexico and Central America to construction sites in the United States. A system of extensive paperwork and the issuance of 1099 tax forms at the end of each year was replaced by payments in cash with little or no reporting or recording of the transactions.

The growth of the gig economy also shifted the perception of the use of independent contractors. Instead of independent contracting being simply a cost-saving (and potentially illegal) method of employment that eradicated workers’ rights, the classification was increasingly promoted as a desirable alternative to the dreary rat-race of employee wage slavery. As the founder of Pasona, one of the world’s largest temporary staffing agencies, said in 2007: “Be a regular worker—and be exploited for the rest of your life.” As an alternative, he proposed the life of an independent contractor, which supposedly offered the allure of independence, individualism, flexibility, and entrepreneurialism. The ideological spin attempted to transform independent contracting from an obligation-evading scam into a transcendent model for twenty-first-century employment. As the managing director of a nonprofit school charged with teaching low-income workers how to develop skills for the new sharing economy told the San Francisco Chronicle in 2017: “Everyone can be their own CEO.”

But the bloom appears to be off the rose for many gig companies. Uber and Lyft’s much ballyhooed IPOs landed on Wall Street with a remarkable thud. More important, gig workers are increasingly challenging working conditions and company policies. Among the many creative job actions of 2019, Uber and Lyft drivers staged a twenty-four-hour strike in May and in February of this year launched a global network of app-based drivers. Also in February, U.S. District Judge William Alsup of the North District of California ordered DoorDash to engage in individual arbitration with over 5,000 couriers who claimed they were misclassified as independent contractors. Ironically, DoorDash had proposed a class-wide lawsuit in order to avoid the $10 million in arbitration filing fees after initially insisting on arbitration as an alternative to class-action litigation. “This hypocrisy will not be blessed, at least by this order,” wrote Judge Alsup.

Since the inception of the ridesharing firms, executives had told their drivers that the highly prized flexible scheduling aspect of their work was contingent upon the status of independent contracting. For the most part, drivers hesitated to challenge this misleading legal claim as long as “the money was decent,” according to Los Angeles–based Rideshare Drivers United organizer Ivan Pardo. “But once pay began dropping to sub-minimum wage levels in 2017 and 2018,” continued Pardo, “drivers began to re-evaluate their relationship with the employers. And as conditions deteriorated further in 2019 and AB 5 entered the scene, drivers in California began to see reclassification and a union contract as the best path to secure better pay and fair treatment.”

AB 5 codified a 2018 California Supreme Court ruling that established the “ABC test” as the determinant of employment status. The ABC test presumes a worker is an employee unless three clear and simple criteria (the contractor is free from control and direction by the hiring company, performs work that falls outside the usual course of its operations, and is “customarily engaged” in similar independent work) are met. It is the cleanest and strongest of the numerous definitions in state and federal law and had been adopted in Massachusetts in 2004. In the past, much of the regulatory emphasis had been on construction misclassification because the violations were so obvious, egregious, and extensive. In fact, the ABC test is already in place for construction in New York and New Jersey. New York, New Jersey, and Illinois are also considering expanding the test to gig economy employers as a result of AB 5.

At the federal level, the U.S. Department of Labor (DOL) had also become more actively engaged in the discussion of misclassification after the 2014 appointment of labor market policy expert David Weil as the DOL’s Administrator of the Wage and Hour Division. In 2015, Weil issued a lengthy Administrator’s Interpretation (AI) that concluded, based on the Fair Labor Standards Act definitions, that “most workers are employees.” Weil negotiated a series of memoranda of understanding with state enforcement agencies to coordinate federal and state actions against employers that misclassified. Now based at Brandeis University, Weil weighed in on the AB 5 discussion in a July 2019 Los Angeles Times op-ed, arguing that rideshare drivers were in fact employees who happened to work under “a management system based on software rather than human beings.”

Unsurprisingly, as with numerous other Obama-era policies, the Trump administration has reversed course on this and deleted the AI from the DOL website. In April 2019, the general counsel of the National Labor Relations Board (NLRB) determined that Uber drivers are independent contractors. Two weeks later the DOL concluded that the workforce of an unidentified firm that operated in the “on-demand” or “sharing” economy should be considered independent contractors. Again, as with so many developments in the Trump era, a significant number of states have taken the opposite stance and actually ramped up enforcement activities regarding payroll fraud and wage theft. The same month that the NLRB and the DOL released their opinions, Michigan, Montana, and Wisconsin announced the creation of taskforces to combat employee misclassification. In response to the federal rulings, New Jersey labor commissioner Rob Asaro-Angelo suggested that the DOL “opinion letter has zero effect on how the New Jersey Department of Labor enforces state laws.”

A number of state agencies have recently filed valuable civil and criminal cases against violations in the trades sector, alongside examples of private class-action suits and litigation. In the last several months alone, the District of Columbia’s attorney general’s office settled with a major electrical contractor for $2.75 million for the misclassification of 535 workers, the New York City district attorney’s office indicted a construction labor broker for defrauding $1 million in workers’ compensation premium payments, a Minnesota construction contractor pleaded guilty to labor trafficking undocumented workers, and the New Jersey Department of Labor fined Uber $649 million for misclassification. On the other hand, industry lobbyists have successfully pushed through gig company “carve-out” bills in seven red states that allow independent contracting for transportation network companies and similar gig firms by exempting that sector from state employment laws.

 

The size of the gig economy should not be exaggerated. A recent study by the U.S. Bureau of Labor Statistics reported that only 1 percent of the nation’s workforce performs “electronically mediated work.” Construction, to take just one example, is a much larger industry and has been plagued by misclassification for far longer. But construction is perceived as an archaic industry, resistant to change and largely untouched by the wonders of technology. In this view, ridesharing and other forms of platform work represent the future, both in terms of algorithmic sophistication and the organization of labor.

The vast majority of American workers are still on payrolls and operate under the terms and conditions of the standard employment model. Yet the modern workplace has become more precarious, both in terms of declining job security and the disappearance of traditional benefit plans. The postwar notion of a paternalistic employer obligation to a workforce has largely evaporated. Much of the current debate on the future of work revolves around robotics, artificial intelligence, and the other shiny transformative toys that technology can produce. There is far less discussion about the future of worker protections.

Certainly, the overheated reaction of employers to the passage of AB 5 is a recognition that their favored business model may be at risk. David Nelson, the public policy director of the California Asian Pacific Chamber of Commerce, direly predicted that “forcing ride-share and delivery drivers to become employees would significantly limit the availability and affordability of these services to exist.” The impending lawsuits and the proposed ballot initiative to reverse AB 5 will determine the viability of the new law. The stakes are high. In the words of a pro-AB 5 spokesman, “we’re going to spend what it takes to win.”

The adoption of the ABC test in a number of states represents an alternative path to the individualistic vision of workers left to fend for themselves. The test is not a silver bullet, and its value should not be overstated, but it does help preserve basic worker protections. Even the strongest examples of legislation, however, are only meaningful if there is a parallel commitment to aggressive regulatory enforcement of the laws at both the federal and state levels.

AB 5 took effect in California on January 1. Despite a significant number of occupational carve-outs in the bill, the state’s Legislative Analyst’s Office estimates that roughly a million workers may need to meet the ABC test to continue as independent contractors. Governor Gavin Newsom’s budget allocates $21.68 million to enforce AB 5, but it is still too early to determine how the law will be interpreted and implemented. In any case, there is no chance of coordinated federal enforcement under the current administration. Officials in a number of states are also reluctant to be overly aggressive, for fear of appearing to quash innovation and alienate an influential and high-profile sector of the economy.

Enacting and enforcing strong employment laws is a precondition for elevating worker standards. Uber and Lyft drivers cannot form unions unless they are considered employees, and the likelihood of a return to a high-wage unionized construction industry in every part of the country is slim without a sustained attack on all forms of payroll fraud. Treating workers as employees establishes a floor for basic protections. The broader challenge will be to use that floor as a springboard to organize the growing number of precarious occupations.


Mark Erlich is a Wertheim Fellow at the Harvard Labor and Worklife Program and retired Executive Secretary-Treasurer of the New England Regional Council of Carpenters.




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Labor Groups, San Francisco Push Bogus Taxpayer-Funded Survey to Support Anti-Gig Law

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A liberal advocacy group’s own researchers raised red flags about a taxpayer-funded study used to justify a union campaign against the California gig economy.

The San Francisco Local Agency Formation Commission helped fund a survey conducted by Jobs with Justice, a left-wing advocacy group largely funded by labor powerhouse Service Employees International Union (SEIU). The survey reported that 71 percent of gig workers in the San Francisco area work more than 30 hours a week and receive “poverty level” wages. According to the group’s website, Jobs with Justice planned to use the survey to “make policy recommendations and support organizing” among gig workers. The survey’s summary page emphasizes the need to enforce anti-gig labor laws.

Left-wing labor group Gig Workers Rising has used the survey to rally in support of California Assembly Bill 5, a controversial law limiting companies’ ability to classify workers as independent contractors. The group called the study “the most comprehensive survey of actual work done” in the gig economy. Internal communications obtained by the Washington Free Beacon, however, reveal that the survey was pitched to potential financial backers as “not representative,” and an academic researcher involved in the study voiced concerns regarding Jobs with Justice’s recruitment tactics.

While the study initially called for 1,200 survey respondents, Jobs with Justice narrowed the scope following the spread of coronavirus, pivoting to an online survey focusing on the pandemic that aimed to reach just 500 respondents.

“The goal behind an online survey of 500 workers, while not representative, would be to turn around data quickly … in order to inform current policy discussions,” an internal description of the updated survey obtained by the Free Beacon said. It went on to reach just 219 respondents.

Pacific Research Institute senior fellow Wayne Winegarden criticized the study’s methodology, calling the survey’s results “meaningless.”

“The survey is not representative of the intended population with the original goal of 500 responses,” Winegarden told the Free Beacon. “The study did not reach this amount, having only 219 responses. So, in no uncertain terms do these results represent the view of gig workers.”

The study also downplayed Jobs with Justice’s involvement in an attempt to bolster its academic appeal. While the published survey lists UC Santa Cruz professor Chris Benner as the project’s lead, Jobs with Justice executive director Kung Feng is described as “leading” the project in internal emails obtained by the Free Beacon. The emails also show that the online survey was written by the group’s research director, Erin Johansson. Benner merely “edited the wording in a few questions,” according to the internal communications.

Benner, who did not return request for comment, also raised concerns regarding Jobs with Justice’s incentive plan to provide a gift card to all survey respondents.

“One, I’m not sure where the budget for that comes from, and two, with an online survey, it leaves open lots of opportunities for people to game it,” Benner wrote in a March 17 email to Johansson.

Following the academic’s objection, Gig Workers Rising continued to advertise the survey in an April tweet by saying respondents would “get a $10 gift card.” A Jobs with Justice invoice for the study listed $45,181 in “survey costs,” including “incentives and app payments.” While the published study lists the gig economy companies each of the survey’s 219 respondents work for, internal data obtained by the Free Beacon shows that 91 of the respondents did not report their company, suggesting some may have been non-gig workers who completed the survey for the incentive.

The invoice was sent to San Francisco Local Agency Formation Commission executive officer Bryan Goebel, who solicited funding for the study on Jobs with Justice’s behalf, internal emails show. Reached for comment, Goebel said the coronavirus-related study “was never intended to be” representative and that $50,000 in taxpayer funds were used only for the “initial pilot survey” launched prior to coronavirus. The final study combined the results of both the pilot survey and coronavirus-related survey, a methodological red flag, according to Winegarden.

“In the midst of the survey being in the field, they stopped the survey, reworked it to account for the coronavirus, and then continued with the survey,” Winegarden told the Free Beacon. “These results from before and after cannot be compared to one another.”

Goebel also told the Free Beacon that Benner “was indeed the overall lead” on the study, adding that Jobs with Justice simply “led the outreach.” He did not address the fact that the coronavirus-related survey was drafted by Jobs with Justice.

Charlyce Bozzello, a spokeswoman for labor watchdog the Center for Union Facts, said activist front groups often misuse research to advance their ideological goals.

“For years, unions have used flawed ‘research’ to support their organizing campaigns, so it’s no surprise to see Jobs with Justice involved in this project,” she told the Free Beacon. “What is surprising is that the city of San Francisco and UC Santa Cruz would lend their names to this charade.”

Other gig economy studies dispute Jobs with Justice’s findings. A Cornell University study published Monday found that 96 percent of Uber and Lyft drivers in Seattle drove less than 40 hours a week. It further found that 92 percent made more than Seattle’s minimum wage of $16.39, with the media driver earning $23.25 per hour after deducting expenses.

Jobs with Justice and Gig Workers Rising did not respond to requests for comment.

Collin AndersonCollin Anderson is a staff writer for the Washington Free Beacon. He graduated from the University of Missouri, where he studied politics. He is originally from St. Louis and now lives in Arlington, VA. His email address is anderson@freebeacon.com.



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Why the Uber driver case has the potential to alter Canada’s gig economy forever

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Article content continued

Heller was a driver for UberEats who argued that he was an employee, not an independent contractor. That meant Uber owed him overtime, vacation, holiday pay, as well as other entitlements.

The Supreme Court didn’t answer the question of whether Heller and other Uber drivers were employees or not, so in that respect the real issue lies ahead. But it did remove an important roadblock, paving the way for a potentially $400 million lawsuit.

Tucked away in the contractor agreement that every Uber driver must sign before they can start working is an arbitration clause.

The clause required drivers to bring any problems to arbitration in Amsterdam, the Netherlands, and not to an Ontario court. The arbitration in Amsterdam would cost around $14,000 in administrative fees up front, as well as the cost of transport and legal representation in the Netherlands. Something no Uber driver could even possibly afford. Take Heller himself, who earns around $400 to $600 a week for 40 or more hours of work.

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Gig Economy Ballot Measure Fails Workers, Labor Groups Say (1)

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Daily Labor Report®

July 7, 2020, 8:45 PM

A California ballot measure supported by ride-hailing and delivery companies would lower workers’ wages and limit the power of legislators to institute new labor protections, according to a new report from two labor advocacy groups.

Proposition 22, known as the “Protect App-Based Drivers and Services Act,” will appear before California voters in November and is backed by $110 million from Uber, Lyft, Postmates, Instacart and Doordash. The companies say their workers want to preserve their status as independent contractors, while the National Employment Law Project and the Partnership for Working Families counter that the proposition would roll back existing protections under a state law giving certain gig workers…

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