Holding: GrubHub serves up a gig employment pickle

No court has explicitly ruled whether gig economy workers are independent contractors or employees

Holding: GrubHub serves up a gig employment pickle

By Reynolds Holding

NEW YORK (Reuters Breakingviews) - GrubHub is serving up a giant pickle for gig employment. If the US$5-billion online food-takeout service wins a rare trial over the job status of workers, discontent will probably fester in a labour force already demanding more benefits. A loss, though, could raise expenses and put the so-called sharing economy at risk. It's time that a sector famous for shunning regulation comes around and works with Uncle Sam.

Modern services like GrubHub and Uber put a tiny but growing slice of Americans to work, accounting for about 0.5 per cent of total jobs in 2015, according to Harvard and Princeton university researchers. A big edge is the lower costs of classifying workers as independent contractors who aren’t legally entitled to pricey benefits such as overtime and expense reimbursement.

In recent years, however, the workers have rebelled, claiming in dozens of lawsuits that they are, in fact, employees, given the extensive control employers exert over their jobs. The companies have, in turn, fought back zealously, and with some success.

Their usual approach has been to short-circuit complaints with contracts that require disputes to be resolved confidentially and individually in private arbitration. Cases that have gone to court have typically ended in settlements. The biggest of them, though – Uber’s US$100-million resolution with drivers – was rejected by a judge last year. As a result, no court has explicitly ruled whether gig-economy workers are independent contractors or employees.

That may be about to change. Last week, a federal trial began in San Francisco over whether GrubHub wrongly classified a deliveryman as an independent contractor and thus owes him back pay and expenses. The arguments are familiar. The company started and led by Matt Maloney says the deliveryman, part-time Los Angeles actor Raef Lawson, was an independent contractor, because he used his own car and worked whenever, and for whomever, he wanted.

Lawson counters that GrubHub’s close supervision of his work, tracking of his movements and ability to fire him made him an employee. Determining who’s right requires the judge to weigh various factors designed to show whether Lawson’s bosses had enough control to make them his employer.

GrubHub already has won at least one big victory. Earlier this year, it persuaded the judge to block Lawson from suing alongside other delivery people in a class action, limiting any potential payout to his alleged damages of less than US$600. Despite the paltry sum, there’s a lot at stake. The outcome may determine the results of any similar lawsuits against GrubHub, and could even affect lawsuits against other companies despite inevitable differences in circumstances that weaken its value as a legal precedent.

In any event, a GrubHub loss in a federal trial would pose a risk for the wider gig economy. For one thing, it would encourage workers currently classified as independent contractors elsewhere to sue for employee status, and perhaps make other judges more receptive to their arguments.

Having to pay overtime, reimburse expenses and provide other employment benefits would raise labour costs substantially – as much as 30 per cent by many estimates – and maybe undermine the financial viability of companies like US$68-billion Uber, which already burns through large sums of cash. At the same time, it's hard to see how workers who enjoy the flexibility of being independent contractors would benefit if such an option, or the prominent companies that offer it, were to shrink or disappear.

In fairness, the threat may be exaggerated. GrubHub itself already treats many of its workers in Massachusetts as employees, and some similar startups have voluntarily switched job classifications. On-demand food preparation and delivery service Munchery, for example, made all of its drivers employees four years ago, because as independent contractors they often quit or were unavailable during peak hours.

The improved service and increased loyalty to the company were worth the extra cost of overtime, minimum wages, employment insurance and even healthcare coverage for those who worked at least 30 hours a week, according to Munchery. Other firms like grocery-delivery service Instacart have made similar changes.

That highlights a possible downside for GrubHub, and its ilk, of a victory over Lawson. Squelching a quest for job benefits at an acrimonious trial makes the company look like the enemy, giving workers even less incentive to be reliable or loyal. Lawson himself was fired for a spotty delivery record and not being available when expected. Whether he would have performed better as an employee is impossible to say, but a workforce of disgruntled independent contractors is clearly bad for business.

A high-profile defeat for GrubHub could prompt change, but the big question is what kind. An intriguing possibility is the creation of a middle ground, a status that gives workers the right to, say, organize and bargain for wages, pool resources with the company for health and disability insurance and receive certain tax benefits and legal protection from discrimination. These “independent workers,” as a 2016 Brookings Institution proposal called them, wouldn’t be as costly as employees and would have the flexibility of independent contractors, but with a kind of social safety net.

There could be unintended consequences of such an arrangement, too. Employers might want to save money by shifting their current employees to this new, cheaper status, creating a net loss for worker welfare. And the expense of additional benefits might mean less cash for currently independent contractors.

Better solutions might be a lot simpler. Uber, for example, is considering granting its drivers a financial stake in the company. Of course, rival Juno, which was bought earlier this year by Gett, is being sued by drivers who allege that they were ripped off by a similar equity scheme.

Employers and the IRS also could make it easier for contractors to have Social Security and Medicare taxes (which they already have to pay) withheld from their paychecks. Congress could ensure that health coverage – through Obamacare or some improved version – is available. Retirement-savings plans and the like could be easier to create and to access, especially during times of unemployment.

The idea would be to cover gig-economy laborers with some of the existing safety net rather than create a confusing new employment category. The real challenge there would be to persuade their bosses that these sorts of changes are a good idea. A recent Stanford University survey found that tech entrepreneurs are remarkably liberal on many social and economic issues, and yet are strongly opposed to rules about how they treat the people they hire.

That suggests the GrubHubs of the world have a choice. They can pursue costly court fights against an increasingly disgruntled workforce, or they can use their undeniable political heft to improve the lot of their labor pool. Given the menu, the choice seems clear, even if it includes a side of crow to eat.

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