Uber has been in the news quite a bit recently after a class action lawsuit was filed against the company by its drivers. The State of California Labor Commission has ruled in their favor, mandating Uber drivers be treated as employees rather than independent contractors. This has a lot of implications beyond Uber, as the employee/independent contractor (E/IC) line has been one of contention and confusion for quite some time.
The distinction can potentially cost an employer large percentages of their profits, as employees are required to be on payroll, causing the company to pay their share of payroll and unemployment taxes and potentially requiring health insurance under the ACA, as well as generally demanding other benefits to be competitive in the employment marketplace. Given the huge potential tax implication, you would think the IRS would have a “bright line” or specific test to determine who is an employee and who is an independent contractor, but they do not (although to be fair, it's a very difficult line to nail down).
What the IRS does offer are various publications explaining the "facts and circumstances" that go into determining how a business owner should classify workers to be in compliance with Federal Labor Law. Here are the main points:
- The level of control that the employer has over the employee in completing their work is the primary factor. More control = more likely to be treated as an employee.
- If the employer mandates not just what work must be done but also the process that must be used, than the worker is probably an employee
- If the employer only mandates a certain result but not the process of achieving the result, then the worker is probably an independent contractor.
- Written agreement between the employer/worker can demonstrate intention and play a significant role in a dispute, but it does not guarantee the relationship is legal or will hold up in court. The factors above supersede written agreement.
Given that guidance, what is Uber’s position and what are the claims of its drivers? Here are their arguments as best as I can tell:
Uber claims that its drivers are free to work as little or as much as they please, on any schedule that they please. The only result they demand is that the passenger safely gets from Point A to Point B. I would bet there is also a written agreement between Uber and its drivers setting forth the intention for drivers to be treated as independent contractors.
The drivers claim that Uber controls nearly every aspect of their work OTHER than the flexible schedule – mandating that the drivers carry certain insurance, pass background tests, pay for their own vehicle expenses, and drive only certain types and ages of vehicles. They also argue that their work is fundamentally integral to the Uber business model.
Allow me to play the politician here (I feel icky) and say that I see value to both sides of the argument. I think the true issue is that some drivers aspire to make their Uber driving a full-time job and believe they are acting like employees, while others drive only as fits their schedule to earn extra income, which feels like a contract position. I think Uber’s claim holds more weight under the IRS “facts and circumstances” test, as the control they exert is minimal and many of the drivers’ arguments, while compelling, are not effective under the E/IC guidance currently provided. I think it would be smart of Uber to offer both "employee" and "independent contractor" positions, where duties and schedules are clearly laid out and agree upon and those withing to work a full-time schedule for Uber can get the benefits that they deserve.
It will be interesting to see if the class action lawsuit makes it to the California Supreme Court, as a ruling in the drivers’ favor there could cause other states to take a similar position, regardless of what US Labor Law and the IRS puts forward. It may also help clarify a pretty “mushy” area of law and may institute new guidelines (such as determining that the “integral to the business model” argument be considered in the E/IC determination going forward).
The takeaway from a tax perspective is that mistakenly classifying your employees as independent contractors can give you some short term savings but lead to a truly massive tax bill later on if the designation doesn’t hold up under examination. Typically, a company must only pay for the employer portion of payroll taxes for employees, but if it is determined that the E/IC designation was incorrect, the employer will be liable for all unpaid payroll taxes that should have been withheld from the employee, plus penalties and interest, as well as other potential penalties relating to the ACA and other labor laws.
As a small business owner, here are some steps you can take to protect yourself:
· Familiarize yourself with the “facts and circumstances” guidance provided by the IRS, and err on the side of caution when it is unclear. Odds are, if you aren’t sure, you have an employee and not a contractor.
· Be certain to obtain signed, written agreements from your contractors rather than just cutting checks. A written agreement can go a long way towards settling a smaller dispute, especially if it clearly lays out that you are paying only for a “result” and not controlling other aspects of work.
· Utilize a payroll company to help you with payroll. Payroll is very complicated, penalties can be very high, and payroll companies are generally very affordable. I have seen many small business owners pay more in late fees and penalties on missed deposits by not utilizing a payroll provider than what they could have paid the provider to do it for them!
Contact me today to schedule your free consultation!