California Says Uber Driver is Employee

California’s Division of Labor Standards Enforcement (DLSE) recently held that an Uber driver is an employee, rather than an independent contractor, in a decision that could have far-reaching ramifications for the popular and quickly expanding app-based car service. Uber has appealed the ruling.

There are many advantages to a business if workers are classified as independent contractors, rather than employees. For employees, businesses are required to pay the employer’s share of employment taxes; whereas, independent contractors must pay it on their own. Classifying workers as independent contractors also provides advantages from a liability standpoint. Employers are generally held to be vicariously liable for acts of their employees committed within the scope of the employment. For example, if an Uber driver gets into a car accident and causes injuries to others, Uber could be held liable if the driver is considered an employee.

Generally, the test for whether a worker is an employee or independent contractor hinges on the amount of control the business has over the worker. In Uber’s case, many factors indicate an independent contractor relationship. For example, drivers set their own days and hours of work, and they use their own vehicles. Drivers are not reimbursed for any expenses, such as gasoline or car insurance. They do not receive benefits, such as health insurance or retirement contributions. They are also permitted to work for other businesses, including competitors. All of these factors lean toward independent contractor status.

Nonetheless, DLSE concluded that Uber still retains sufficient control over the workers to classify them as employees. For example, Uber controls what kinds of vehicles the drivers are allowed to use. Each vehicle must be less than ten years old, and it must be registered with Uber. The drivers use Uber’s intellectual property, including the Uber name. Further, the drivers are an integral part of Uber’s business operations. Without them, the business would not exist. This can be contrasted with a situation where a business hires a contractor to perform some work that is not part of the business’s actual operations, such as someone who performs maintenance or repairs on an office.

An IRS audit of worker classification issues can have devastating consequences, with back-taxes spanning multiple years, as well as penalties and interest. The IRS can be very aggressive in these audits. If you own a business that uses independent contractors, and you are concerned about the risk of having those workers reclassified as employees, it is important to discuss your options with experienced counsel. You may be eligible for the IRS Voluntary Classification Settlement Program (VCSP). The VCSP allows business to voluntarily reclassify workers on a go-forward basis, thereby avoiding the risk of a full-blown employment tax audit.