Labor / Employment

In The Gig Economy, Who Is An Employee And Who Is An Independent Contractor?

From the employer’s perspective, there are many advantages to treating workers like independent contractors as opposed to employees -- but is it legal?

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(Photo by ANGELO MERENDINO/AFP/Getty Images)

Whenever I need a taxi, I usually call a transportation service in my city. I met the owner a few times at local business mixers where he advertised his services. His prices were fair and I prefer to support small and local businesses whenever possible. But on one occasion, he was unavailable, so I used Uber instead.

During the ride, I got to know the driver. He was a man in his thirties who has a day job at a financial institution. He initially became an Uber driver full-time to make ends meet when he was unemployed. But now he does it part-time to make some extra pocket change. He also drives for Uber’s competitor, Lyft. He, like other Uber drivers, works whenever he wants. He prefers unusual hours or Saturday nights because they don’t conflict with his day job and the pay is better.

When he worked full-time as a driver for Uber and Lyft, he claims to have made between $5,000 to $6,000 per month. But he had to pay for his own gas, insurance, and maintenance costs which became more frequent since he drove a lot more than usual.

He also knows other people who drove for Uber but quit soon after because the money wasn’t worth it after expenses.

Uber drivers are highly cited as examples of workers in the “gig economy” where people are paid based on the individual jobs or “gigs” they take, usually through a smartphone or computer app. The platforms generally do not require its workers to work a set schedule. They also do not provide tools or equipment to their workers. The advantages to the workers are that there is more flexibility and they can choose which jobs to accept.

The gig economy model encouraged companies like Uber and Lyft to treat its workers like independent contractors rather than employees as their activities were analogous to operating a small business. After all, how is this different from a freelance graphics designer who can pick and choose assignments they see on a classifieds ad or on a business group posting?

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From the employer’s perspective, there are many advantages to treating workers like independent contractors as opposed to employees. Independent contractors can be paid with one simple payment. Employees must have taxes withheld and quarterly employment tax returns must be filed by the employer. Employers must also pay employment taxes for every employee they hire — including one half of their social security and Medicare taxes along with state unemployment taxes. Independent contractors are not subject to labor laws that regulate things like indemnity, expense reimbursement, mandatory break times, overtime, and sick pay. And independent contractors generally do not have legal remedies for discrimination and harassment.

Because of the above, there is a great temptation for businesses to classify workers as independent contractors rather than employees. Some will do it illegally and hope that they do not get caught. Others will restructure their business practices so that their workers meet the requirements for independent contractor treatment.

So how does a person qualify for independent contractor treatment? Most states follow the common law test with some variations. The common law test looks at many factors including the level of control the employer has over the person, whether the employer provides tools, and whether the person can work for other businesses. Many states allow certain professions such as lawyers, doctors, accountants, and architects to be automatically treated like independent contractors.

The many factors have led to confusion and disputes with conflicting decisions. For example, if I need someone to draft a basic contract, I can hire a non-barred law school graduate with previous firm experience or a contract attorney. Both will require minimal supervision. Yet one I may have to pay like an employee while the other I can pay like an independent contractor.

The growing presence of gig economy jobs will only magnify the confusion. In most cases, the worker will have their own tools and supplies. For example, Uber drivers will use the cars they already have. Also, most can work remotely and do not need to be present at an office. And usually they can work whenever they want. While this might sound like something freelance workers or small home-based businesses would do, in reality, most gig economy workers are not operating actual businesses. Instead, they are turning to these firms to earn additional income.

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Some states, most recently California, have decided to eliminate the multi-factor common law test in favor of a simplified test known as the “ABC test.” This test looks at three requirements and if a person meets all of them, he or she can be treated like an independent contractor. They are:

(A) the worker is free from the control of the employer in connection with the performance of the work, both under the contract for the performance of such work and in fact;

(B) that the worker does work that is not in the usual course of the hiring entity’s business; and

(C) that the worker is customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed for the hiring entity.

California’s AB 5 not only codified the California Supreme Court’s decision in Dynamex Operations West, Inc. v. Superior Court of Los Angeles, (Cal. Sup. Ct. 2018) adopting the ABC test, but also expanded its use for determining whether a person is an employee or independent contractor. The provisions of AB 5 will take effect starting January 1, 2020.

The Dynamex decision and AB 5 was designed with gig economy jobs in mind and so businesses are looking into whether they should convert their existing independent contractors into employees. Uber and Lyft have announced that they will not comply with AB 5 because they claim that their drivers are independent contractors even under the new ABC test.

Gig economy jobs blurred the line between who is an employee or an independent contractor under the common law. California has passed the ABC test to simplify the rules and others states are contemplating doing the same. Some businesses are contemplating whether to comply while others plan to continue their operations. Will the ABC test clarify the confusion? Are other tests available? Will this make Uber more expensive for me? These will be the topic of a future column.

Steven Chung is a tax attorney in Los Angeles, California. He helps people with basic tax planning and resolve tax disputes. He is also sympathetic to people with large student loans. He can be reached via email at sachimalbe@excite.com. Or you can connect with him on Twitter (@stevenchung) and connect with him on LinkedIn.

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