At Mila, we spend a lot of time talking about the advantages of the gig economy. And operating in this new space can certainly have its advantages—lower overhead and quicker response times are chief among them—but it’s not all roses and lollipops. As on-demand companies from Uber to Airbnb have learned in courthouses around the world, there’s often a price to pay for being a pioneer. For better or for worse, forging your own way and innovating can often result in exploring vague, undefined areas in legal systems. As always, experimentation carries some risk.
That’s why we’re devoting this blog to explaining how on-demand platforms can continue to experiment freely without exposing themselves to what may be the paramount legal risk they face: worker misclassification. But first, a quick explainer.
What is worker misclassification?
Worker misclassification is what regulators and other legal officials name the less-than-legal practice of classifying employees as contractors to save on costs. For an employer, the benefits of misclassification are clear, and in fact quite similar to the benefits promised by joining the gig economy: saving on taxes, health insurance, workers compensation, unemployment, and any number of other fees and costs associated with full time employees.
As any independent worker in the gig economy knows, the crowd does indeed function as independent contractors, not full time employees. In the past, when the line has become blurred, companies have often faced legal problems.
How can companies avoid worker misclassification?
For most companies, avoiding misclassification means making sure the distinction between independent contractor stays clear. Simple enough in concept, but when implemented in reality, enforcing this distinction can be more difficult. We’ve broken it down into some key rules to keep in mind at all times.
Contractors should be paid directly by the customer
One of the principal criteria used by investigators and regulators to distinguish employees from contractors or self-employed person is whether or not the employer pays the contractor’s expenses. Law in most countries dictates that on-demand platforms do not become involved in supplying, leasing, or financing of supplies necessary to do the job.
In this case, Mila’s service providers are part-time freelancers or self-employed serving their clients (the service recipients). All of the expenses are the responsibility of the contractor and Mila does not offer reimbursement for them.
Don’t stop your service providers from working for other companies
One of the most convincing arguments that a service provider is no longer an independent contractor is if he or she does not have any other income sources. It’s important for your contractors to receive a segment of their income from other companies besides your own, or at least have the option to do so. At Mila we are working together with different business partners like Orange, Samsung or Swisscom. Our service providers are serving customers from all those business partners and have thus various sources of income from different clients.
Create new processes for your contractors that are distinct from your employee processes
One of the most important criteria used to determine whether an individual is a contractor or a full employee is relatively straightforward: are they often grouped together with employees? Do they look like an employee? Your contractor should not wear a standard employee uniform from your company, they should not train with your employees, they should not clock in with your employees—they should be truly separate.
Independent workers should be able to set their own price
There are a few ways to make your payroll processes distinct from those of a traditional employer-employee relationship. Firstly, do not issue bills to the customer directly. Instead, provide the customer with estimates for all the services you offer, with the final bill being worked out between the contractor (your service provider) and their client (the end customer, the one receiving the service).
Likewise, and this is quite important: you never pay the service provider directly. Make sure that payments are negotiated between the customer and the service provider, with the service provider billing the customer directly.
Though the tips we provide here may seem relatively straightforward, they are not as simple as they may seem. Indeed, as we have seen with on-demand platforms, it is maddeningly simple to fall into the trap of misclassification. However, the potential costs are high, and many companies pay the price for their lack of vigilance.