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Misclassified Contractors

This Company’s Lawsuit is a Cautionary Tale about
the Risks of Misclassified Contractors in the Gig Economy

By March 18, 2019August 23rd, 2022No Comments
This Company's Lawsuit is a Cautionary Tale about the Risks of Misclassified Contractors in the Gig Economy

The gig economy is in full swing around the world, representing a powerful trend that shows no signs of slowing down anytime soon. More people are willing to become independent contractors than ever, taking full control over their careers in the process.

But at the same time, the situation presents challenges not seen prior to the gig economy’s growth. Legitimately bringing contractors into a business is one thing. Classifying employees as contractors so that employers don’t have to pay health expenses or employment taxes is another matter altogether. The latter is what appears to have happened in Australia to Foodora, a company with a story that ought to act as a necessary cautionary tale about the risks of misclassified contractors as the gig economy grows.


Foodora’s Misclassified Contractors: What Happened?

According to legal actions launched against Foodora by Australia’s Fair Work Ombudsman, it is alleged that at least three of the company’s workers were definitely employees, not contractors as originally claimed.

A big part of this decision had to do with the high level of control, supervision, and direction that Foodora exercised over the location, hours, and manner of work performed by these people. Other factors included the fact that the “contractors” were paid a fixed rate that they were unable to negotiate, they were forced to wear Foodora-branded clothing, and each of the workers did not have their own customer base or business space—or even insurances.

Soon, Foodora came out and admitted that these workers were “more likely than not” employees—which led to the determination that the company owed a collective $5 million in back pay. Foodora initially offered only $3 million to cover its liabilities, but the unions fought for full pay.

As a result of this situation, Foodora was also ordered to pay the New South Wales Tax Office money it owed. The Fair Work Commission also ordered Foodora to pay $15,000 to one of the workers directly.

The Ambiguity of the Gig Economy

Foodora was just one of many examples of a large company attempting to leverage the “gig” economy to their advantage. By classifying someone as a contractor rather than an employee, organizations can save a great deal of money in terms of employment taxes, benefits, and more—even if the misclassification happened by accident.

The major issue is that even companies that aren’t trying to circumvent rules are having a hard time distinguishing between employees and contractors or freelancers because of how ambiguous this situation is. If a company has complete control over when someone starts and finishes a shift (as Foodora did in the case of these workers) they’re likely employees, not contractors. If someone is coming into an organization in an external capacity and is able to negotiate their rates, they are probably a freelancer. It’s a fine line, but it’s an important one to know—as Foodora quickly learned.

All told, bringing in international contractors does unlock a number of immediate benefits. Contractors can allow actual employees/team members to remain focused on their primary tasks and open doors to a wider array of highly qualified, more flexible workers. There are risks too, however—like the fact that employers still have to establish a legal entity or utilize a global Employer of Record (also known as International PEO) no matter what, and businesses may have no real security through this type of agreement and, ultimately, lack IP protection that might be a deal breaker in some cases.

Using an Employer of Record For Misclassified Contractor Risk Mitigation

One of the best ways that companies can mitigate the risks of misclassified contractors involves enlisting the help of an Employer of Record (EoR). Not only can an EoR help make sure all appropriate paperwork is filed so that you’re classifying your employees correctly in the first place, it will also help better align your workers, projects, and timelines.

But most importantly, an Employer of Record can help ensure people are classified correctly and in compliance with local labor regulations. This alone can help significantly minimize the risk of misclassification.

If you’d like to learn more about how an IPEO/EoR can help mitigate the risks of misclassified contractors or the benefits that an IPEO/EoR partner can offer, reach out to Velocity Global to get started on your global expansion.

We’re ready when you are.