Operations

Will Uber Have To Convert to An Employee-Based Model?

Posted on June 30, 2015 by Sara Eastwood-McLean - Also by this author

You are not an independent contractor if you perform services that can be controlled by an employer (what will be done and how it will be done). Does that describe the environment for Uber and TNC drivers?
You are not an independent contractor if you perform services that can be controlled by an employer (what will be done and how it will be done). Does that describe the environment for Uber and TNC drivers?

The first Uber app, called “UberCab,” was released in 2010. It was the brainchild of Travis Kalanick, a Silicon Valley executive who had a disdain for San Francisco cabs. Uber was built on the “hail” or taxi model (now called on demand) as a slick new alternative to traditional taxis with the difference being the vehicles would look like the distinct black cars of New York rather than colored cabs.

The original idea was to release this app to the public allowing for a free market of drivers. That was the strategy behind getting the necessary mass of vehicle inventory. Fast forward five years and we are seeing the cracks in that strategy with the lack of control over driver behavior. Uber has consistently tried to respond to crisis by creating more “controls” over its drivers, including rating systems, insurance packages, and vehicle leasing options. Its challenge is that those “controls” are undercutting its ability to claim it can legally classify drivers as independent contractors. Its basic model of being just an app on the open market is no longer an easy sell to the IRS, the Department of Labor, and to investors.

From the IRS perspective, an individual is an independent contractor if the payer has the right to control or direct only the result of the work and not what will be done and how it will be done. The earnings of an independent contractor are subject to self-employment taxes. You are not an independent contractor if you perform services that can be controlled by an employer (what will be done and how it will be done). This applies even if you are given freedom of action. What matters is that the employer has the legal right to control the details of how the services are performed.

The Department of Labor cites the Supreme Court which has stated “that there is no definition that solves all problems relating to the employer-employee relationship under the Fair Labor Standards Act (FLSA).” The Court has also said that determining the relation cannot be based on isolated factors or upon a single characteristic, but depends on the circumstances of the entire activity. The goal of the analysis is to ascertain the underlying economic reality of the situation and whether the individual is economically dependent on the supposed employer. In general, an employee, as distinguished from an independent contractor engaged in a business of his own, is one who “follows the usual path of an employee” and depends on the business he serves. The factors that the Supreme Court has considered significant, although no single one is regarded as controlling, are:

1) The extent to which the worker’s services are an integral part of the employer’s business (examples: Does the worker play an integral role in the business by performing the primary type of work that the employer performs for his customers or clients? Does the worker perform a discrete job that is one part of the business’ overall process of production? Does the worker supervise any of the company’s employees?)

2) The permanency of the relationship (ex.: How long has the worker worked for the same company?)

3) The amount of the worker’s investment in facilities and equipment (ex.: Is the worker reimbursed for any purchases or materials, supplies, etc.? Does the worker use his or her own tools or equipment?)

4) The nature and degree of control by the principal (ex.: Who decides on what hours to be worked? Who is responsible for quality control? Does the worker work for any other company(ies)? Who sets the pay rate?)

5) The worker’s opportunities for profit and loss (ex.: Did the worker make any investments such as insurance or bonding? Can the worker earn a profit by performing the job more efficiently or exercising managerial skill or suffer a loss of capital investment?)

6) The skills required in performing the job and the amount of initiative, judgment, or foresight in open market competition with others required for the success of the claimed independent enterprise (ex.: Does the worker perform routine tasks requiring little training? Does the worker advertise independently via yellow pages, business cards, etc.? Does the worker have a separate business site?)
 
You can see here glaring challenges for Uber to defend its position to classify drivers as IOs. If it converts to the employee model, it will have to compete on a costlier level with us. If it doesn’t convert, it will have to loosen most of its driver “controls,” which may mean pandemonium. It remains to be seen how much activity, including a class-action suit against Uber and Lyft by drivers, is in play. Those suits are being handled by super labor attorney Shannon Liss-Reardon, who fought this fight against Fed Ex and won. Stay tuned.

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