November 2022

Changes in Worker Classification in the Gig World

By Mindy L. Mayo, CPP

GigWorkerIn January 2020, a shot known as California Assembly Bill 5 (AB5), was heard round the gig worker world.

AB5 radically changed the history of worker classification in the state of California and attempted to reclassify millions of gig workers as employees. The reverberations were felt throughout the United States and spread to other countries as taxing authorities around the globe looked at California’s legislation and began grappling with their own treatment of these workers.

AB5 codifies the Dynamex decision (Dynamex Operations W. v. Superior Court and Charles Lee, Real Party in Interest, 4 Cal.5th 903 [Cal. 2018]) in which the California Supreme Court determined that a three-part ABC Test must be used in worker classification determinations in any labor code or unemployment insurance case. 

A worker must satisfy all three criteria of the ABC Test to be treated as an independent contractor. The criteria are as follows:

  1. The worker is free from control and direction in the performance of services;
  2. The worker is performing work outside the usual course of the business of the hiring company; and
  3. The worker is customarily engaged in an independently established trade, occupation, or business.

Under the ABC Test, the presumption is that a worker is an employee. The burden is on the employer to demonstrate the independent contractor status of the employee.

While California was passing AB5, other states, as well as foreign jurisdictions, were following suit to tame the gig economy and the usage of independent contractors in their own economies. 


Contractors in the EU

In 2021, the European Commission proposed a set of measures to improve the working conditions in platform work and to support the sustainable growth of digital labor platforms in the European Union (EU). 

In one of the biggest challenges to the labor practices at popular ridesharing and food-delivery services, the European Commission took a major step toward requiring companies to consider their drivers and couriers to be employees, thus entitled to minimum wage and legal protections.

Gig Labor Economy on the Rise

The digital platform economy is growing quickly. Over 28 million people in the EU work through digital labor platforms. It is expected that their number is expected to reach 43 million by 2025. It is estimated that most of these people are genuinely self-employed. Approximately 5.5 million are believed to be incorrectly classified as self-employed. Between 2016 and 2020, the revenues in the platform economy grew almost fivefold, from an estimated €3 billion to around €14 billion ($13.6 billion USD).

The proposed presumption of employment resides at the heart of the new status test. The draft directive provides a list of five criteria that demonstrate “control” over any individual. If the digital labor platform satisfies just two of the following five criteria, there is a presumption of employment. Those criteria are as follows:

  1. Effectively determining or setting upper limits for the level of remuneration;
  2. Requiring the person performing platform work to respect specific binding rules with regard to appearance, conduct towards the recipient of the service, or performance of the work;
  3. Supervising the performance of work or verifying the quality of work results, including by electronic means;
  4. Effectively restricting the person’s freedom, including through sanctions, to organize their work; in particular, the discretion to choose their working hours or periods of absence, to accept or to refuse tasks, or to use subcontractors or substitutes; and/or
  5. Effectively restricting the possibility to build a client base or to perform work for any third party.

The European Commission proposed rules that, if enacted, would affect up to an estimated 4.1 million people and give the EU some of the world’s strictest rules for the gig economy. The rules are unlikely to take effect until 2024 or later. In the meantime, European countries are attempting to tame their worker classification issues through their own courts and through labor regulations designed to standardize treatment of gig workers.

Changes in Serbia

The Serbian government changed the personal income tax and social contribution laws effective January 2020 in response to the rising gig economy. Of the many changes enacted, “the taxation of entrepreneurs engaging in service contracts with one employer” gathered the most attention. A new independent contractor test was created. Entrepreneurs who fail to pass the test will be subject to higher taxation. Below is Serbia’s nine criteria independent contractor test:

  1. Whether working hours are determined by the client and the fee is the same even when the entrepreneur is on leave;
  2. Whether the entrepreneur usually works at the client’s premises or at such other places as directed by the client;
  3. Whether the client organizes training for the entrepreneur;
  4. Whether the client engaged the entrepreneur following a recruitment process involving advertising or services of recruitment professionals;
  5. Whether the client provides equipment, tools, and other tangible or intangible assets necessary for the entrepreneur’s work, or whether the client organizes and leads the work process;
  6. Whether at least 70% of total income is earned from one client (including the client’s related parties) within any 12-month period;
  7. Whether the entrepreneur carries out the same business activity as the client without bearing the usual commercial risk associated with the work product delivered to the client’s client;
  8. Whether the entrepreneur is partly or fully prohibited from providing services to other clients, except where the prohibition relates only to a limited number; and
  9. Whether the period of engagement of the entrepreneur for the client reaches or exceeds 130 business days in any 12-month period.

An entrepreneur can pass the independent contractor test only if at least five out of the above nine questions are answered negatively.

Changes in the United Kingdom

Until April 2021, the burden of proof in U.K. worker classification fell to the contractors themselves. Under IR35, workers could be considered “off-payroll” or independent contractors. The off-payroll working rules apply if a worker provides their services through their own limited company or another type of intermediary to the client.

An intermediary will usually be the worker’s own personal service company (PSC), but could also be a partnership, a personal service company, or an individual.

The rules ensure that workers, who would have been employees if they were providing their services directly to the client, pay broadly the same income tax and National Insurance Contributions (NIC) as employees. These rules are known as “IR35.”

As of April 2021, workers who don’t meet the criteria for being self-employed will fall inside IR35. Now, all large and medium-sized businesses will be responsible for classifying the employment status of contractors with PSCs and will be required to follow a new set of administrative procedures to ensure compliance.

Instead of simply paying an invoice from your contractor, the fee payer or client will become responsible for any payroll taxes incurred when an individual should have been properly classified as an employee.

The purpose of the new IR35 regulations is to require that contractors, who do not fall within the His Majesty’s Revenue and Customs (HMRC) criteria as self-employed and are essentially employed through their own companies, pay equivalent taxes, fees, and NIC contributions as standard employees.

The British government estimates that the changes will affect at least 80,000 contractors. 

Like other European countries, the U.K. has seen new laws that require employee classification for certain workers. Uber drivers must be treated as workers rather than self-employed, the U.K.'s Supreme Court has ruled. The decision could mean thousands of Uber drivers are entitled to minimum wage and holiday pay. 

In its ruling, the U.K.’s Supreme Court considered a few different factors related to driver autonomy and subordination. They are the following:

  • Predetermined fares and contract terms: Uber set all ride prices, dictating how much drivers could earn for their work. Uber also set 100% of its contract terms, giving drivers no input into them.
  • Discipline and penalties: Uber could penalize drivers for canceling too many rides, giving drivers no option but to accept all rides assigned to them if they wanted to maintain good scores
  • Oversight and termination: Uber regularly monitored its drivers through the star rating system passengers used. It had the authority to give drivers warnings and fire them if performance did not improve.

The court determined that the facts listed gave Uber too much autonomy over drivers for them to be considered self-employed.

Changes in Hungary

Hungarian courts use primary and secondary factors to determine whether the relationship is that of employee or independent contractor. The factors include the obligation to perform the services personally, the required regular availability of the worker, and the hierarchy between the properties. Misclassification of any workers may result in severe financial sanctions.


Changes in Romania

Since 2003, Romanian IT workers, in an effort to boost the IT economy in the country, have enjoyed zero income tax. This led to a decrease in independent contractors within the IT industry.

In January 2020, the Romanian government said that the IT industry’s zero income tax could soon come to a halt, possibly increasing the number of independent contractors. Romania’s extremely complicated tax system and serious penalties instituted for individuals who evade taxes make it crucial to comply when contracting with workers in Romania. Changes in Spain

Spain uses criteria, such as individual autonomy and contractual documentation, in its worker classification determinations. Spanish workers who have the freedom to choose when, where, and for whom they work are typically contractors, while those who do not are generally employees. Workers usually have formal employment contracts, while contractors do not.

Independent contractors working in Spain must pay social security fees to receive benefits like public pension or unemployment subsidies. They are also, like the United States, responsible for their entire tax burden.

As in the U.K., a change to Spanish law occurred in 2021 when the government implemented a landmark law to combat employee misclassification by requiring delivery platforms to hire the workers currently working for them on a contract basis. Companies in Spain must draft and sign employment contracts with delivery drives and treat them as employees. The Spanish law only applies to deliver drivers and riders and is not applicable to other gig economy workers.


Changes in The Netherlands

Delivery drivers historically were independent contractors or self-employed in The Netherlands. An Amsterdam court has ruled otherwise. In some cases, the rideshare company may also have to pay back wages to the drivers it previously misclassified as contractors.

Wages, work, and authority were the bases used in the worker classification determination. The court evaluated the driver ranking system and the use of algorithms in assigning the drivers’ work and determining the prices for each ride. The drivers had no say in their routes or the fares charged for them.

The court found this relationship gave the platform significant authority over the drivers. The drivers were employees rather than contractors working for themselves.


Changes in Japan

According to Japanese labor law, the following factors are a significant indicator of there being an employment relationship between a worker and the other party to the contract:

  • There is no freedom to accept or reject work requests, nor the instructions for how such work is to be completed
  • There is a significant amount of supervision and control over the work to be completed
  • There are restrictions on the place of work and hours to be worked
  • Remuneration is paid, provided that this refers to remuneration being paid not for the result of the work itself, but for the fact that the employee was employed for the period, or for remuneration paid in the form of wages calculated on an hourly or daily basis
  • Machinery and equipment used in carrying out the work are provided at the expense of the company
  • The level of remuneration paid is the same as that of regular employees
  • Priority or exclusivity of the role above other work such as stating that “you will only complete work for this company”
  • Employment/internal work rules and policies, and other documents that prescribe workplace conduct are provided
  • Income taxes are withheld from the remuneration paid
  • Being eligible for severance payment or retirement money systems, and benefit plans legal framework differentiating employees from independent contractors


Changes in France

An employee is not defined by French law, but French law does define the employment contract. An employment contract is defined as “an agreement by which an individual works for another person (natural or legal), under the latter’s subordination, for which s/he receives remuneration.”

In France, the following three factors typify an employment contract:

  1. Discharge of tasks
  2. Remuneration
  3. Relationship of subordination


The first two factors tend to be found in almost every employment contract. Therefore, the third factor is the factor which differentiates employees from other service providers, including independent contractors.

Article L.8221-6-1 of the French Labor Code defines independent contractors as follows: “is presumed to be an independent contractor, any individual whose working conditions are defined exclusively by himself or in a contract, in conjunction with his customer.”

The French Labor Code also provides that individuals who are registered as self-employed service providers are presumed not to be linked to their customer with an employment contract in the execution of their activities.

French courts have looked to the following factors when making worker classification determinations:

  • Working hours: Employees should comply with company working hours or time under penalty of disciplinary measures
  • Duties and remuneration: Employees have a permanent task for which they receive a regular monthly salary
  • Place of work and work equipment: Employees usually work on company premises. The company should provide them with all necessary work equipment and materials.
  • Exclusivity or portfolio of clients: Employees usually work for one employer, while the independent contractor has a portfolio of clients
  • Registration: Employees are declared and registered with various institutions, notably the social security agency, by their employer who pays the relevant social security contributions on their behalf

Changes in the United States

In the United States, the Biden administration has suggested that gig workers should be treated as employees, but it has not taken significant steps to change employment laws. In May 2021, the Department of Labor (DOL) reversed a Trump-era rule that would have made it more difficult to reclassify gig workers in the country as employees. In October 2022, the DOL proposed a rule that would modify how to determine whether a worker is an employee or independent contractor under the Fair Labor Standards Act (FLSA).

It has become very clear that gig workers are a global phenomenon and are here to stay.  Protecting workers while allowing free enterprise is a balancing act that is fraught with tension in all the jurisdictions. Treading lightly and making sure you are aware of recent legislation and regulatory actions, and how each country views independent contractors, is integral to utilizing a worker in a new jurisdiction.

Mindy L. Mayo, CPP, is a Managing Director in KPMG’s Silicon Valley office. She has more than 30 years of employment tax experience and has assisted clients through myriad payroll issues encountered during a company’s life cycle. Mayo has worked with companies of all sizes, assisting with employment tax matters from start of business through branch or company closure. She began her career as a payroll tax auditor with the State of California, Employment Development Department, paving the way for her future as a payroll consultant. Mayo specializes in independent contractor determinations as well as payroll tax audit assistance, leveraging her experience as an auditor to assist clients who are undergoing either a federal or state payroll tax review. She is a frequent presenter for the American Payroll Association (APA) as part of the National Speakers Bureau and a member of the Global Payroll Management Institute’s (GPMI) Global Payroll Editorial Advisory Board.
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