In a much watched and anticipated case, global ride-sharing giant, Uber, and its drivers recently reached a settlement agreement containing many monetary and non-monetary aspects, including the establishment of a $100 million fund. One critical aspect of the proposed agreement, currently awaiting approval by a California Judge, is that Uber’s drivers will continue to be treated as independent contractors, rather than employees.

Since it was founded in 2009, Uber has considered its drivers as independent contractors and, as such, these drivers are not entitled to benefits, overtime pay, or other employee rights, such as coverage for on-the-job injuries or freedom from workplace discrimination or harassment. Seeking a change in their employment status, in 2013, drivers from California and Massachusetts filed a class action lawsuit against Uber seeking to be treated as employees.

This case has been widely followed by employers and employees alike, with hopes that it would go to trial and shed valuable insight on how the law will adjust, if at all, the traditional employer-employee relationship in the on-demand economy, filled with flex workers, shift giggers and others who enjoy the flexibility and absence of control that the independent contractor relationship brings. Unfortunately for everyone else, Uber decided not to be the test case for this evolving legal area, instead choosing to settle well before trial. Nonetheless, the case, and the proposed settlement, offer valuable insight on a number of employment matters and smart employers should take heed to the lessons offered.

First is the question of whether Uber’s treatment of its drivers as independent contractors does, in fact, comply with current law. Like Uber, many employers, particularly small businesses, often classify their workers as independent contractors in an effort to utilize a streamlined and generally less costly business model. However, the risks associated with taking this approach without a full understanding of the rules governing the independent contractor relationship are significant. This article offers some guidance to help ensure that you too do not become the test case for this increasingly complex legal issue.

Determining Proper Worker Status

As an employer, it is important to determine whether or not the persons who work for your company are independent contractors or employees. A person is considered an independent contractor if whoever pays them has the right to control or direct only the result of the work and not what will be done or how it will be done. A person is an employee if the payer can control what will be done, how it will be done, etc. This will apply even if you give a worker freedom of action.

When classifying a worker, it is important to assess many factors concerning the control and independence the payer exercises over that worker. These factors generally fall within three categories:

  1. Behavioral: Does the company control or have the right to control what a worker does and how they do it?
  2. Financial: Are the business aspects of the worker’s job (i.e. who provides equipment, are expenses reimbursed, etc.) controlled by the payer?
  3. Type of Relationship: Are there written contracts or employee type benefits (i.e. Insurance, pensions, vacations, etc.)? Is the relationship for a set period of time? Is the work performed a key aspect of the payer’s business?

It is also important to note that while the factors above outline the basic definitions of employees and independent contractors, these definitions are just a starting point. There are generally two ‘tests’ that are used in determining whether a worker is an employee or an independent contractor, and the test to be used depends on the specific law. For example, the IRS uses a ’20 Factor, Right-to-Control’ test that helps you to determine the classification, while FLSA and FMLA use the ‘Economic Realties’ test. As an employer, it is crucial to understand all relevant definitions to ensure your applying all the factors and the tests above to make sure you are in compliance. The key is to look at the relationship as a whole and consider the extent or right of control of each party.

If, after, you still are unsure of whether a worker is an employee or an independent contractor, you can file a Form SS-8 with the IRS to get clarification. (Employees may also file this form.) The IRS will review the facts and circumstances surrounding the relationship and make an official determination. However, it may take a minimum of six months to get a determination, so this avenue is not always effective, and, importantly, once determined, you would need to follow the IRS guidance, even if you disagree with it.

Employer Impact

The ramifications of misclassifying a worker’s status as an independent contractor rather than as an employee are serious and expensive. The penalties generally depend on whether the misclassification is intentional or unintentional, but either way, an employer will be punished for misclassifying its workers. Some consequences include:

  • Liability for employment taxes. Employers are responsible for proper tax withholding, including FLSA, FICA, etc. on all employees, even if the misclassification was unintentional.
  • Fines and Costs: Depending on the situation, Employers may be liable for a plethora of fines and penalties, including failing to file a W-2, failing to pay taxes, interest from the day taxes should have been paid, attorney’s fees, liquidated damages, etc.
  • Criminal Penalties: If an employer is found to have intentionally misclassified worker’s status, they could face fines of up to $1,000 per misclassified worker and 1 year in prison.

Importantly, certain employers may be able to avoid at least the federal penalties through the Voluntary Classification Settlement Program. The IRS has enacted this program allowing a tax payer the opportunity to reclassify their workers as employees for future tax periods. This program will grant the tax payer partial relief from federal employment taxes if the taxpayer agrees to prospectively treat their worker or workers as employees. Under the program, the taxpayer will only pay 10% of the amount of employment taxes that would have been due on the reclassified workers compensation for the most recent tax year. The taxpayer will also not be liable for interest and penalties on the payment, and will not be audited for employment tax purposes for prior years with respect to worker classification.

In order to participate in this program, a tax payer must be deemed eligible by applying and filling out Form 8952. Eligibility requirements include:

  • The taxpayer wants to start treating the workers as employees.
  • Taxpayers must have consistently treated the workers they want to reclassify as independent contractors, including filing a 1099 for them in the previous 3 years.
  • Taxpayers cannot currently be under an employment tax audit by the IRS.
  • Taxpayers cannot currently be under an audit concerning the classification of the workers by the DOL or State agency.
  • If the IRS or DOL previously conducted an audit, an employer may still be eligible if they complied with the audit results and are not currently contesting the classification in court.

If the tax payer is found eligible, they must enter into a closing agreement with the IRS in order to receive the partial relief.

Final Thoughts

The cost for misclassifying a worker as an independent contractor versus an employee can be steep. Taking appropriate steps to ensure your workers are classified correctly from the beginning is a must for all employers. Uber smartly settled, but this issue is unlikely to go away any time soon—it is best to be proactive and prepared.

If you would like more information on the Uber settlement or employee classifications, please contact us at or (312) 440-0602.

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