Gig Economy, Compliance, and Startups: How Misclassification Could Cost you $8.5 Million.

By Glenn Laumeister, AllWork CEO

The Gig Economy has shown itself to be extremely valuable to startups who want to grow quickly and build targeted elements of their business in a super flexible way.

 This surge of freelance workers shows no signs of slowing down. In fact, a survey by Braintrust found that 85% of knowledge workers are open to becoming freelancers. They want to work from anywhere, be their own boss, and work on the jobs that interest them the most. 

With this flexible workforce comes a whole new set of compliance and legal concerns. Managing and paying this workforce is much different than how you may be currently managing full-time, salaried employees. As a startup, your focus is on fundraising, growing your revenue, and making an awesome product, but there’s something else you need to worry about too: freelancer classification and compliance. 

Freelancers need to be classified based on what type of job they do, how often they will do it, and if that work is vital to your business. Classify these workers incorrectly, and you could find yourself with a multi-million-dollar problem.  

 What Lime learned the hard way about using freelancers. 

What happened?

 Most startup leaders don’t realize just how many rules there are when it comes to worker classification. All it takes is for you to violate just ONE of these complex rules, and you could find yourself on the very nasty side of the IRS, facing steep penalties and even lawsuits. That’s exactly what happened recently to Lime, an electric scooter company that has raised over $935 million in known venture funding. A California court ruled that Lime misclassified their “juicers”, who pick up and recharge their scooters, as independent contractors. The reason? Without these workers, their business model wouldn’t be possible. 

What was the issue?

By misclassifying their workers as independent contractors, Lime violated labor code regarding the payment of minimum wage, reimbursement for necessary business expenditures, and the provision of accurate wage statements. The result was a hefty $8.5 million settlement. 

 Misclassification comes in when you improperly classifying employees as 1099 independent contractors, when they are, in fact, W-2 employees who should be entitled to overtime, workers’ compensation, unemployment, earned sick leave, family leave, temporary disability, and other health benefits.

What does this mean for my business?

 Lawsuits like this show that you need to be much more careful when it comes to the classification of these gig workers. It becomes an issue when these workers are vital to the running of your business. Gig workers can most definitely be critical to the day-to-day running and ultimate success of a business. Once they do so, these are no longer 1099 contractors, now they are W-2 employees and need to be classified as such. 

 If you have a business that uses freelancers, you need to take action now to make sure these workers are classified correctly and there are no surprises down the road. The burden of proof and documentation is with the company, so it is important to take a proactive approach to this issue.

 This is what we do every day; help start-ups and established companies of all sizes navigate the complex and ever-changing world of compliance for the Gig Economy and the new Future of Work. It just makes sense to leverage an outside company that specializes in this type of work and can provide you with an objective view of your individual situation.

Ready to learn more about how AllWork can help you with these potential compliance concerns? Get in touch to schedule a demo!