New Sharing Technology Creates New "Dependent Contractor" Tax Status

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New-Sharing-Technology Ridesharing services like Uber and Lyft are creating new employment categories for tax purposes. Uber, the $50 billion dollar ridesharing company from San Fransisco and its neighbor Lyft treat their drivers as independent contractors and not as regular employees.  Some drivers for both companies dispute that classification.

The difference between an independent contractor and an employee is critical because it determines not only how drivers pay taxes but whether companies like Uber and Lyft will be obligated to withhold social security, medicare taxes and pay workers' compensation, not to mention complying with a host of other labor laws.

The rules for determining whether a service provider is an employee or an independent contractor were laid out by the courts decades ago during the New Deal Era.  But the application of those standards to the new tech-oriented "sharing economy" is controversial.  The correct classification is not clear because the drivers occupy somewhat of an interim category that some commentators are referring to as “dependent contractor”.  The chart below demonstrates the different service provider classifications:

Uber and Lyft both argue that their drivers should be classified as independent contractors.  The critical inquiry here is the degree of control that the worker has over operations. Employees, unlike independent contractors, typically do not control how the work gets done.  That determination is usually dictated by the employer.  Conversely, independent contractors are only responsible for the final outcome of the services.  They may determine on their own how to achieve that result.

In determining control, all relevant factors may be considered.  On the one hand, drivers at Uber and Lyft use their own cars and pay for their own gas and vehicle insurance.  Uber and Lyft see themselves merely as software app providers who arrange sharing between drivers and customers.  On the other hand, drivers at the companies have no ability to set prices and their on-the-job conduct is closely scrutinized by the app providers who set stringent standards and have the ability to terminate drivers.

The IRS provides some traditional guidance on the issue with its report on the “Classification of Workers Within the Limousine Industry”.  Limousine service providers who only provide “pure dispatch services” may classify their workers as independent contractors.  Those pure dispatch service providers, however, are few and far between. “Indeed, few companies in fact can accurately be classified as pure dispatch companies” as stated in the report. Most companies fall into an intermediate hybrid classification.  Vagueness arises in these circumstances because answers to the following inquiries are not clear:

  • Do drivers have a significant investment?
  • Do drivers have an opportunity for profit and loss?
  • Are drivers subject to employer direction?
  • Do drivers make their services available to the general public?
  • Do drivers render services personally?

Recent determinations by governmental agencies around the country also shed some light on the issue.  California’s labor commissioner recently ruled that a driver for Uber Technologies should be classified as an employee of that company.  Although the ruling isn’t binding authority for courts, similar rulings build momentum for judges that often defer to those determinations.  There are about a dozen or so of these rulings by government agencies around the country that have weighed in on the topic. The state of Florida awarded unemployment benefits to a driver awarding him employee status.   One court in California actually put the issue before a jury.  Another earlier administrative ruling in the state actually ruled in favor of Uber.  Uber points to at least 5 of these administrative rulings that they say are favorable.  Given the sheer size of Uber and Lyft, an eventual unfavorable determination by courts on the issue will result in billions of added liability.   

In deciding this and similar issues, courts will most likely prefer to move one small step at a time and assess the impact as they go.  Only time will tell if long-established rules work well in a rapidly evolving technological society.  In fact, in 5 to 10 years, the advent of driverless cars may make the driver/employer status irrelevant.

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Charles R Goulding Attorney/CPA, is the President of R&D Tax Savers.

Michael Wilshere is a Tax Analyst with R&D Tax Savers.