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Worker classification update, part 2: the 1099-driven economy

In the first part of this post, we took note of the latest interpretation from the U.S. Department of Labor on distinguishing independent contractors from employees. The Labor Department is likely to continue to raise questions about whether employers are making classification decisions that comply with the Fair Labor Standards Act (FLSA).

But federal labor law is only one aspect of the questions about classification that arise in an economy with an increasing number of contractors. There is also the issue of worker classification for payroll tax purposes. And that issue has become even more complicated with the rise of social-sharing services such Uber, in which companies provide services on demand using workers who receive only 1099s and don't get benefits.

In this part of our two-part post, we will discuss the recent developments regarding drivers for Uber, the ride-sharing service that in many ways symbolizes the emerging 1099-driven economy.

How do Uber, Lyft and other ride-sharing services work? The premise is that these companies use drivers who provide their own vehicles. Consumers who are seeking rides use the company's online platform to arrange a ride with a driver who has signed up to share his or her vehicle.

But are these drivers really independent contractors? In June, California's Labor Commission issued a ruling that one of Uber's San Francisco-based drivers was actually an employee, not a contractor.

Though Uber appealed that decision, the plot has thickened considerably since then. Earlier this month, a federal judge heard arguments in a lawsuit that is seeking class-action status for all of Uber's 160,000 drivers in California. There have also been numerous legal challenges to other on-demand sharing services.

Though the law on worker classification is complicated, the clash of economic interests is clear. Companies can keep their employment-tax costs down by perhaps 30 percent by using contractors rather than employees. This means Uber and other on-demand companies have a lot riding on a business model that treats workers as contractors, not as employees for whom employers have payroll tax obligations.

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