On September 16, 2014, an Uber driver named Barbara Ann Berwick filed a complaint with the California Labor Commissioner. Among other things, Berwick wanted to be reimbursed for outstanding business expenses, including gas and toll fees. Uber stated that because Berwick was not an employee she was not entitled to reimbursement of business expenses. The California Labor Commissioner agreed with Berwick and awarded her over $4,000 in business expenses and interest. While this case is isolated to one specific individual, it could have a significant impact on Uber’s business model and overall financial health.
How does this impact your business? Employers using independent contractors do not have to pay payroll taxes, minimum wage or overtime, comply with other wage and hour law requirements such as providing meal periods and rest breaks, or reimburse their workers for business expenses incurred in performing their jobs. Additionally, employers do not have to cover independent contractors under workers’ compensation insurance, and are not liable for payments under unemployment insurance, or disability insurance.
How does a business owner make this determination? The IRS has adopted common law principles to define an independent contractor and an employee. These rules focus primarily on the level of control an employer has over a service or product and the level of independence afforded to the worker. The facts that provide evidence of the degree of control and independence fall into three categories:
- Behavioral: Does the company control or have the right to control what the worker does and how the worker does his or her job?
- Financial: Are the business aspects of the worker’s job controlled by the employer? (These include things like how the worker is paid, whether expenses are reimbursed, who provides tools/supplies, etc.)
- Type of Relationship: Are there written contracts or employee type benefits (i.e. pension plan, insurance, vacation pay, etc.)? Will the relationship continue and is the work performed a key aspect of the business?
Businesses must weigh all three factors when making this classification. Some factors may indicate that the worker is an employee, while other factors indicate that the worker is an independent contractor. There is no set formula that determines whether the worker is an employee or an independent contractor. As a result, it can be a difficult determination to make and it can have a significant financial impact on the business. For more information, please contact us at 858-558-9200.