Employee or Independent Contractor? Consequences of Worker Misclassification

Not so long ago, we were talking about the long-term viability of the gig economy, given the protection that companies should provide to all people, including those who choose this type of work. However, the analysed topic brings into discussion another controversy: worker misclassification. Treating workers as independent contractors instead of employees is a consequence of the legal gaps being forced to contend within the modern economy.

We probably all know the Uber case, in which the U.K. Supreme Court ruled, in early 2021, that Uber drivers should be treated as employees, not independent contractors. The decision came as a result of a five-year lawsuit initiated by two former Uber collaborators, who asked the court to recognize their right to a minimum wage and paid leave. 

Over the last decade, the use of independent contractors has increased dramatically, with recent estimates suggesting an increase by almost 40%, going from 6.9% of employment in 2005 to 9.6% in 2015. Moreover, according to a United States Government report, an overwhelming percentage of these contractual relationships did not pass the “judicial interpretation test”, and in fact represent misclassifications of workers.

What is worker misclassification?

In principle, it stems from a basic but decisive distinction in labour and workplace laws. Those who work for a particular company are employed in accordance with the legal provisions in force. Broadly speaking, the difference between the employee and the self-employed refers to the responsibilities assigned through concluded contracts.

Therefore, independent contracting (usually, through a collaboration agreement) implies that the party that will provide certain services exercises its independence in this contractual relationship, regarding the pay rates, how and where he/she will fulfil the tasks, deadlines, opportunities for future projects etc.

On the other hand, under employment, the hiring party basically calls all the shots, such as work tasks, how the employee will perform them and when he or she does so, what he or she is allowed to do or not, what performance is considered acceptable and, of course, the salary.

Why is right classification important?

The classification is relevant when we talk about employee rights in the workplace. In other words, a person who is considered an independent contractor does not benefit from the same protection offered by the law as employers do, regarding fundamental elements, including the minimum wage, paid overtime, social contributions, unemployment benefits, the possibility to be represented by a trade union in accordance with national laws, etc. A independent contractor is responsible for paying all state payroll taxes (personal income tax, social security). Failure to comply with this rule will entail certain penalties (usually fines).

What are the indicators of a potential problem?

There are several indicators of potential misclassification. To this fact, behaviours to consider include the following:

• Independent contractors go through progressive discipline commonly used in employment relationships if there are performance issues, including written warnings, disciplinary investigation, lower fees, or unilateral termination of a collaboration contract for workplace misconduct.
• Independent contractors receive specific employee benefits, such as company car, holiday or shopping cards, meal vouchers, private health insurance, etc.
• Contributors use the same equipment as the rest of the team. This practice may cause some confusion, as they should use their own devices.
• Independent contractors report to a manager. This is a problem because reporting to supervisors would undermine the contractor’s independence. The more control a company exercises over individuals’ work, the less likely they are collaborators.
• The contributor was told to sign a non-compete agreement. Here is another problem. On the other hand, nondisclosure agreements (NDAs) are accepted.

How can you resolve this?

• Talk to your boss

First, you can try to talk to your employer to see if the company will review your classification and reclassify you as an employee. Explain why you think you were wrongly classified as an independent contractor. In case of a negative answer, you will get at least an explanation as to why the company believes that you should remain a collaborator, and not a full-time employee.

• Involve state institutions

If the first option does not work, you can contact the competent authorities. Workers who believe that they have been wrongly classified as self-employers may report this to government agencies that have the capacity to resolve such situations.