Uber & Lyft: The Hidden Business Risks of the Gig Economy during COVID-19

Due to ongoing pandemic-related uncertainty and what seems like daily regulatory changes, many organizations are shifting to non-traditional workplace structures. Employees are working from home, technology has become a cornerstone to keep teams connected, and businesses are frequently choosing to hire contract workers instead of building traditional employee/employer relationships. When it comes to employment law, one of the biggest risks for any disruptor of traditional workplace relations is the misclassification of employees and contractors (also known as gig workers). Think about Uber, Lyft, and SkipTheDishes and their use of gig workers. There have been many legal battles to figure out whether they are employees, independent contractors providing services, or dependent contractors. Do you know the difference?

Do you know the potential legal and financial pitfalls that can arise if you do misclassify your workers?

Whether businesses are ready or not, the gig economy is a rapidly growing part of the Canadian labour market in our uncertain COVID-19 driven economy. While businesses may reap financial benefits and benefit from short-term commitments, it also comes with a certain level of risk generally associated with unclear contracts and a lack of established boundaries. Before the COVID-19 pandemic hit, a 2019 report from the Canadian government showed the gig economy workforce increased by 70% between 2005 and 2016, from 1 million gig workers to 1.7 million. In Toronto, one out of ten workers depend on the gig economy for at least part of their income. Businesses use the gig economy to disrupt traditional employment models and to achieve tremendous financial success. In the face of COVID-19, many businesses are turning to gig workers as a way to survive. However, this strategy can carry high legal risk, and potential non-compliance costs can be devastating. On October 22nd, Uber and Lyft lost a critical court case as reported in the New York Times,  when the appeal judge in California ruled that “When violation of statutory workplace protections takes place on a massive scale, as alleged in this case, it causes public harm over and above the private interest of any given individual. However, Uber and Lyft have sought to change the rules of game by funding and successfully promoting Proposition 22, which unquestionably classifies workers as independent contractors rather than employees.  With $200 million in funding, it is no surprise that the ballot measure was passed in California with 58% support. It is a major win for businesses / huge disappointment to the gig workers, and an outcome that could affect other legal battles in the fight over employee rights in the gig economy.

In Canada, a business with profits driven by gig workers is not exempt from laws that govern the workplace. And no one will turn a blind eye just because of tough times brought on by COVID-19. Minimum employment standards cannot be violated or removed simply by putting someone on a “gig contract”.  An employee by any other name, be it a “contractor” or a “gig worker”, is still an employee. Note that even independent contractors can be deemed “dependent contractors”, a legal space that falls between independence as a full contractor, and dependence as an employee.

You might think you can create business/worker relationships within grey areas of employment laws, but these decisions will catch up to you.

Understanding What Dependent Contractors Are

Courts have recognised the rights of, and have provided protections for, contractors who are deemed to be dependent contractors, sort of a hybrid between a true independent contractor and an employee. Simply put, a dependent contractor has a right to notice of termination of their services – even during a pandemic. A business modeling their worker compensation on the ‘Gig model’ must be wary of potentially facing significant legal fees and damages, and even being forced to shut down.

For instance, in the case of Keenan v Canac Kitchens Ltd, the court awarded the workers $125,000 in damages, since they were found to be dependent contractors. An employer is not required to pay EI and CPP benefits or vacation pay for a dependent contractor. However, a dependent contractor is entitled to notice of termination, which can be the same as or close to an employee’s entitlement. The financial penalties of a court finding a contractor as a dependent contractor can be staggering, and one a business with slim profit margins or reduced operations due to the pandemic may not be able to bear.

Further, as reported in Forbes in 2015, Homejoy, an Uber-like home cleaning company, shut down citing multiple misclassification lawsuits from their independent contractors who argued they were actually employees. Creating more difficulties for businesses in the gig economy is that there is no uniform means of structuring the “gig” contract with the worker. There are as many different forms of “gig” work as there are businesses that have grown through the new gig economy. It’s worth noting that businesses who turn to gig workers out of necessity during the COVID-19 pandemic are often doing so without proper attention to the structure of the relationship and the contractor agreement itself.

How the Pandemic Has Affected the Gig Economy

Economic shutdowns due to the pandemic temporarily shut down certain gig worker services such as ride share workers, but it has also increased the need for other gig workers such as food delivery workers. Earlier this year, Canadian Foodora workers won the right to unionize and to be classified as dependent contractors and the company promptly pulled out of Canada. In August, former workers reached a $3.46M settlement with Foodora – a cost that the business was hoping to avoid.

With uncertainty comes temporary solutions to fill gaps. With so many businesses forced to shut down due to the pandemic, short term gig workers seem like a good temporary solution.

How To Protect Your Business From Risk

High profile legal challenges against companies like Uber and Foodora have been in the public eye, and businesses that rely on gig workers should think carefully about the risks. There are legal risks – and the ensuing costs – associated with misclassification of workers. The potential of such labour liabilities can also deter future investors that may be needed for both growth and exit strategies beyond the pandemic.

This is not to say that businesses can never have independent contractors. Prudent business risk management mandates proactive assessments be conducted upfront. This should include an assessment of the worker or services model if the business contemplates being ensconced in the “gig economy”.

If using independent contractors to provide services, the business must enforce policies to proactively maintain the independent contractor relationship. Businesses using the services of gig workers must take extra precautions to protect themselves from legal penalties more than their traditional employer counterparts. Fail to do so and the only “gig” in your company could be the “gig”antic payments to your improperly classified employees.

At Hum Law we work with you to proactively design policies to mitigate risks associated with your worker or employee contracts. If you want to make sure that you haven’t misclassified your workers or that your contracts are set up to protect your organizational rights, contact us today.

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