Uber drivers – employees or independent contractors? (What’s the significance anyway?)

By now everyone is familiar with Uber. And in case you’re not, Uber is an online taxi dispatch company that uses its own mobile app that allows its customers to submit a trip request on their smartphones for drivers who then pick up riders using driver-owned vehicles.

Uber’s business is built on an independent contractor (IC) model, which in Uber’s case means that ideally, Uber drivers receive no benefits, use their own vehicles, and pay all expenses for gas, maintenance, and insurance. Twenty to twenty-five (20 to 25) percent of driver earnings are paid to Uber as a fee to use its service. Some estimate that this contractor model can save businesses up to 30% on labor costs.

Until recently, most parties involved with Uber were ecstatic with the results. After all, the company rapidly grew to a net worth of over $60 billion and some Uber drivers were earning as much as $5,000 per week and as much as $90,000 annually (according to Uber). More realistic estimates place compensation at around $25 to $35 per hour in New York and Los Angeles and $8 to $15 hourly in other U.S. locations.

With Uber’s success, the number of drivers has dramatically increased as there are now an estimated 34,000 Uber drivers in New York. Uber cut its rates by 20% in 2014 while increasing its commissions, which naturally did not please its drivers. After announcing further rate decreases in January of 2016, a large protest by Uber drivers was recently staged in New York City. These rate cuts, in conjunction with the increase in supply of Uber drivers, have significantly decreased driver income potential.

To make matters worse, Uber is facing lawsuits directly related to the independent contractor issue and therefore directly affecting its drivers. These suits are referred to as “independent contractor misclassification suits” and are direct challenges to Uber’s business contractor model. At stake for Uber are significantly more business costs if drivers are found to be employees rather than ICs. New York treats Uber drivers as independent contractors, yet a recent ruling in California (where an Uber driver attempted to obtain reimbursement for expenses) found that Uber drivers were employees, further muddying the legal waters of future litigation.

Such misclassification suits are typical for drivers of larger vehicles. In another recent California case, FedEx settled a lawsuit with 2,000 of its drivers. The predicament is that in cases like Uber, where its drivers own their vehicles, can work for other driving services and set their own hours, workers possess attributes of an independent contractor, yet are dependent on the service in ways that seemingly lessen their independence. One judge has asked whether a third classification may be appropriate – a “dependent contractor” somewhere between “employee” and “independent contractor.”

Why does Uber not want its drivers to be classified as employees? As mentioned above, the answer is increased business costs. Employees are entitled to certain protections and benefits to which independent contractors are generally not entitled. Some of these benefits include protection under wage and hour laws, including the right to minimum wage, overtime, meal breaks, and reimbursement of business expenses.

Also, workers classified as employees enjoy the benefit of protection under antidiscrimination laws, including the right to be free from workplace discrimination and harassment. Independent contractors are not subject to state and federal payroll tax withholdings, and are not eligible for unemployment and workers’ compensation benefits. When a company misclassifies a worker as an independent contractor, they are depriving workers of benefits to which they are legally entitled.

Thus, if you’re an Uber driver and you live in a state where you are treated as an independent contractor, you will not receive reimbursement for business expenses, You will have little or no protection under discrimination and wage laws. You will also not be eligible for unemployment and workers’ compensation benefits. Uber’s business costs in states like New York will be significantly less than in states like California where Uber drivers are considered employees and entitled to all of the amenities, benefits, and protections related thereto. It’s not hard to see why Uber is zealously contesting these independent contractor misclassification lawsuits.

This dynamic and complex area of the law requires the assistance of a tax expert. If you have a question or concern about whether your employer has correctly classified you as an independent contractor or otherwise, call THE TAX EXPERTS at the Thorgood Law Firm www.thorgoodlaw.com. For a FREE consultation call 212-490-0704.Uber drivers - employees or independent contractors? (What’s the significance anyway?)

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