A couple days ago, in her first major economic speech, Democratic presidential candidate Hillary Rodham Clinton came out strongly against a practice that until recently, most Americans probably hadn't heard of.
Misclassification, or treating a worker as an independent contractor rather than an employee for tax purposes, is something that advocates have been campaigning against for the past few years. The practice allows employers to evade payroll taxes and workers compensation, not to mention unemployment insurance, overtime and even the minimum wage.
The reason the issue got so much attention, however, is because of the role it's playing in the emerging debate over the digital economy: whether workers for companies like Uber are really micro-entrepreneurs, and therefore true independent contractors, or whether those companies are engaging in a massive tax dodge by misclassifying them as such.
Thus far, politicians have mostly fallen over each other to praise the Ubers of the world, seeking to align themselves with the idea of innovation, modernity and a service everyone loves. Lately, however, the arguments of their critics are starting to take hold. First Sen. Elizabeth Warren (D-Mass.), then Sen. Mark Warner (D-Va.), and now Clinton are starting to talk about the downsides for workers: A system set up for professionals with higher incomes and lots of freedom can actually leave people vulnerable when applied to job categories that might look independent, but really aren't.
"This on-demand, or so-called gig economy is creating exciting economies and unleashing innovation," Clinton said in her speech. "But it is also raising hard questions about workplace protections and what a good job will look like in the future."
Now it's true that most of the action against misclassification in the digital space is coming from the courts, where Uber, Lyft and the house-cleaning service Handy have so far been sued by workers saying they should have been treated as employees. But the biggest effort to combat misclassification on a larger scale is coming from the very office Clinton is seeking: the White House.
President Obama's Department of Labor has been on a misclassification kick for years now, launching investigations into construction companies, cleaning services, restaurants, home-care agencies and other professions where the practice has taken root. Although they don't have specific statistics on the cases they've won, in total it's amounted to millions of dollars in back pay for overtime and minimum wage violations.
The effort went into overdrive last year, when the department hired a Boston University professor named David Weil as head of the Wage and Hour division. He wrote the book on the long-standing economic trend he calls "fissuring," in which companies outsource work to subcontractors and independent contractors, allowing them to focus on core competencies and avoid responsibility for a bunch of employees. That's also what's led to the rise in misclassification, which can range as high as 30 percent of workers in some regions and sectors.
"As more and more of this work is shed, it gets pushed lower and lower in different industry structures, and that’s where you see misclassification pop up," Weil said in an interview.
In some places it's gotten to the point where if you don't treat your employees like independent contractors, you're at a disadvantage. "There’s this idea that for me to be competitive, I have to go down to that lower level," Weil says. "That’s what we really want to prevent."
This morning, Weil's Wage and Hour division released an extensive explanation of what misclassification looks like, offering detailed examples from several industries, to make it absolutely clear when a company might be in the wrong. The guidance stresses that the Fair Labor Standards Act's definition of "employment" is actually very expansive, and that if you're treating a worker who's integral to your business like an independent contractor, you're probably violating it.
"In sum, most workers are employees under the FLSA’s broad definitions," the guidance concludes. Even without changing the statute or the rules around it, that sends a strong message that being confused about what the law requires is no excuse — which may irk employers.
"That says that DOL isn’t going to find many people who are independent contractors," says Tammy McCutchen, a former wage and hour division administrator herself, who now works as an employer-side attorney at Littler Mendelson. "That really contrasts with the reality of the 21st century workforce. DOL’s efforts are old school. They’re ignoring the reality of the modern economy."
Weil declined to say whether he thought that many companies in the tech-enabled "on-demand economy" were misclassifying their workers when they treat them as independent contractors. But already, the noise around the issue is leading many to take the safe route. Instacart, for example, recently announced it would be converting its grocery shoppers from contractors into employees. Others, like the tech support service Managed by Q, have found that doing so is better for business anyway. That's also happening in traditional industries like trucking, where both states and the federal government have found rampant misclassification, and some businesses are now going back toward employees to avoid the risk.
Now, conservatives also slammed Clinton for her remarks on misclassification and the challenges of the on-demand economy, saying she would seek to cram a burgeoning new form of employment into an old-school, analog box. But Weil says that he thinks that current legal framework — strictly enforced — leaves plenty of room for innovation.
"I just fundamentally believe that the creativity of business can be applied to HR policy, within what the law allows you to do," says Weil, who has taught thousands of MBA students over the course of his career.
But if more workers end up being correctly classified as independent contractors because of how the economy is changing, Clinton may end up finding better ways to protect them, perhaps by working to extend safety net protections such as unemployment insurance and workers compensation to more people. If she does it right, she won't kill off this new kind of job in the process.