The Problem of 'Misclassification' or How to Define who is an 'Employee' Under Protective Legislation in the Information Age

The problem of determining who is an “employee” under various protective statutes is foundational to the practice of labor and employment law. Any failures of individual bargaining in the employment relationship can only be remedied through collective bargaining or worker protective legislation, both of which require determining which workers are “employees” covered by the statutory system of collective bargaining or eligible for the benefits of the protective legislation. Because the statutory definitions of who is a covered employee are commonly very general and self-referential, the courts have adopted a series of legal tests to provide structure for arguments as to which employees are covered. The tests include the “rightto-control test,” the “economic realities test,” hybrid tests, and more recently, at legislative direction, the “ABC test.” The classification of some workers as covered “employees” and others as non-covered workers, most often “independent contractors,” has been an important issue in labor and employment law for as long as there has been protective legislation only covering “employees”. Employers have incentive to misclassify their workers as independent contractors, in an effort to avoid the costs of the protective legislation, or to formulate their business in a way that enables them to use independent contractors rather than employees to minimize regulatory costs. This last strategy is known in the academic literature as “regulatory arbitrage” because the employer constructs his or her business model so as to end up in a cheaper regulatory regime. The problems of misclassification and regulatory arbitrage to avoid protective legislation have intensified as information technology has allowed increased subcontracting and the development of business models in the sharing economy that pose serious puzzles under the traditional tests of the employment relationship. In this chapter I present a brief overview of the “misclassification problem;” the problem of distinguishing covered employees from independent contractors in the information age. I begin with a general exposition of the problem, including an outline and discussion of the traditional tests of who is an employee under American labor and employment law. I then discuss the problem in light of the recent developments of the information age, the growth of subcontracting and outsourcing and the development of new business models utilizing internet platforms that allow online matching of service consumers with workers for “work on demand,” and the performance of contracted work through “crowd-sourcing.” Finally, I discuss the various reforms that people have suggested to address the problem of determining when workers are covered by protective legislation in the information age so as to provide predictability and minimize the problems of misclassification and regulatory arbitrage. In particular, I discuss recent legislative developments and proposals to include “dependent contractors” and “independent workers” among covered workers. I also discuss my own proposal that we abandon outmoded legal definitions of who is an “employee” and who is an “independent contractor” and instead adopt two unifying principles for defining coverage under protective legislation: first, the avoidance of regulatory arbitrage so that decisions on the organization of production are made on the basis of real economic advantages rather than just on the basis of avoiding legislative responsibility; and second, the assignment of responsibility for the provision of benefits under protective legislation to the cheapest cost avoider so as to minimize the burden of fulfilling the promises of protective legislation.