California Gov. Gavin Newsom signed Assembly Bill 5 last autumn, a bill that could make gig businesses like Lyft and Uber class their workers as employees rather than independent contractors. The new law states that workers must be classed as employees if a business controls the way they require tasks to be performed, or if that work is used as a regular part of company operations. With the rising gig economy and entrepreneurs seeking to outsource as many tasks as possible to freelancers to keep the costs of a new business down, this raises significant questions. It can be tempting for a new business owner to outsource or sidestep more expensive policies to ensure their company stays afloat during the critical first years, but it’s important to note that there can be substantial business risks associated with this.
Legal Risks
A small business and its workforce are protected by workers compensation insurance, which covers employees in the event of workplace injury or illness. Businesses that classify their staff as ‘independent workers’ when this isn’t strictly true sometimes sidestep the need for this, but this can lead to problems. While rising employee-benefit costs entice some new business owners into limiting benefits, doing so can be risky to the business.
Employers are legally required to cover workers injured on the job, and failing to do so can result in expensive lawsuits, which are potentially much more harmful to the business than adequately compensating an injured worker in the first place. This first garnered attention in 2015, when an Uber driver filed a class action lawsuit against the company after being attacked by a customer while he was working. Had the driver been classed as an employee and covered by workers compensation insurance, this would have been avoided.
Lower Overall Costs
Legal fees — and the resulting damages — aren’t the only risks companies take when they sidestep worker protection, however. While a savvy entrepreneur may think paying out of pocket in the event of a workplace injury would be more cost-effective, the reality is that paying small fees that cover all workers on a regular basis is likely to work out cheaper than a sudden unexpected out-of-pocket expense. Companies pay out about $170 billion each year on workplace injury costs, which has a significant impact on profits. When employers take out insurance, estimates suggest that an employee earning $50,000 a year would cost under $2,000, while paying for their injury out of pocket could cost almost $40,000, according to the National Safety Council.
Employer Security
Employer peace of mind is also neglected when a new business owner finds ways around employee benefits. Paying large unexpected costs is far worse for a business than paying a small fee regularly, but in some states, there are also penalties forced on employers who don’t provide safety coverage for their employees. These range from fees to jail time, depending on the state. Either way, it’s bad for business.
Additionally, the importance of worker morale can’t be understated. 27% of respondents in a 2014 study by the Society for Human Resource Management said that the availability of benefits directly related to their job satisfaction. Happy employees make for a more productive workforce, and they will perform better if they feel valued and that their occupational safety is accounted for.
While it can be tempting for new business owners to keep costs low by avoiding classifying their workforce as employees and providing the proper coverage, this can actually be much more costly for the business. For a new business to thrive, workers must be satisfied and productive, and there must be a minimal risk of unexpected costs. Adequate protection is, therefore, vital.