What Ride Sharing Can Teach Us About Worker Classification

Posted by | Employment, Sharing Economy | May 01, 2014

Ride Sharing Sites Uber and Lyft Challenged on Issue of Independent Contractor vs. Employee

A Lyft driver, with the company’s iconic pink mustache. The mustache is required of all drivers and will be at issue in the classification dispute.

Recently, a case came to my attention that raised some very interesting issues facing online companies concerning the differentiation between independent contractors and employees. All business owners must understand the difference and be able to distinguish which is which among their workers. With the unique business models arriving online, this distinction is sometimes blurred. That’s where ride-sharing comes in.

Lyft and Uber are two companies that arrange ride-sharing in various cities (both operate in Washington, DC). They operate by allowing users to connect with various drivers around the city, and paying for a ride someplace completely through an app. These companies have raised a lot of fuss at the municipal level since they effectively operate a taxi service without adhering to any taxi regulations or licensing. But that’s not what this article is about.

Independent Contractor vs. Employee

This is about the question of independent contractor vs. employee. This difference has very practical consequences, with very steep penalties if misclassified. If your worker is an independent contractor, then you must pay them and providing a 1099 at the end of the year, but that’s about it. If they are an employee, on the other hand, then you must withhold income taxes, withhold and pay Social Security and Medicare taxes, and pay unemployment tax on wages. You may also have to provide health insurance if you qualify under the Affordable Healthcare Act. In addition, when an employee causes damage or is liable for something, then that liability typically extends to the employer.

Most business owners prefer independent contractors, for the reasons above. However, the IRS has been cracking down on misclassifications, which could force you to back-pay employment taxes and suffer fines. Your classification could also be challenged if a worker harms someone while working for you. The harmed person would probably target you as well, and the outcome could depend on the worker’s classification. Or, your workers may decide that they want the benefits of being classified as employees, and require you to treat them as such. This is what is happening to Lyft and Uber.

The Lawsuits Against Uber and Lyft

In two separate lawsuits, the drivers of Uber and Lyft are challenging their classification as independent contractors, seeking protection under the California Labor Code, which prohibits employers from taking any tips from employees. The issue arises because both Lyft and Uber did not have mandatory charges, but suggested donations. Users then “donated” to their drivers an amount, and the company then took a percentage. Since the lawsuit, Lyft has actually changed its terms and conditions to have a different set of rules for California.

The plaintiffs claim that Uber and Lyft are keeping prices artificially low by banning actual tips to the drivers. The drivers are also deprived of the typical costs that would normally be covered by an employer, and workers’ compensation and unemployment insurance. Uber and Lyft claim they are just software companies connecting people, and nothing more. They claim they are not transportation providers, and any drivers are just independent contractors, using their own cars, insurance, and on their own time.

There are a number of elements in determining the distinction between independent contractor and employee, but generally the most powerful on is the amount of control the employer has over the worker. The plaintiffs in the Lyft case point out that Lyft has a number of requirements, from fist-bumping riders to distance limits. Whether this will be enough is up to the courts, which have yet to make a decision.

The Take-Away

The case goes to show that simply stating that your workers are independent contractors is generally not enough. The courts and IRS will look at a wide range of factors to make a determination, and that will often depend on your contractor agreement and your website’s terms and conditions. That is why it is vital to have these properly drafted.

San Francisco Business Times – Lyft sued by driver who says he’s an employee, not a contractor

San Francisco Gate – Uber drivers file class-action suit over tips

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