The use of contracting arrangements is widespread; however, around the world, we are seeing trends suggesting this type of work arrangement may become more restricted, higher cost or higher risk to companies in the future. We asked several partners to share their insights on what’s changing for companies that use contractors and what the key impacts of this may be in the future.
What changes are we seeing in the use of contractors?
Pam Devata, employment law partner in Seyfarth’s Chicago office, says that many US states have already enacted laws that apply to contractors. Pam says these laws have impacted various employment conditions, including wages and hours, background screening and ban-the-box laws relating to what and how companies can use criminal history or other screens to make decisions.
Erin Hawthorne, employment law partner in Seyfarth’s Melbourne office, says that in Australia, the government is proposing new laws that will make it easier for contractors to argue they are employees and harder for businesses to defend allegations of sham contracting. There will also be a new capacity for the national labour tribunal to vary or void all or part of independent contractor contracts that include ‘unfair’ terms. This will affect the risk profile of all independent contractor arrangements. In addition, for road transport businesses and businesses that operate online platforms deal with ‘employee-like’ contractors, the proposed laws will introduce ‘employment-like’ conditions for contractor arrangements, including minimum rates and conditions, termination protections and union-led collective bargaining.
Helen McFarland, employment law partner in Seyfarth’s Seattle office, says that more and more states (particularly on the West Coast) are enforcing laws that make it extremely difficult to be classified as an independent contractor. State agencies are aggressively pursuing these issues, even seeking to classify gig workers as employees. Further, legislators are drafting new laws (on the city and state level) chipping away at the differences by requiring companies to provide leaves and various other benefits to contractors that were previously reserved only for employees.
Mandana Massoumi, employment law partner in Seyfarth’s Los Angeles office, says that California has been the perfect test case in how issues related to classification of independent contractors has been legislated and then litigated. In 2019, California passed laws requiring the application of the “ABC test” to determine if employees are independent contractors for purposes under certain circumstances. Under the ABC test, a worker is considered an employee and not an independent contractor unless the hiring entity satisfies all three of the following conditions:
- The worker is free from the control and direction of the hiring entity in connection with the performance of the work, both under the contract for the performance of the work and in fact;
- The worker performs work that is outside the usual course of the hiring entity’s business; and
- The worker is customarily engaged in an independently established trade, occupation, or business of the same nature as that involved in the work performed.
However, while the ABC test is the applicable test for most workers, some occupations or industries are an exception to it, meaning a case-by-case review is always required.
Ana Cid, employment law partner in Seyfarth’s New York office specialising in European and Latin American employment law, says that while some years ago, we saw an initial trend in some countries, like Spain, which regulated an ‘economically dependent’ contractor providing some sort of ‘employment’ rights to those contractors that had a strong dependence into one client, this trend has not continued or developed much. Yet, what is a trend in Europe and also Latin American countries is to have a much stricter bar when classifying independent contractors as such, instead of employees, interpreting signs of supervision and control as factors to reclassify the contractors as employees and also regulating specific test to presume the relationship as employment relationship, particularly in the context of individuals rendering services through digital platforms, where a draft EU Directive is being discussed and is expected to be concluded soon.
Tessa Cranfield, employment law partner in Seyfarth’s London office, sees no sudden changes in the UK, despite various government consultations around adjusting the balance in favour of gig and other ‘insecure’ workers and simplifying the UK’s legal and tax tests for employment. However, a spate of ‘gig economy’ cases has made clear that status depends more on the reality of an arrangement than the written terms. And one change that is here to stay (despite a plan to reverse it by the short-lived Liz Truss government last year) is to make end users ultimately responsible for employment taxes, where a contractor works via an intermediary and works akin to an employee.
Kathryn Weaver, employment law partner in Seyfarth’s Hong Kong office, says that while contracting arrangements remain outside the purview of employment protection laws in Hong Kong, there has been increased scrutiny by the Hong Kong tribunals on the classification of independent contractors. Recently, the Labour Tribunal ruled in favour of six gig workers for a food and delivery parcel platform being employees and not independent contractors, which meant that they were then accorded the statutory employee protections and benefits. This is the first time the Hong Kong Labour Tribunal has found in favour of gig workers and is likely to be of considerable concern to other gig economy companies in Hong Kong.
What does this mean for businesses?
Pam says that employers in the US need to be aware of different types of laws when determining whether to engage with contractors or employees. This is because multiple state and local jurisdictions in the US are broadening their scope of protection for contractors. Pam warns that employers can no longer engage contractors without triggering specific labour requirements in certain states. For example, Pam notes that independent contractors in New York City and Los Angeles as well as other states are subject to Fair Chance and ban-the-box laws traditionally reserved for employees.
Australian businesses that use contractors will need to prepare for a period of uncertainty in the short term as the law reforms take shape. In the longer term, Erin predicts greater legal risk, higher costs, and less flexibility for businesses using contractors (as well as other forms of labour outside of permanent employment). Depending on the reasons for using contractors, these changes may necessitate review of alternative options.
Helen encourages employers to be extremely cautious when choosing to use contractors to perform duties that can also be completed by your employees. When considering the added risk of litigation and government penalties, and joint employment risks as contractors are bringing more lawsuits directly against the companies, it may not be worth it to hire contractors.
Mandana notes that for businesses in the United States, it is important to review any state specific laws (such as the ABC test implemented in California) to ensure proper compliance with the classification requirements, given that this area has been a hotbed of litigation.
Ana suggests that international businesses set up mechanisms to ensure that the relationships with contractors meet the applicable test in each country, particularly when such contractors are providing most of their services for one company. Particular attention should be given to employee presumption tests in each country, even more so if the services are set up under digital platform structures.
Amid the fast-growing gig economy market in Hong Kong, Kathryn reminds companies to exercise caution when engaging gig workers or contractors. If the overall impression of the relationship between the contractor and the company is that of employment, taking into account factors such as the degree of control over the contractor, who provides the equipment to perform the services, whether there is a right to appoint a substitute, who bears the financial risks, and whether the contractor is integrated into the company, then no matter how carefully drafted the independent contractor agreement is, there will be a high risk that the contractor will be deemed to be an employee by the Hong Kong tribunals.
Please contact any of our partners if would like to explore or review your contracting arrangements.
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