Archive for the ‘Employment’ Category

Who Works for Uber?

Posted by | Employment, Sharing Economy | June 18, 2015

California Says that Uber Drivers are Employees, Not Contractors

Ride-sharing app Uber hit a major speed bump. The California Labor Commission ruled that its drivers are employees, not independent contractors. Uber was ordered to pay $4,000 to a driver for mileage and tolls. While that’s nothing for a company valued at $50 billion, this seemingly small distinction over what to call its drivers could mean significant changes in Uber’s business structure, and tons of money. It could also shake up the whole sharing economy just as it’s being created.

Employee vs. Independent Contractor

The difference between an employee and an independent contractor is very important for any business. The hard part is that the business does not get to choose how their workers are classified. And that classification is measured largely by the amount of control the employer has over the worker. If an employer controls the hours, wages, type of work done, and other things then the worker is likely an employee. If the worker has his own business, makes his own hours, and is paid a flat fee, it’s likely he’s an independent contractor. This distinction has a major impact on the business. The business must pay for its employees’ supplies, healthcare, withhold taxes from paychecks, and take on legal liability for the employees’ acts. An independent contractor must pay its own taxes, cover its own supplies, and is liable for their own acts.

Uber Drivers are Employees

The Commission looked at Uber’s business model and determined that Uber is “involved in every aspect of the operation.” Specifically, Uber sets rates, chooses drivers based on standards, and can fire drivers. This amount of control suggested to the Commission that the drivers were employees, not independent contractors like Uber argued. For Uber, that means it may have to pay for its drivers’ gas, car maintenance, tolls, healthcare, workers compensation, and taxes. Multiply that by more than 160,000 active drivers and you’ve got some significant costs. The driver who filed the suit only drove for a few months, and Uber had to pay her $4,000 in mileage and tolls. The Commission isn’t the only one that determines the employee/independent contractor question. The IRS is the most diligent watchdog on this matter, and courts are often involved. Florida’s unemployment agency has also ruled that Uber drivers are employees, and a court in San Francisco is considering the same question regarding tips.

Sharing Economy or Just a Company Exploiting Workers?

Ultimately, this affects not just Uber and ride apps, but the sharing economy as a whole. The entire structure is based on the independence of those doing the work from the companies that bring them together with buyers. If that relationship is undermined, then these companies are nothing more than giant corporations with a large workforce – just like everyone else. WashPo – Uber Diver is an Employee

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Hobby Lobby and the Future of Corporations

Posted by | Employment, Legal Analysis | July 01, 2014

Hobby Lobby Decision May Have Large Impacts on Corporations

Much has been said about the Supreme Court’s decision in Burwell v. Hobby Lobby, especially as it relates to women’s rights. However, this is a business law blog, and there are some especially important impacts on businesses from the decision. Unfortunately, the case raises far more questions that it hopes to answer, and the majority provided almost no instructions for lower courts. The end result will be increased litigation by corporations seeking to avoid regulation.

First, an overview: In Hobby Lobby, the Supreme Court majority, written by Justice Alito, essentially held that corporations are persons that can claim religious exemptions to federal laws. It’s important to note that this was not decided on First Amendment grounds. Rather, it was based on the Religious Freedom Restoration Act (RFRA), which was a law passed by Congress in 1993. The RFRA gives “persons” the right to demand a religious exemption to certain federal laws, and requires the government to show that the law serves a government interest and is using the least restrictive means in order to overcome the religious exemption. The law has been on the books for quite some time and has been upheld on Constitutional grounds.

In coming to the decision, the Court held that the RFRA applies to closely held corporations, so publically traded corporations are not included. However, Justice Ginsberg pointed out in her dissent that the majority’s reasoning applies just the same to large corporations, so the decision would logically extend to them as well.

There are two potential effects of the case on corporations. First, it may open the door to claiming exemptions to regulations, especially regarding healthcare, that go counter to their shareholders’ religious beliefs. The second is that the concept of corporate personhood has been altered once again, raising the question of whether a corporate person is distinct from the shareholder behind it.

Religious Exemptions from Healthcare Requirements

For obvious reasons, healthcare is probably the most immediate question. Justice Ginsberg’s dissent raised a number of hypothetical, yet very real, situations that could be effected by the Court’s decision:

“Would the exemption the Court holds RFRA demands for employers with religiously grounded objections to the use of certain contraceptives extend to employers with religiously grounded objections to blood transfusions (Jehovah’s Witnesses); antidepressants (Scientologists); medications derived from pigs, including anesthesia, intravenous fluids, and pills coated with gelatin (certain Muslims, Jews, and Hindus); and vaccinations (Christian Scientists, among others)?”

Taken to an extreme, some Christian Scientists and Pentecostals believe only in faith healing and reject modern medicine completely. Could such a corporation deny all health insurance to its employees? Justice Alito suggests that would be bad for business, but doesn’t claim it would be impermissible.

Despite Justice Alito’s assurances that such questions will not come up, it seems very clear that some corporations will suddenly have strong religious convictions where saving money is at stake.

Possible Permitted Discrimination Under Hobby Lobby

Justice Alito tried to limit the decision so that corporations could not opt out of any law they felt was incompatible with their religion. He was especially clear that religious exemptions would not be available for any question of racial discrimination. However, that leaves the very real possibility of other types of illegal discrimination that are common religious exemptions.

LGBT discrimination was at the very heart of a recent debate in Arizona over their version of the RFRA. After supporting it, but receiving significant backlash, Gov. Brewer vetoed a proposed law that would allow companies to choose who they work with based on religion. It was made clear that the point of the law was to specifically permit businesses to discriminate in hiring and serving customers based on sexual orientation. While it failed in Arizona, it was quickly passed in Mississippi. The parallels between these bills and the Hobby Lobby decision are clear, and the possibility for a similar result exists.

Religious non-profits and churches, which already enjoy a number of religious exemptions, may be helpful in determining what could potentially qualify as an exemption under Hobby Lobby. Religious non-profits have used various religious exemptions to discriminate against LGBT employees, unwed pregnant mothers, and women who used in vitro fertilization. The question Hobby Lobby raises is whether corporations can now do the same.

Sometimes an extreme example helps clarify the issues. Churches are currently exempt from certain provisions the Civil Rights Act of 1964, which allow them to require all their employees to be part of their church. This makes sense for churches, but can it now be applied to corporations? Can the corporation demand employees join their church or face termination? Or a less extreme hypothetical – can this be used as a defense in a religious discrimination case?

Is It Even a Corporation Any More?

Under the law, a corporation is considered a new person. This is a “legal fiction” that was created to allow large groups of people to form companies that would then protect the shareholders from liability. In other words, shareholders cannot be forced to pay the corporation’s debts.

This is a very good system, and incredibly necessary in today’s economy. However, the legal fiction only exists so long as the corporation and the shareholders are distinct. The Hobby Lobby decision is part of a string of cases conferring individual rights on corporations, thus separating the distinction between the corporation and the shareholders.

The issue in Hobby Lobby was framed as a religious freedoms problem. If the law requires a corporation to do something the owners believe to be incompatible with their religion, then the owners’ freedoms are infringed. Justice Alito explained:

“[I]t is important to keep in mind that the purpose of this fiction is to provide protection for human beings. A corporation is simply a form of organization used by human beings to achieve desired ends. An established body of law specifies the rights and obligations of the people (including shareholders, officers, and employees) who are associated with a corporation in one way or another. When rights, whether constitutional or statutory, are extended to corporations, the purpose is to protect the rights of these people.” (emphasis added)

This was similar to the argument in Citizens United, allowing corporations to spend money on political campaigns based on the shareholders’ rights of speech. The problem is that such a simplistic definition leaves the question of liability wide open. If Constitutional rights of the shareholders can pierce the corporate veil up to the corporation, then it stands to reason the liabilities of the corporation could pierce the corporate veil down to the shareholders.

In Hobby Lobby, it was the corporation, not the owners, who was supplying healthcare. The Court brushed away that distinction, and treated the owners as the suppliers. If we read the law like Justice Alito, then are the owners similarly liable for healthcare? If Hobby Lobby impermissibly denies other healthcare rights, will the owners be held personally responsible?

This is a slippery slope that could eventually hurt the concept of the corporate person. That would be harmful to the economy and society in many ways.

What’s Next?

Undoubtedly, there will be a string of cases across the country of corporations trying to claim religious exemptions to any number of federal regulations. Healthcare and discrimination will just be the start. Basically, any regulation that could conceivably be a religious impediment (and would save the company money), will be under attack.

It’s important to recognize that this was not a Constitutional decision. Since the RFRA is just a statute, Congress could simply change it or redefine “person.” Senate Democrats have already declared their intention to do just that, though it’s unlikely to ever pass the House.

Nonetheless, Hobby Lobby shows that the distinction between a corporation and its shareholder is growing blurrier every day. If rights can flow one way, then liabilities may be able to flow the other way. Such a result would be a disaster and destroy a bedrock of the American economy.

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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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