If you currently work or have ever worked as a freelancer, temporary worker, contract worker, or independent contractor, or if you have done side jobs as a source of income, you are or have been a part of the “gig economy.”
This blog post and the next will explain the legal implications for you as a gig economy worker.
What Is the Gig Economy?
There isn’t a perfect definition that explains the gig economy, but in essence, it’s where workers complete tasks on a project-by-project or client-by-client basis rather than regularly working for a single employer. Examples of gig economy workers generally include the following:
- drivers for Uber, Lyft, or Sidecar;
- any freelancer, such as a writer, photographer, consultant, artist, or journalist;
- worker for a temp agency;
- someone who rents out a spare room through a website like Airbnb; or
- someone who is available for hire on websites like Fiverr, Guru, TaskRabbit, or Elance.
In the gig economy, a worker is almost always an independent contractor and not an employee. The difference between the two is very important.
An independent contractor is someone who works only as needed for another pursuant to an agreement or contract. An employee is someone who works for the same employer on a regular basis and who does not provide the work as a part of the employee’s own business. In other words, an independent contractor usually works for himself or herself, while an employee works for his or her employer.
Here are some of the typical pros and cons of being an independent contractor:
Pros:
- the flexibility to work your own hours,
- the ability to choose exactly the type of work you want to do, and
- the ability to working for yourself rather than someone else.
Cons:
- few or no benefits such as paid vacation, paid sick days, health insurance, and/or retirement benefits;
- fewer or no legal protections against discrimination and harassment;
- lack of eligibility for legally protected or paid family leave; and
- lack of eligibility for unemployment benefits.
The legal implications of these pros and cons of being an independent contractor versus being an employee in the rest of these blog posts. We will start discussing the legal implications by comparing an employee and an independent contractor.
Independent Contractor Versus Employee
The legal difference between an independent contractor and an employee primarily revolves around the level of control the employer has over the worker. Generally speaking, the more control an employer has over how the work is done, the more likely the worker is an employee rather than an independent contractor.
The difference can be very fact-specific and deserves its own topic, so it will not be discussed further here. However, more information can be found in LegalZoom.com’s article “Employee vs. Independent Contractor: Differences You Need to Know” and in the IRS’s article “Independent Contractor (Self-Employed) or Employee?”
So why does all of this matter? The biggest reason is money. By hiring an independent contractor instead of an employee, the employer can avoid paying federal taxes (Social Security and Medicare), state unemployment compensation insurance, and worker’s compensation insurance. The employer can also avoid paying for benefits, such as 401K matching and health insurance.
Other advantages for employers include avoidance of certain federal or local labor and discrimination laws. Such laws include the Fair Labor Standards Act of 1938, a federal law that mandates the minimum wage, overtime wages, and 40-hour work weeks, and the DC Human Rights Act of 1977, which prohibits discrimination based on “race, color, religion, national origin, sex, age, marital status, personal appearance, sexual orientation, gender identity or expression, family responsibilities, genetic information, disability, matriculation, or political affiliation of any individual.”
Even small businesses can be affected by such laws. For example, the DC Human Rights Act of 1977 applies to Washington D.C. businesses that have just one employee.
Typical disadvantages of using independent contractors instead of employees include less control over how work gets done, potential liability for a worker’s injury on the job, and the increased difficulty or inconvenience of having to find competent new workers periodically. Despite these disadvantages, most employers prefer to hire independent contractors over employees for most jobs.
For more information about the advantages and disadvantages of hiring an independent contractor instead of an employee, please read Nolo.com’s informative article “Pros and Cons of Hiring Independent Contractors.”
The employer preference for hiring workers as independent contractors instead of employees has led to misclassification of workers as independent contractors instead of employees. This hurts not only the government in lost payroll taxes, but it also harms workers because they do not have legal rights they should be afforded, such as those provided by the Fair Labor Standards Act of 1938 and the DC Human Rights Act of 1977.
Summing It Up
The gig economy is where workers do not permanently work for a single employer but instead work for themselves on a job-by-job or client-by-client basis.
Practically all gig economy workers are independent contractors and not employees. The primary difference between the two is that an employer has more control over how work is done with an employee rather than an independent contractor.
Pros of being an independent contractor:
- the flexibility to work your own hours,
- the ability to choose exactly that type of work you want to do, and
- the ability to work for yourself rather than someone else.
Cons of being an independent contractor:
- few or no benefits such as paid vacation, paid sick days, health insurance, and/or retirement benefits;
- fewer or no legal protections against discrimination and harassment;
- lack of eligibility for legally protected or paid family leave; and
- lack of eligibility for unemployment benefits.
Advantages for employers to hire independent contractors:
- it saves a lot of money over hiring employees: for example, by hiring independent contractors, the employer can avoid paying federal taxes, state unemployment compensation insurance, worker’s compensation insurance, and retirement and health-care benefits; and
- it avoids certain federal or local labor laws, such as the Fair Labor Standards Act of 1938 and the DC Human Rights Act of 1977.
Disadvantages for employer to hire independent contractors:
- less control over how work gets done,
- potential liability for a worker’s injury on the job, and
- increased difficulty or inconvenience of having to find competent and qualified new workers periodically.
