Explainer

The Legal Loophole That Lets Companies Like Doordash Steal Tips, Explained

Popular courier services such as Instacart, Doordash, and Amazon Fresh have been making headlines recently with the news that they’re meeting minimum pay promises to drivers by cutting compensation and using tips to make up the difference. In other words, customers were tipping under the impression that drivers got tips on top of the delivery fee earned per trip, but instead, the companies subtracted the value of those “tips” from the payments that they had promised to workers — saving the company money, but cheating drivers. (Under pressure, Instacart recently reversed its policy.)

Why can these companies get away with such behavior, especially in states like Washington where the tipped minimum wage is illegal? The answer is that these workers aren’t employees. They’re independent contractors, and labor law for independent contractors is very different than it is for employees. As self-employed workers, they are entitled to fewer protections, but also, in theory, have a greater degree of freedom and control.

Some of those same workers argue they’re being misclassified by their employers and should actually be considered employees. This issue has been the subject of substantial litigation, as in 2016 when Uber was dinged for misclassifying workers in California and Massachusetts, and again in California in 2018, where workers won a suit against the delivery company Dynamex. Now some states, including California, are trying to fix the problem with new legislation.

Misclassification occurs when companies improperly categorize someone who functions as an employee as an independent contractor. Individual states and agencies have their own standards — as, for example, when deciding employment status for workers’ compensation purposes — and the IRS has its own 11-point standard. A much simpler rule was applied in the Dynamex case, though: The ABC test. The court found that to be considered an independent contractor, an employee must meet three criteria.

The first is freedom from control: Independent contractors decide how, when, and where they work, set the terms of their employment, and do not receive highly specific direction in the course of their work. The second is performance of work outside the company’s scope of business. In addition, the work reflects an established and independent trade or specialty in which the worker is “customarily engaged.” For example, a plumber is “customarily engaged” in work pertaining to installing, maintaining, and fixing plumbing.

In another example, a florist’s shop might hire a tax preparer as an independent contractor, relying on an expert who sets their own terms and schedule to do work that isn’t within the florist’s normal parameters of business. But if the florist hired someone to work in the store arranging flowers, that person would likely be considered an employee.

The rise of the “gig economy,” sometimes known as the 1099 economy in a reference to the tax forms used to report “miscellaneous” income for independent contractors, has highlighted the misclassification issue, but it’s not new. Misclassification has been a huge historic problem in the construction industry, as well as for domestic workers, janitors, truckers, and many others. Nearly 24 million workers labored as independent contractors in 2015 and only a small slice, around 1 percent, were “gig economy” workers.

For companies, there’s a clear advantage to relying on independent contractors: They’re much less expensive to maintain. Companies don’t have to pay unemployment insurance, workers’ comp, or payroll taxes. Overtime and minimum wage don’t apply, nor do state and local requirements around paid family or sick leave. Nor do they need to provide benefits such as paid time off, retirement funds, or health insurance.

Independent contractors assume all the risks of operating a business, which is sometimes by desire and design. Tax preparers and freelance journalists, for example, may prefer the flexibility of independent contracting, and companies with periodic specific needs that fall outside their normal work, like a company hiring experts for diversity and inclusion consulting, benefit from these kinds of independent contractors.

However, corporations also label workers who function like regular employees as contractors: If you’re delivering packages for Big Package Company in a BPC shirt, reporting for an hourly schedule, following specific routes, and having other aspects of your day-to-day work life dictated by BPC, you are an employee — as a court determined in 2015 in the case of a very real package company: FedEx. Even if you also moonlight for Rival Package Company doing similar work, you’re still an employee.

“Misclassifying limits people’s ability to negotiate while companies are acting as employers and controlling the way work happens,” explained Erica Smiley of Jobs With Justice.

Workers aren’t the only ones concerned about misclassification. The practice is also anticompetitive, harming companies that comply with the law by treating employees as employees, taking on the added responsibility and cost that comes with it. “This is just another way that companies shift burdens onto workers and taxpayers,” says Steve Smith of the California Labor Federation.

This is just another way that companies shift burdens onto workers and taxpayers.
– Steve Smith

Gig economy jobs often come with lofty promises of profit and are marketed with language used to describe independent contracting, such as the ability to set your own hours and select your customers. Earners aren’t paid by the hour in many cases, but by the job; the more jobs they can rack up, the higher the pay.

On the ground, the reality is very different, whether you’re a cleaner with Handy or a courier with Postmates. Companies dictate the terms of employment quite extensively, and in some cases have even created their version of the company store, as with companies like Uber and Swift, which have gotten into the vehicle sales and leasing business for their “contractors.”

States such as Massachusetts, New Jersey, and now California are trying to solve this with laws that clearly define the distinctions between employees and independent contractors.  California’s AB5, for instance, would codify the Dynamex decision. These laws do not, of course, magically eliminate the practice of misclassification or instantly reclassify workers, but they add further guidance around the topic and create tools for workers and labor organizers to use in negotiations with employers.

In other regions, worker-organizers have focused on issues around working conditions themselves, such as pay and access to benefits, rather than the question of misclassification. That’s happened in New York, Washington State and elsewhere — though it should be noted that many of these focus on the gig economy specifically.

The push to clarify the definition of independent contractors could benefit workers and employers alike, and it may also be very disruptive to the tech industry. While the gig economy makes up a relatively small percentage of misclassified workers, Smith said, “What you do see with the gig economy is businesses building an entire business model around misclassification.”

Even as lawmakers consider codifying protections, the National Employment Law Project finds these companies are a driving force behind a wave of “marketplace platform” legislation across the U.S. that explicitly defines gig economy workers as independent contractors, not employees. One venture capitalist shamelessly told CNN: “What is ultimately a better business decision? To try to change the law in a way that you think works for your platform, or to make sure your platform fits into the existing law?”

Building an industry on normalizing misclassification, and sometimes pushing workers to advocate against their own rights, as seen with smiling gig economy workers shilling for their bosses, is a dangerous and troubling trend. Companies are quick to claim that codifying independent contractor status would be “ruinous,” but they also said the same thing about minimum wages, protecting the right to collective bargaining, and other measures designed to improve worker health and safety, and yet somehow, capitalism prevails. Companies that cannot meet their operating costs fall, and others rise to replace them.

“Some businesses,” commented Smiley, “may not deserve to exist in a modern society.”

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Analysis

New Bills Address the Racist and Ableist Wage Loopholes in the New Deal

While fresh-faced progressive lawmakers have been grabbing headlines with their Green New Deal, multiple bills have been quietly piling up in Congress to plug longstanding holes in the original New Deal. These bills would extend basic but critical labor protections to workers who have historically been cut out of these standards: workers with disabilities, tipped workers, farm workers, and home care workers.

Here’s the tl;dr:

A first bill, introduced at the end of January by Sen. Bob Casey, and Reps. Bobby Scott and Cathy McMorris Rodgers, would phase out section 14(c) of the Fair Labor Standards Act, which has made it legal for employers to pay disabled workers as little as pennies per hour. It would also provide resources to help these workers transition into competitive, integrated employment in their communities.

Second, Congressional Democrats’ $15 federal minimum wage bill, the Raise the Wage Act — introduced in mid-January by Sen. Bernie Sanders and Rep. Bobby Scott with the backing of the full Democratic leadership — would also eliminate the subminimum wage for workers with disabilities and phase out the separate subminimum wage for tipped workers, which is currently $2.13 per hour.

In the first week of February, Sen. Kamala Harris and Rep. Raúl Grijalva introduced the Fairness for Farm Workers Act, which would extend time-and-a-half overtime pay to agricultural workers, as well as minimum-wage protections to most agricultural workers who still lack them.

Finally, Sen. Harris and Rep. Pramila Jayapal recently announced the first-ever federal domestic workers’ bill of rights, which would give the nation’s more than 2 million home care workers long-denied rights to overtime pay, safety and health protections, recourse against harassment and discrimination, collective bargaining, and more.

This legislation is designed to chip away at several pernicious “-isms” written into the United States’ labor law — racism, sexism, and ableism.

Many labor carve-outs are the direct legacy of slavery: At the urging of Southern lawmakers determined to maintain a white economic and social hierarchy, the 1935 National Labor Relations Act (NLRA) and 1938 Fair Labor Standards Act (FLSA) — which established some of our most basic worker protections like the rights to form a union, earn a minimum wage, and receive overtime pay — cut out domestic and agricultural workers, who were overwhelmingly black and brown. At the same time, the discriminatory practice of tipping — which had originally enabled American employers to avoid paying wages to newly-freed black workers — and treating disabled workers as inferior permanently codified some forms of labor as lower-than-minimum-wage work.

As a result, workers in these groups tend to have a lot less power than other workers. For starters, the pay isn’t enough to keep workers out of poverty even if they have a full time job: In recent years, the median annual wage has been roughly $23,000 for tipped workers*, home care workers, and agricultural workers, and an estimated 420,000 disabled workers employed in “sheltered workshops” created under 14(c) were paid an average of $2.15 per hour. These groups of workers are also disproportionately likely to endure physical and verbal abuse, sexual harassment, wage theft, discrimination, and dangerous working conditions.

Many labor carve-outs are the direct legacy of slavery

Yet these unprotected jobs make up a large and growing swath of our economy: Caregiving is the fastest-growing major occupation in the United States, and is forecast to be one of the largest sectors by the end of the next decade, with more than 4.1 million workers employed as home health aides and personal care aides by 2026. The largest employer of tipped workers, the restaurant industry, accounts for 9.5 million workers, which is nearly seven percent of the U.S. workforce. Since these jobs are heavily dominated by women and workers of color, their devaluation perpetuates America’s already-deep inequalities on the basis of race, gender, and disability. The Trump administration has further endangered the many immigrant workers in these professions — who made up 24 percent of domestic workers and 76 percent of farm workers in recent years — by pushing anti-immigrant policies and using xenophobic language that make it even less likely that immigrant workers will seek recourse for illegal or inhumane treatment.

Opponents will likely break out the usual fearmongering that closing loopholes will harm rather than help workers by making it harder to find jobs, like we’ve recently seen in D.C., New Jersey, and Maine. The problem with their argument is simple: States have already enacted these policies and seen positive results. In the eight states where tipped workers are paid the full minimum wage, tipped workers earn more and restaurant growth has outpaced other states. States such as New Hampshire and Maryland are already phasing out the subminimum wage for disabled workers, while eight states and Seattle already have domestic workers’ bills of rights in place. And in several states, including agricultural powerhouses California and Minnesota, farm workers have won overtime protections.

Lawmakers’ proposed fixes are by no means perfect. Perhaps the most egregious untouched loophole affects America’s more than 800,000 incarcerated workers, who earn as little as a few cents per hour — or nothing at all — and for whom labor is compulsory in some states. Also excluded are the roughly 1 in 8 workers in so-called “alternative work arrangements,” including independent contractors (ICs) as well as workers whose employers misclassify them as ICs to avoid taxes and legal requirements, such as Uber and Lyft drivers. Still, even if they’re imperfect and eight decades overdue, the proposed fixes are an important steps forward.

It’s no accident that the champions of these efforts in Congress are largely women and people of color, who come from the communities that have borne the brunt of these exclusionary policies. And it’s encouraging that some lawmakers believe that in addition to big, bold ideas, being a true progressive leader involves unglamorous, piecemeal grunt work, such as plugging the longstanding leaks in the nation’s labor laws. As long as the loopholes continue to exist, the shameful “isms” that create our two-tiered society will continue to stare us down through the holes of our frayed worker protection system.

* The most recent analysis of tipped workers’ wages nationwide, by Sylvia Allegretto and David Cooper, uses 2011-2013 BLS data in 2013 dollars. We assume that median wages have grown at roughly the pace of inflation, adjusting to today’s dollars using the Consumer Price Index for All Urban Consumers.

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Analysis

New Jersey Now Offers Paid Leave for All Families — Including Chosen Ones

New Jersey is a state of “mosts.” The most epic rest stops. The most tanned beach goers. The most envy of New York. But now it is has a new most to add to its name: state with the most inclusive paid family leave in the nation.

Today, thanks to the efforts of local advocates led by the NJ Time to Care Coalition, New Jersey Gov. Phil Murphy (D) signed into law dramatic improvements to New Jersey’s paid family leave law. The law doubles the length of paid family leave available to 12 weeks, increases the average weekly benefit to $859 from $632, improves supports for domestic violence survivors and their families, and more.

One of the most exciting policy advances is that the bill updates the definition of “family” to people who “have a close association with the employee which is the equivalent of a family relationship,” making New Jersey the first state in the nation to extend paid family leave benefits to chosen family. This new law will particularly improve the economic security of workers who are LGBTQ or who have a disability, as these workers are most likely to be forced to make the impossible choice between caring for a chosen family member and taking home a paycheck.

New Jersey’s victory is standing on the shoulders of decades of legal precedent. The U.S. government first recognized chosen family during Vietnam, allowing federal workers to take leave for the funerals of loved ones killed in combat if those people had “a close association with the employee … equivalent to a family relationship.” More federal benefits incorporated this definition in the 1990s, and in the last few years a host of states and localities, such as Arizona, Chicago, and Austin, have passed paid sick time laws that are inclusive of chosen family.

What is chosen family anyway? Simply put, it’s those people in your life you would do anything for. For me, one of those people is my college roommate, Diana. When my mom had a potentially fatal cerebral hemorrhage the month before finals our senior year, Diana dropped everything and drove with me nine hours to the hospital. When Diana’s son was born prematurely at just 24 weeks, I took time off work to help support her and her family. Diana and I have been family for more than 20 years — longer than I’ve known my husband, my stepmother, or any of my nieces and nephews — but until now no state in the country would have let us take paid family leave to take care of each other.

Millions of people across the country have an elderly neighbor who is more like a grandmother or a battle buddy they served with in the military.

And Diana and I aren’t alone — millions of people across the country have an elderly neighbor who is more like a grandmother or a battle buddy they served with in the military. In fact, research Laura Durso and I conducted shows nearly one in three Americans have taken time off work to care for chosen family. While caring for chosen family is a shared experience, it is especially common among LGBTQ workers and workers with disabilities, due in part to family rejection, making this advance particularly important for those communities.

While this bill makes New Jersey a trailblazer on paid family leave and chosen family, this is the latest step for the movement to increase recognition of the importance of supporting diverse family structures in legislation. Historically, of course, diverse families have always existed, but the law has at best ignored them and at worst actively harmed them, from denying cash benefits to unmarried mothers to defining marriage as a union limited to one man and one woman. While harmful family policies still exist, increasing legal recognition of chosen family is a bright light.

Of course, these legal changes were not happening in a vacuum. In the media, chosen family rose to the spotlight as the name of Noreen Stevens’ cartoon about Canadian lesbians and their loved ones, and is in evidence today on FX’s award-winning Pose, about New York City ball culture, as well as in media that isn’t queer-specific. (X-Men or Fast and the Furious, anyone?) And more to the point, it’s the reality of people’s lives, perhaps made most painfully, tragically clear during the height of the AIDS epidemic, when chosen family were denied visitation rights in hospitals despite their family-like relationships.

New Jersey has made a great start. Who’s next?

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New Law Could Eliminate Disability Minimum Wage Loophole

Earlier this month, Representative Bobby Scott (D-IL) and Senator Bob Casey (D-PA) introduced legislation to eliminate the subminimum wage for workers with disabilities. The bill, the Transformation to Competitive Employment Act, phases out section 14(c) of the Fair Labor Standards Act, which made it legal for certified “sheltered workshops” to pay people with disabilities less than the minimum wage.

This means the estimated 400,000 people with disabilities who are paid an average of $2.15 an hour will slowly gain access to jobs that pay the full minimum wage. That’s a big deal, especially to people like George, who used to work in a sheltered workshop run by Melwood, the company where Cari serves as president and CEO.

George used to get nervous at work exactly twice a year. He’d held the same job providing cleaning services at the U.S. Department of Housing and Urban Development since 2008, but since Melwood was a sheltered workshop, George could be paid less than the minimum wage. The only way for him to avoid that was to test well at time trials held every six months. If he completed his work quickly enough, he was paid at a fixed rate. If he was too slow, he’d be paid a subminimum wage.

In 2019, people with disabilities should not be facing futures with segregation and subminimum wages.

Today, we recognize that type of testing as cruel. But Melwood was established in 1963 by families who wanted to provide their children with developmental disabilities with opportunities to gain skills, have a vocation, and earn a wage. At the time, this was considered progressive — many people with disabilities ended up warehoused in institutions, and these families simply wanted to be able to keep them at home. But as disability policy has evolved, disabled people have been able to demand more — including access to jobs that pay well enough that workers can support themselves. Society changed, and programs like Melwood had to change with it.

In 2016, Melwood got on board. It relinquished the 14(c) certificate that classified it as a sheltered workshop and transitioned to paying all of its employees with disabilities competitive wages in integrated settings.

There were supports in place to make it work: The University Centers on Disability, Parent Training and Information Centers, and Protection and Advocacy Network all provide supports and services to help people move to integrated employment. Oregon and other states have demonstrated the ability for disabled workers to achieve successful outcomes transitioning to competitive integrated employment when state Vocational Rehabilitation Agencies and Intellectual/Developmental Disability Services work together.

In 2019, people with disabilities should not be facing futures with segregation and subminimum wages. They should be allowed to reach their full potential in a competitive integrated environment. They should earn a fair day’s wage for a fair day’s work.

Correction: This piece was updated to remove one of the original authors.

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The MLB Makes Millions on Minor Leaguers. It Refuses to Pay Minimum Wage.

Pitchers and catchers report to spring training this week, the first sign that Major League Baseball’s Opening Day is drawing near. But amid the hope that springs up with every new baseball season is an unacceptable fact: Many of the players at spring training aren’t being paid.

“Each year, every major league team has their minor league players report to spring training. Most fans don’t know those minor league players have to work 31 straight days for no pay,” said Garrett Broshius, a former minor league baseball player and current attorney who is attempting to sue Major League Baseball to ensure that minor leaguers receive fair pay for not only spring training, but all year round.

“If you’re requiring someone to work, you should be paying them the minimum wage. It’s a fairly basic principle,” he said.

Low wages, though, are the reality for most minor league players. At the lowest end of the pay scale, they make about $1,150 per month during the season, which lasts about half the year, and receive nothing during the offseason or spring training, even though they are expected to stay in shape and train.

All that unpaid and low-paid time adds up; many players make about $7,500 annually, or even less. And because they spend so much time practicing, traveling, and playing games without being eligible for any sort of overtime pay, their hourly compensation dips far below minimum wage.

“I’d work 70 hours a week, and I would get paid $45 per game, so that comes out to like $3 an hour,” said Jeremy Wolf, a former minor league player who now runs More Than Baseball, an organization that aids minor leaguers. “The hot dog vendor makes more than the players do.”

This is possible because minor league baseball players are exempt from most minimum wage and overtime pay protections. A federal spending bill that averted a government shutdown in March 2018 included the positively Orwellian “Save America’s Pastime Act,” which explicitly exempted minor league baseball players from federal pay protections in the Fair Labor Standards Act, so long as they were paid the equivalent of the federal minimum wage of $7.25 for a 40-hour week, which comes out to about $1,160 per month. The bill also explicitly said players are only paid for 40 hours of work during the season  “irrespective of the number of hours the employee devotes to baseball related activities,” and that players don’t need to be paid for spring training or the off season.

I’d work 70 hours a week, and I would get paid $45 per game, so that comes out to like $3 an hour.

Major League Baseball had been pushing for something like the “Save America’s Pastime Act” to become law for years, in order to blunt legal efforts such as Broshius’. After spending just half a million dollars or less annually on lobbying Congress between 2009 and 2015, Major League Baseball spent more than $1 million annually from 2016 to 2018.

Now the league is aiming to do the same thing at the state level, since states are allowed to exceed federal minimum wage and labor protections. At the behest of MLB,  Arizona Republican state Sen. T.J. Shope introduced a bill that would exempt minor league players from that state’s minimum wage law, which requires pay of $12 per hour by 2020, with few exceptions. He introduced it despite having clear misgivings about its legality, calling it “not ready for prime time.”

Not coincidentally, Arizona is one of the two states in which the bulk of spring training takes place (the other being Florida, where the state minimum wage is just $8.46 an hour). Broshius’ suit also brought claims under Arizona law, which the bill’s sponsor explicitly says would be undermined by his legislation.

“It’s just a preemptive strike by Major League Baseball,” said Wolf. “There a group of people that are just trying to cement not paying these employees.”

As Broshius explained, the month they work without pay in the spring can really hurt minor league players who don’t make it onto a major league roster — which entitles them to not only a minimum salary of more than $40,000 but also union protection — when they get shipped off to a new minor league team. “You go to a new place and you have to pay for your first month rent, put down a security deposit, a lot of players have student loans, and obviously you have your regular bills too,” he said.

Major League Baseball teams, not the minor league affiliates themselves, pay minor league players. They claim that paying fair wages to everyone in the minor league system would cause financial ruin, and also isn’t necessary because players have months of offseason in which they can work other jobs. Plus, they argue, minor league players are more akin to struggling actors going on auditions than daily workers who should receive steady pay.

“Their core argument is that it’s not practical to pay the players based on how long the games last or the hours they spent practicing because a minor league player isn’t doing it for a career, they’re doing it to see if [making it to the majors is] viable,” explained Lindsay Brandon, an attorney who specializes in sports law.

But, Brandon added: “Are these athletes generating revenue for these minor league teams? Absolutely.” The Texas Rangers, for instance, made $1.2 million from spring training last year. Brandon likened the case of minor league players to that of NCAA athletes, who are also attempting to earn a fair share of the revenue they generate. (Other professional sports leagues, such as the NBA or NHL, tend to pay their minor league players better.)

Compensating unpaid players for their month in spring training would amount to a rounding error for most major league teams. In fact, paying them at least minimum wage all year round would barely put a dent in the bottom line.

“If you give every player minimum wage for a 12-month season —  each team has 200 minor leaguers — each team raises their payroll by $4.5 million,” said Wolf. “$4.5 million is one average major leaguer.” Indeed, average pay in MLB in 2018 was about $4.5 million, while the league made $10.3 billion in revenue.

Why do minor leaguers put up with such shabby treatment? They don’t want to step out of line because they know that the dream of the majors, and its vast riches, is not that far away.

“I got to wear a Mets uniform. Players who are playing are blinded by that sort of thing,” said Wolf. “No one’s going to strike, no one’s going to scream union, no one’s going to do anything to make themselves stand out.”

So baseball gets to keep paying its players next to nothing, because it can.

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