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
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
Do drivers have an opportunity
for profit and loss?
Are drivers subject to employer
Do drivers make their services
available to the general public?
Do drivers render services
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
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.