Sunday, November 29, 2015

Misclassification and Regulation, Will Government be Nimble

The Federal Aviation Administration (FAA) recently announced that it will scramble to enact registration regulations for remote control aircraft, called "drones." It hopes to have these in place before the 2015 holiday season. Some report that holiday drone sales are anticipated to be over 1 million units this year; lots of gift-giving. These are not your remote-control helicopters for $19.99. These include four-rotor craft with cameras mounted beneath, selling for $600-$1,000 at your local home technology store. The law is struggling to keep up with this relatively new technology.

There have been model planes for years. Perhaps it is disingenuous to call drones "new." But model planes were a somewhat expensive hobby, engaged in by relatively few. Recent technology has not created drones, but has increased the capability of these devices while decreasing cost. Previously, there was apparently no perception of regulation needed for very small aircraft. In fact, the Delawareonline reports some believe the FAA lacks jurisdiction to regulate anything under 55 pounds. All of these new roto-drones seem to fit into that weight category. 

The FAA will now try to have regulations in place for drones by the 2015 holiday season. That is ambitious. When it announce plans for these rules there were only about 60 shopping days remaining until Christmas. DelawareOnline reported that the FAA goal was to have regulations submitted by November 20, 2015. It named a committee of "25 representatives from the aviation industry" to accomplish that regulatory feat in less than 30 days. The committee's final report was dated November 21, 2015. 

The FAA is reacting to this technology. It is likely that the outcome will be a requirement that owners of these drones will have to register them in a federal database. The government is seeking to adapt to the technological change with rules that acknowledge the challenge. The alternatives are to do nothing regarding these devices or to use existing regulation to deal with change, a more reactive approach. Technology is evolving and the government strives to keep up. The capability of various technology is repeatedly doubling, rapidly, as costs bring more and more technology into consumer hands. Regulation will be a challenge. 

Employment also continues to evolve in the United States. We look to regulation and legislation to provide parameters and consistency. But that appears to be a similar challenge. We see evolving relationships in the workplace. Seemingly gone are the career jobs that end with 30 years of service and a gold watch. It seems that employment regulation and definition is more reactive, with various jurisdictions facing challenges of misclassification independently and generally using existing law. 

Last November, I was introduced to the subject of Internet-based car ride services, with specific emphasis on Uber and Lyft. There is a great debate surrounding these two, and others like them. They are "disruptive" to the marketplace of existing alternatives, such as taxis and limousines. These traditional ride sources are resistant to the new Internet services. Taxi drivers see them as destroying their livelihood. They decry the taxes and licensing for which they are responsible, and which Internet ride services seem to avoid. 

In January 2015, I shared Misclassification - What is it? Msclassification is essentially where a workers' description is misrepresented. Someone who is an employee is labelled an independent contractor. There are multiple encouragements for this labelling. They include tax avoidance as well as reduced costs for both workers' and unemployment compensation.

Employers are responsible to collect and in some part match taxes for employees. Taxes represent a cost for employers. There is bookkeeping expense for income tax, but the FICA taxes have to be matched. Many people assume that their Social Security and Medicare taxes are about 7.5%, because that is what is withheld from their paychecks. But in most instances, the employer pays another 7.5%. Social Security and Medicare consume 15% of American payroll. Despite this there are solvency issues for these programs. 

Another misclassification motivation is workers' compensation. Employers are often (if the business is of sufficient size) required to provide workers' compensation coverage for employees. Employees are entitled to overtime and other wage protections by the Fair Labor Standard Act (FLSA), which does not provide that protection to contractors. As a company achieves various employee counts, other laws become implicated, such as the Americans with Disabilities Act, the Family Medical Leave Act, the mandatory health insurance law and more. Thus, an employer may have a variety of incentives to minimize the number of employees. 

Misclassification and Uber have both been back in the news recently. 

Federal Express was sued by a multitude of drivers. Forbes recently reported that one suit has been settled after "a 2014 Ninth Circuit ruling that FedEx misclassified drivers as independent contractors." FedEx is creating a $228 million fund to resolve claims by over 2,000 . . . drivers." It is possible that the money due to these drivers is compensation that would have been paid as wages had it not been for the misclassification. Will FedEx likewise be paying the 7.5% FICA tax to Washington on those back earnings?

FedEx is not alone. One website reported in May that Lowe's entered a settlement with home improvement contractors. Another reported a painters class action suit settlement earlier in 2015. Exotic dancers, restaurant workers, construction workers and more have been involved in litigation regarding allegations of misclassification, seeking overtime, workers' compensation, and other benefits.

A Reuters story notes that California has concluded that the disruptive Uber drivers are employees, not contractors. The story says "classifying Uber drivers as employees opens the company up to considerably higher costs." These include "Social Security (the FICA mentioned above), workers' compensation and unemployment insurance." The New York Times cautions that Uber decisions currently affect small numbers of drivers, and that Uber plans an appeal. The Times reports that Uber has successfully litigated the question, and five states have conversely concluded that Uber drivers are contractors. 

With the cooperation of "check cashing" businesses, construction company misclassification has been labelled "A Made in Florida Construction Industry Rip-Off." In June 2015, according to WorkCompCentral, Florida CFO Atwater announced arrests in a "massive fraud ring," the purpose of which was to use "shell companies" and "check-cashing stores" to improperly "rent" workers' compensation insurance coverage. 

North Carolina focused legislative efforts on misclassification in 2015. The News Observer reported on the efforts, which some North Carolineans claim were not sufficient. In that opinion piece, the author claimed that North Carolina should look south to Florida for effective methodology for attacking misclassification. Some apparently see misclassification as created in Florida, while others see Florida efforts as the guide to battling it. 

The commonality of all of this seems to be imagination. The world is changing, with many seeking comparative advantage. Individuals and companies are trying to find ways to avoid regulation to increase profit, by leveraging technology, by creative use of legal definitions. 

Last May, I attended a presentation by Salim Ismail presented by the National Council on Compensation Insurance. A key point of Ismail's presentation was that the law will have trouble keeping up with disruptive technology. He contends that the law is too slow to effectively react in the paradigm of ever-changing terrain. He points out that the Google Car has rear-view mirrors, but no steering wheel. 

He explains that legislators thought to require mirrors, but none ever thought to require cars to have steering wheels. His point is that the legislative process did not predict the disruption or the technology and finds itself playing catch-up. Is that description any less applicable to misrepresentation; have legislators and regulators merely failed to anticipate the imagination and ingenuity of those that might seek to skirt the regulations? 

Recognizing the costs of misclassification, can the law effectively play catch-up on the issues presented by Uber drivers and the various other service-providing Internet applications? Is the FAA drone regulation process illustrative? The FAA cannot have been unaware of drones for the last several years of evolution. But the issue now becomes critical and thus the 2015 pre-holiday rush to regulate them. It seems unlikely that awareness is the primary issue. Drones have been a concern for some time, but their prevalence has led to dramatic and rapid action in the closing months of 2015. In short, the FAA decided to act. 

Has the time come to act similarly on misclassification? Will North Carolina and other states deal with misclassification? Are existing regulations sufficient, and it is a matter of deciding to enforce? Perhaps recent Florida successes support that existing regulation is sufficient. But, if additional regulation is required to deal with the misclassification problem, can blue-ribbon panels be assembled, actions taken, as the FAA recently did for drones? 

Maybe Ismael is wrong, and government can be nimble enough to keep pace with evolving technology and imaginative wrongdoers. Or will the misclassification issue linger, regulated by a multitude of federal and state laws that perhaps are not as imaginative as those who would seek to avoid them?

Interesting days are ahead.