Entrepreneurs who participate in the “Sharing Economy” may be granted a new worker status as the traditional classifications of employee and independent contractor no longer fit this modern group of workers. Also known as the Gig Economy or the On-Demand Economy, workers in this sector have more independence from the control of their employer than a traditional employee, but they also do not maintain all of the characteristics of independent contractors who do not enjoy the protections of labor laws.
Senate Finance Committee member Mark R. Warner (D-Va.) and Florida Senator Marco Rubio have spoken recently on the challenges faced by individuals participating in the emerging sharing economy and the possible need for tax reform. (“New Worker Classification Needed in Sharing Economy, Warner Says.” Tax Analysts. November 20, 2015. 2015 TNT 225-7; and “Tax Code Is Hampering Internet Start-Ups, Rubio Says.” Tax Analysts. October 7, 2015. 2015 TNT 194-3.)
If a worker is determined to be an employee, the employer must withhold, pay and report federal income, FICA and unemployment taxes, along with the relevant state withholding and payment requirements, including workers’ compensation. If a worker is classified as an independent contractor, the employer pays nothing other than the contract price for the work to be performed; it is incumbent on the independent contractor to pay his self-employment tax and operate without the safety net of unemployment insurance and workers’ compensation benefits.
The ever-evolving Sharing Economy includes industries where workers can complete tasks for a variety of services such as driving, delivery, software, marketing and consulting, home repair and housekeeping, based on schedules they set, and for the clients of their choosing. The desirability of this type of work environment for the business owner is broad and includes flexible hours, choice in people for whom services are performed, and setting competitive rates in an autonomous environment.
Practitioners have been discussing the likelihood of a third classification of “dependent contractors” or “independent employees,” while lawmakers have been discussing a possible need for tax reform to accommodate this emerging economy.
One challenge from a policymaking standpoint is that individuals in the sharing economy are classified as independent contractors without the protections afforded to employees, Warner said, and are “operating on a tightrope with no net underneath.” When creating a new worker classification framework, Warner said, Congress should consider ways to allow the innovation and flexibility of the sharing economy to continue while ensuring there is some level of safety available to people participating in the sector. (TNT 225-7)
Sen. Marco Rubio has also spoken on this issue and argued that tax reform should address issues associated with the sharing economy. He said that innovative new companies that make it easier for customers to find needed services too often face obstacles in the tax code. Rubio also said the new economy doesn’t fit our tax code, and the United States need to ask, “How can we change our old policies to fit the new economy?” (TNT 194-3)
Some countries recognize a dependent contractor category to accommodate those who are fairly independent from the controls of a traditional employer, but in need of some degree of protection as a small business, often operated by only one person. In some Canadian jurisdictions, this classification is available if a worker earns 80% or more of his or her income from a single source. Although they are not considered employees, since they are financially dependent on one primary company, courts have held that these dependent contractors are entitled to reasonable notice of termination. (Burnham, Carson. “Independent Contractor or Employee: How Some Countries Differ.” November 7, 2013. LexisNexis. Accessed February 9, 2016 at http://www.martindale.com.; and Keenan v. Canac Kitchens, 2015 ONSC 1055.) In Spain, the single source must equate to 75% of the dependent contractor’s income, and the dependent contractors are then entitled to certain benefits such as 18 days of leave each year and limitations on hours worked. (Id.)
Most Canadian jurisdictions also allow dependent contractors access to collective bargaining mechanisms similar to those available to employees, although they do not have the other labor rights of employees. (Id.)
Where we may end up is not yet clear. Employers have enough difficulty appropriately classifying their workers within the current two-classification system. Introducing a third classification would help expand traditional benefits offered to workers participating in the sharing economy—but likely at the cost of reduced wages to offset related employer expenses. What is certain is that as more individuals earn their livelihood within the Sharing Economy, a new worker classification of some kind is imminent.