Are “On-Demand” Workers Employees or Independent Contractors?

June 17, 2015 – An answer to this important question – at least as to California Lyft and Uber drivers – may be close at hand. The effects of the answer will likely ripple throughout the “on-demand” or “sharing” economy nationwide.

Dozens of fledgling on-demand companies use mobile apps to match individuals offering a service with those who need or want that service. This new on-demand economy includes ride-sharing services such as Uber and Lyft, as well as many other start-ups, offering everything from help with laundry and errands to massages: DoorDash, Postmates, Homejoy, Thumbtack, TaskRabbit, Instacart, Handy, Zeel, SpoonRocket, Washio, Luxe, and Dufl – to name just a few.

All, or substantially all, of these companies classify the people who provide services as independent contractors rather than employees. This classification has significant real-world implications. For instance, the workers themselves are responsible for paying 100 percent of their contributions to unemployment insurance and Social Security (instead of splitting those contributions with an employer), and no income taxes are withheld from the payments these workers receive. Additionally, employees receive myriad legal protections not offered to independent contractors – such as minimum wage, overtime, meal and rest breaks (in California), a right to be reimbursed for job-related expenses, and protection against harassment and discrimination.

Workers – most notably Uber and Lyft drivers – have begun challenging their classification as independent contractors. These challenges are being brought in various forums, including agencies responsible for administering unemployment benefits and enforcing labor laws, as well as through class action lawsuits filed in the federal district courts.

On March 11, 2015, the U.S. District Court for the Northern District of California ruled, in separate cases against Lyft (Cotter v. Lyft, Inc.) and Uber (O’Connor v. Uber Technologies, Inc.), that the plaintiff drivers are entitled to have juries decide whether they were employees or independent contractors. On May 21, 2015 Florida’s Department of Economic Opportunity (the state agency responsible for overseeing unemployment benefits) determined that a former Uber driver, Darrin McGillis, had been an employee. And on June 16, 2015, Uber appealed a ruling by the California Labor Commissioner that Barbara Berwick, a former driver who filed an administrative action seeking reimbursement for costs incurred in connection with her work, was Uber’s employee.

What Makes a Worker an Employee?

The determination whether a worker is an employee and an independent contractor turns on the extent to which the principal (such as Uber, Lyft, or other alleged employer) has a right to control the “manner and means” by which the worker accomplishes his or her tasks. The principal’s ability to terminate a worker without cause is strong evidence that the worker is an employee. Other relevant factors include

(a) whether the one performing services is engaged in a distinct occupation or business; (b) the kind of occupation, with reference to whether, in the locality, the work is usually done under the direction of the principal or by a specialist without supervision; (c) the skill required in the particular occupation; (d) whether the principal or the worker supplies the instrumentalities, tools, and the place of work for the person doing the work; (e) the length of time for which the services are to be performed; (f) the method of payment, whether by the time or by the job; (g) whether or not the work is a part of the regular business of the principal; and (h) whether or not the parties believe they are creating the relationship of employer-employee.

Finally, courts also consider the degree to which the worker’s profit or loss depends on his or her managerial skills and whether he or she is free to hire helpers or sub-contractors. Clearly, this is a fact-specific inquiry, and the result may well vary from one on-demand company to the next. The judges in the Uber and Lyft cases noted that, in each case, some of the factors favored a finding that the workers are employees, while other factors pointed in the opposing direction.

On-Demand Workers as “Square Pegs”

In his ruling in the Lyft case, Judge Vince Chhabria succinctly described the challenge of deciding whether a worker in the on-demand economy is an employee or an independent contractor as being “handed a square peg and asked to choose between two round holes.” Judge Chhabria went on to explain that the “test the California courts have developed over the 20th Century for classifying workers isn’t very helpful in addressing this 21st Century problem.” He then suggested the unsettling possibility that some Lyft drivers should be classified as employees, while others should be considered independent contractors – or even that “Lyft drivers should be considered a new category of worker altogether, requiring a different set of protections.”

Legislatures may step in to clarify the legal protections available to on-demand workers. Until then, though, decisions about how such workers should be classified will be made by juries – making prediction and decision-making difficult for companies wishing to enter this rapidly-growing sector.

Misclassify At Your Own Risk

All companies in the on-demand economy should follow these rulings closely, or risk being hit with hefty penalties. Under California Labor Code section 226.8, those who “willfully” misclassify employees as independent contractors – i.e., those who “avoid[ ] employee status for an individual by voluntarily and knowingly misclassifying that individual” – are subject to penalties ranging from $5,000 to $25,000 per violation. And a new violation occurs each time a misclassified worker’s pay is reduced as a result of the misclassification – so the potential liability is great. Contact Cohorn Law if you are unsure whether your workers are properly classified.

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