Career & Jobs

Uber Paying $100 Million In Back Taxes Is A Positive Sign For Gig Workers

The arrival of the gig economy placed a renewed emphasis on the problem of worker misclassification. This usually refers to employers classifying employees improperly as independent contractors. There are a variety of reasons why an employer might do this, but one common reason is to save money on payroll and employment taxes, like state unemployment. But companies who claim their workers are independent contractors don’t always get away with not paying their fair share of payroll taxes, as we recently saw in New Jersey with Uber Technologies Inc. and Raiser LLC.

New Jersey Department of Labor and Workforce Development Gets $100 Million in Back Taxes

Uber Technologies Inc. (Uber) and Raiser LLC (Raiser) made the news recently because they agreed to pay $100 million in what amounts to unpaid state payroll taxes to the New Jersey Department of Labor and Workforce Development’s (NJDOL) Unemployment Trust Fund.

NJDOL asserts that Uber and Raiser (a subsidiary of Uber) had to pay this money because they misclassified their drivers as independent contractors instead of employees. This misclassification then led to Uber and Raiser not paying their share of New Jersey payroll taxes for things like unemployment, workforce development and temporary disability.

According to the New York Times, this tax issue started back in 2019 after an audit by the NJDOL concluded that Uber and Raiser owed four years’ worth of back taxes from 2014 to 2018 totaling $530 million, with another $119 million in interest.

Uber (and presumably Raiser) disagreed with this conclusion and the case got sent to the New Jersey Office of Administrative Law. However, before a final decision could be made, Uber and Raiser agreed to pay $100 million, consisting of $78 million in back taxes and $22 million in penalties and interest.

Despite reaching this agreement, Uber and Raiser still explicitly contend that their drivers are not employees and are instead independent contractors. What this means for Uber and Raiser’s payroll tax obligations for years not included as a part of the audit is unclear.

Why Worker Misclassification Is a Big Deal

When an employer wrongly labels its workers as independent contractors and not employees, it gives two major benefits to employers. First, it reduces the employer’s potential legal liability for the wrongful acts of those workers. The legal doctrine of respondent superior states that an employer can be vicariously liable for the improper actions of its employee or agent. Only in limited cases will an independent contractor be an agent for an employer.

The second major benefit is that it’s usually cheaper to hire an independent contractor instead of an employee. One reason it’s cheaper is that independent contractors aren’t usually eligible for benefits that employees can receive, like paid leave, health insurance, vacation time or other workplace perks. Another reason is that employers can avoid paying payroll taxes, as evidenced in the Uber, Raiser and NJDOL $100 million tax agreement.

This misclassification doesn’t just help employers, but also hurts independent contractors in several ways. First, they aren’t covered by many of the worker protection laws, such as those applying to minimum wage, overtime and discrimination. Second, if they lose their job, they aren’t (usually) eligible for unemployment benefits. Third, if independent contractors get hurt on the job, they won’t typically receive workers’ compensation benefits. Fourth, they’re responsible for the full amount of Social Security and Medicare federal payroll taxes. Fifth, they miss out on benefits and perks only offered to employees. Finally, they can’t form unions and engage in collective action.

How to Classify a Worker as an Employee or Independent Contractor

Given the importance of classifying a worker one way instead of another, a variety of tests have been developed over the years for various contexts, such as federal taxes, workers’ compensation and workers’ wages. Some of the more common tests include the:

Currently, the test getting the most attention is the ABC test, which in place in about 20 states for unemployment insurance purposes, but only about 10 states for wage and hour purposes. One thing to keep in mind is that in states that use the ABC test, they may only use them for workers in certain industries, like construction.

Under the ABC test, there is a presumption that a worker is an employee unless the employer can show that all three of the following conditions exist:

A. The individual is free from control and direction in connection with the performance of the service, both under his contract for the performance of service and in fact;

B. The service is performed outside the usual course of the business of the employer; and

C. The individual is customarily engaged in an independently established trade, occupation, profession or business of the same nature as that involved in the service performed.

The above is the ABC test in Massachusetts, although other states that apply the ABC test will sometimes use slightly different wording.

Part A refers to whether the employer can tell the worker how to do their job. Part B refers to whether the worker engages in work that’s related to the employer’s primary business. Part C refers to how likely the worker will still have a profession if they were to no longer work for the business in question. We can apply this test to the typical Uber driver and quickly see how easy it is to conclude the driver is an employee.

Applying the ABC Test to Uber Drivers

Under the ABC test, an Uber driver is presumed to be an employee unless Uber can show that parts A, B and C apply to the worker. Looking at part A, Uber has control over the driver in the following ways:

· Uber controls the rate the drivers charge their passengers.

· Uber drivers can’t pick and choose their passengers.

· Uber can punish drivers for not using the most efficient routes when carrying passengers.

· Uber can “deactivate” drivers if they drive in a way that Uber doesn’t like. This includes not accepting enough passengers, taking too long on trips or having a customer rating that falls below a certain level.

Uber also sets standards for the vehicles that drivers use, such as having four doors, being able to transport at least 4 people, being a vehicle model that’s 15 years or newer and not having any cosmetic damage.

Based on the above facts, it’s difficult for Uber to conclude that part A of the ABC test applies and the drivers are free from Uber’s control or direction. Let’s assume for a moment that Uber passes part A. Uber also needs to show that part B applies, but it will fail to do that. This is because Uber is a transportation company.

Uber is in the business of getting passengers from one location to another and the work the drivers do is integral to achieving these goals. This isn’t a situation where an accounting firm is hiring a plumber to fix the water leak in the office bathroom.

Uber disagrees and argues that it’s a technology platform company and not a transportation company. Therefore, the drivers are completing tasks that are not part of Uber’s business.

This isn’t the strongest argument as other companies have unsuccessfully tried to make similar arguments in the past. For example, a coal mining company said its miners were independent contractors because the company wasn’t in the mining business, but instead in the business of hiring independent contractors. Or there’s FedEx contending they’re in the logistics business, not package delivery business.

Part C is where Uber might be successful in that many people who drive for Uber also work as professional drivers for other gig economy companies that use drivers, like Lyft or DoorDash.

The result is that Uber probably fails to meet two parts of the ABC test when they need to meet all three. The consequence is that when applying the ABC test, it’s hard for Uber to classify their drivers as independent contractors.

What Does the $100 Million Tax Payment Mean for Worker Misclassification?

In terms of Uber successfully arguing that its drivers are independent contractors, the $100 million tax payment technically means nothing. Looking at the ABC test, you’ll notice that whether or not an employer pays payroll taxes for the worker doesn’t apply to the analysis.

While common sense isn’t necessarily a form of admissible evidence in court, it’s hard to ignore the common sense idea that a company wouldn’t agree to pay taxes for employees when that company believes they’re independent contractors and not employees. After all, the battlefield in this worker misclassification war includes the court of public opinion as much as it does a court of law.

A more compelling reason as to why this tax payment matters is that it reduces a major motivation for misclassifying workers. It’s true that companies don’t choose to hire independent contractors only to save money on payroll taxes, as there are other benefits that have been discussed above. Yet some of these benefits don’t really apply in practice.

For instance, one reason for Uber to classify its drivers as independent contractors is to reduce civil liability when drivers misbehave or make mistakes. However, Uber has been spending a lot of money on the undesired actions of its drivers, such as settling sexual assault lawsuits and providing third-party liability insurance coverage. So as much as Uber claims it shouldn’t be liable for its driver’s conduct, Uber is facing a lot of potential civil liability when its drivers do bad things.

Bottom Line

The $100 million agreement by Uber and Raiser to pay back taxes doesn’t mean the worker classification dispute ends. But it’s a modest victory in favor of improving the rights and benefits of workers in the gig economy. And it could be the first of several positive steps in getting companies to treat their workers more equitably.

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