A California Labor Commissioner recently ruled that a driver for Uber Technologies, Inc. should be put in the lane of an employee of the company versus an independent contractor. Meanwhile, in a separate worker classification matter, a U.S. District Judge allowed a lawsuit by two Uber drivers to proceed in court—rejecting Uber’s arbitration attempts. Uber has the resources and will litigate these issues in the courts on their road to resolution, but in the interim, the current litigation offers an opportunity to review the three major common law categories of worker classification. Plus, we’ve put together the four things that small business owners can learn from Uber’s legal issues.
Avoid Worker Classification Road Blocks by Understanding 3 Major Common Law Categories
The IRS now focuses on three major common law categories (each incorporating many factors) to determine worker classification. Let’s look at these factors and speculate how they may potentially apply to the Uber cases—although we do not have the individual facts.
1. Behavioral Control
Description: Has the business retained the right to control the details of a worker’s performance, or has it given up its right to these details?
Potential Uber Case Impact: Uber is likely arguing that they do not control when the worker “goes online,” the type of car driven, etc. Arguments against Uber could be that the company gives their workers very specific instructions regarding behavior, rate fares, etc.
Additional Factors: Factors that are not as relevant any more include hours worked, location of work, and/or the wearing of uniforms or IDs for customer security.
2. Financial Control
Description: Is there a significant investment by the worker, a financial risk borne by the worker, and does the worker control his own costs?
Potential Uber Case Impact: Uber is probably claiming that the workers choose the cars they drive, thus affecting their costs and potential for profit. On the flip side, Uber sets all of the fares for the workers, so they are paid a “fixed” amount for services provided—which indicates an employee.
Additional Factors: Other factors in this area include whether the worker is free to offer these services to other parties in the same market.
3. Relationship of the Parties
Description: Is the intent of the parties written? Are employee benefits paid, and what are the terms for termination and/or not paying for services not provided? Is there a permanency of relationship between the parties?
Potential Uber Case Impact: Uber would argue their agreement with drivers specifically states their independent contractor status. Uber also does not pay a driver for simply being “online;” they must provide a ride service to receive payment. Finally, Uber does not pay any employee benefits.
4 Small Business Take-Aways from this Worker Classification Pile-Up
1. Written independent contractor agreements are a must. A company absolutely must have written agreements in place with people who are being treated as independent contractors. Having said that, a written agreement does not guarantee independent contractor status since the courts will look to the substance of the relationships between the parties (see factors above).
2. Written independent contractor agreements aren’t equivalent to a get-out-of-jail-free card. An independent contractor agreement signed by both parties does not necessarily prevent a disgruntled party from suing for employee status. In both of the cases mentioned above, complaints for employee status (and reimbursements) were brought against Uber by independent contractors who had signed agreements. Again, the courts will look to the specific factors and relationships between the parties to determine employee status.
3. Worker classification creates potential legal issues, but it also has financial impacts. A determination of employee status versus independent contractor can significantly affect operating expenses, such as:
• payroll tax expenses (and penalties),
• workers’ compensation,
• overtime, and
• Affordable Care Act (ACA) employee benefit cost/reporting implications.
4. Double check your worker classifications now. Understand the factors controlling worker classification identified above, and classify (or re-classify) your workers accordingly. CRI can help with this process and ensure you document understandings when the directions seem otherwise unclear.
Follow This Road Map of Worker Classification
We trust this road map will safely transport you to a better understanding of worker classification. And remember: in addition to the three common law rules above, the IRS has 20 factors that it uses to determine worker classification. So be sure to call your CRI advisor with any questions. We can help with classification of workers, voluntary disclosures and penalty relief, planning in relation to ACA and number of employees, and ensuring documentation of understandings for prospective workers.