Independent Contractor v Employee: What Really Happened with Uber? | USTaxAid

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Independent Contractor v Employee: What Really Happened with Uber?

Written by Diane Kennedy, CPA on June 23, 2015

This past week, Uber started a court case that could mean life or death for the business.

Uber is a technology or a transportation company, depending on which Department of Labor decision you read, that takes reservations, takes payment and allows independent drivers to select passengers they want. The passenger arranges everything through the Uber online app, including where and when to be picked up, where they are going and collects the payment for the ride. There are rules for the drivers regarding their presentation, safety and maintenance of the vehicle and how they are supposed to interact with the passengers.

Uber has maintained all along that the drivers who furnish their own cars, select when and how much they drive and have the ability to turn down fares are actually independent contractors. They are not employees, according to Uber. In 2012, Uber’s independent contractor designation was challenged by a driver who was hoping to collect some expense reimbursements and/or benefits. If the driver was considered an employee, they would have unemployment insurance, reimbursed car expenses, and payroll taxes paid for them. The California Department of Labor said (in 2012) that the worker was an independent contractor because Uber was a technology company.

Independent Contractor v Employee:  What Really Happened with UberA San Francisco driver brought a case again, claiming that she was an employee and under California law was entitled to a reimbursement of her business-related expenses of $3,878.08. The case was decided in March 2015 by the California Department of Labor (DOL) and this time it was decided that the Uber driver WAS an employee. The driver was awarded $4,152.20.

You can read the DOL opinion here:

That’s the background. Now let’s talk about this case and why you, as a business owner, should care.

How Important Is The Uber California Case to You?

How Important Is The Uber California Case to YouDOL decisions are not transferrable. Just because this one driver was called an employee it doesn’t mean all are employees. So, right now, this case means nothing to you or your business.

But this uncertainty was enough for Uber to push back. They filed a court case, which means that the ruling there could be applicable in your business’s case if you happened to be in the same jurisdiction. And if Uber loses there and they go on to the state level of the Supreme Court, the ruling could be applicable for all California companies. And if Uber loses at the California Supreme Court, they may go to the US Supreme Court. If the Supreme Court judges agree to hear the case, the ruling then could affect all of us.

So, technically, right now, this probably shouldn’t mean anything for your business. Of course, it’s always better to be forewarned.

Why did the DOL rule the way they did? What can you do to prevent something like this from happening to your business?

Uber Opinion by California Department of Labor

Uber Opinion by California Department of LaborIt’s still helpful to look at the DOL argument to see if you can figure out why they ruled like they did. Even though Uber might eventually win, it’s going to be a costly proposition for them. If you can avoid this, all the better for you.

In the legal analysis of the DOL opinion, they start off by stating what it takes to have an independent contractor status in California

  • Whether the person performing the services is engaged in an occupation or business distinct from that of the principal,
  • Whether or not the work is part of the regular business of the principal or alleged employer;
  • Whether the principal or the worker supplies the instrumentalities, tools and the place for the person doing the work;
  • The alleged employee’s investment in the equipment or materials required by his or her task or his or her employment of helpers;
  • Whether the service rendered requires a special skill;
  • The kind of occupation, with reference to whether, in the locality, the work is usually done under the direction of the principal or by a specialist without supervision;
  • The alleged employee’s opportunity for profit or loss depending on his or her managerial skill;
  • The length of time for which the services are to be performed;
  • The degree of permanence of the working relationship;
  • The method of payment, whether by time or by job; and
  • Whether or not the parties believe they are creating an employer-employee relationship may have some bearing on the question, but it is not determinative since this is a question of law based on objective tests.

One of the critical differences in the arguments is that Uber stated they were in the technology business, and the plaintiff said they were in the transportation business. If Uber is in the transportation business, then the driver might have a valid point. That’s because the driver was critical to the business. Of course, that’s just one point.

Uber Opinion by California Department of LaborDK Note: Uber doesn’t just provide scheduling for rides. It also has conference lines, online business meeting sites and more. I think DOL got this wrong and there is probably a ‘shame on you’ for Uber’s attorney not point this out more strongly.

Uber argued that they didn’t have control over the driver’s activities and the DOL found that it didn’t take much control because it wasn’t a very highly skilled job.

DK Note: That was pretty insulting to the driver and I think it is wrong. There is an assumption that you know how to drive an automobile, that you know how to use a smart phone to run the app and how to navigate. Uber didn’t do any training for those things.

Even though the driver furnished their own car and paid all vehicle expenses, the DOL thought it was irrelevant because the drivers were integral to Uber’s business.

Uber Opinion by California Department of LaborDK Note: I think this argument could be made for any business. If you hire a cleaning service, having a clean office is integral to your business so they must be employees. If you hire an answering service, getting messages from your customers is integral so they must be employees. Since it’s true for every business, what is unique about the argument for Uber being an employer?

The DOL said that nothing the driver could do would effect profit or loss.

DK Note: Now that’s ridiculous. Drivers get to pick when and how much they drive. One of the issues I’ve heard from successful Uber drivers regarding the complaining drivers who don’t make much money is that the later group insists on working 9 to 5. The successful drivers know that they should work when there is demand. That means, depending on where you are, that you’re working holidays and nights most of the time. That’s a managerial decision and it greatly influences how much money you can make. The DOL got this wrong.

I think the decision by DOL is wrong.

This is compounded by the fact that the driver had set up a California corporation to receive payment for her services. Employees don’t set up corporation to receive payment. She stated, as part of her case, that after she told Uber to pay her corporation she changed her mind. I think that was likely posturing so that she could bring the case. The contract was between her company and Uber, though. That means a contractual dispute should have been between her corporation and Uber. That would have been nonsensical and the whole case should have never have been heard.

How Can You Protect Your Business?

How Can You Protect Your BusinessThe Uber ruling, although only technically for just one driver and then, just for the state of California, can put all of us on notice that we need to look at our own independent contractor rules.

The state of California had their own tests for independent contractor vs employee, which do differ from the IRS rules. And, as we’ve seen, the court took some liberties with those definitions. There is no such thing as a sure thing.

The IRS’s definitions are slightly different. First of all, they talk about three characteristics to review:

Behavioral Control: This covers facts that show whether the business has a right to direct or control the work through instructions, training or other means.

Financial Control: This covers facts that show whether the business has a right to direct or control the financial and business aspects of the worker’s job.

Type of Relationship: This factor relates to how the workers and the business owner perceive their relationship.

In the case of Uber, the entire case hung on whether the owner’s work depended on these workers and whether the owner controlled the work. Here are some tips to avoid having the same problem:

  1. Make sure you and the worker both understand what the status is. Although, a signed agreement won’t void a possible problem, it definitely will help. Your worker can actually pay less tax if they understand the benefits of being an independent contractor instead of an employee.
  2. Give your worker guidelines, but don’t be too precise in how the work will be done. If you tell someone they have to work certain hours, you’ve probably got an employee.
  3. Encourage your worker to have other clients. If they work for a handful of people, they are more likely to be an independent contractor because they control their own business.
  4. Insist on your worker having a business structures, such as an LLC. In the Uber case, the worker did have a corporation that had contracted. The DOL ignore that fact, and I think that may be the point that overturns the case. The DOL is wrong.
  5. Be careful how you refer to your workers. If you can them employees, talk about employing them or say anything else to them or publicly, such as through a website, you may have an employee, not an independent contractor.
  6. Consider using foreign workers virtually where possible. That’s not a popular piece of advice, I know. But the fact is that you won’t get an “I’m an employee” accusation from someone outside the country. You also won’t get into trouble with nexus from another state. Like it or not, we’re in a global economy.

Personally, I use a lot of independent contractors. I like the fact that they are often better trained and more self starting than employees. There is less financial risk because they are providing their own tools (smart phone, computer, Internet) and are already trained on them. I can hire fast and use short term contracts to reduce costs and risks. I make sure there is always a contract in place first and I also work with people who have the independent contractor mindset. I think that may be the most important thing. If you start working with someone who is looking for an easy payday, like the plaintiff in the Uber case, you’ve got a big problem no matter what contracts you have in place.

As a business owner, independent contractors will save you money and time over hiring employees. But you have to do it right. Our business coaching class on Wednesday, 7/15/15 at 5 pm Pacific (8 pm Eastern) will cover how to legally have Independent Contractors, plus I’m going to give you a Independent Contractor Agreement template you can use.

You can join our live coaching and review past recordings for just $19/month, provided you sign up by June 30th. On July 1st, the price goes up to $67/month.


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