United States: What Startups Can Learn From Uber's Employee Misclassification Mess

Uber's on-demand business model is under increased scrutiny, as a class-action lawsuit from a group of drivers moves through the California court system. 

The drivers say the company has misclassified them as independent contractors, when in fact they should be entitled to all the benefits afforded to employees. A federal court judge permitted drivers to proceed with various claims against the ride-sharing business. 

The matter should raise alarms for on-demand businesses, since they tend to rely on contract workers, as well as any tech founders who depend on independent contractors. 

Startups planning to scale up into a larger operation also take note: It's easier for a small company to reclassify workers than larger organizations. Avoiding this gray area now could sidestep big issues down the road. 

Guidance For On-Demand Businesses

Uber has had the foundation of its peer-to-peer ridesharing platform challenged not just in California, but in several class-action lawsuits across the country. The company is also facing administrative litigation before the California Labor Commissioner's office.

In June, the administrative agency ruled that one driver was entitled to $4,000 due to misclassification as an independent contractor. Naturally, Uber appealed the decision. Down the road, an adverse final ruling could force the company to provide overtime pay and benefits to all of its drivers. 

Shyp, on the other hand, recognized the danger of relying too much on independent contractors. In June, it reclassified its couriers as employees, as have Instacart and Munchery. 

Having become a hot issue, the matter prompted the United States Department of Labor to publish its first-ever formal guidance last month. The material covers the circumstances under which a worker may be properly classified as an independent contractor.

The guidance starts and ends with two basic conclusions: that most workers are employees under applicable federal law, and that written agreements between employers and their workforce supposedly confirming proper classification as independent workers are not iron-clad. In fact, they have much less relevance to the analysis than what the actual relationship is between the parties.

The document also significantly limits the circumstances under which the classification is permissible: As an employer you can dub personnel as independent workers only when the contracted services have no relationship to your business' operations. 

For instance, a plumber coming to fix a toilet, an accountant providing consulting services, or a software developer helping a construction company create bid tracking software are all considered contractors by the United States Department of Labor.

How The Government Determines Proper Classification

In determining a worker's proper status, the government looks at six factors in particular:

  • whether the work is an integral part of the employerís business
  • whether the worker's authority and independence over the performance of the work affect the worker's opportunity for profit or loss
  • whether the worker bears any cost in performing the work
  • whether the worker is performing similar work for other entities
  • how definite and permanent the relationship
  • the degree of the business enterprise's control over the worker

This final category, which looks at control, is receiving the most attention in independent contractor misclassification cases among startups.

It is both possible and realistic for a worker to be properly classified as an independent contractor. But certain factors must be met, otherwise a company may increase its liability. If a California-based startup obligates an independent contractor to incur significant expenses in performing the work, it's a factor showing the contractor made an investment in the business.

If the contractor is later classified as an employee, the startup not only has to reimburse the expenses, but also pay a mind-numbing amount of penalties.

10 Questions Every Startup Should Ask About Independent Contractors

Every startup should ask the following to determine whether an independent contractor classification for a worker warrants another look:  

  1. Is the person solely providing the contracted services to our business?
  2. Is the person paid on a salary or commission basis?
  3. Is the contract indefinite in duration, as opposed to a finite time for a specific project?
  4. Do we have an employee who is doing the same work as the person classified as an independent contractor?
  5. Is the person receiving both a W-2 and a 1099 from our company?
  6. Is the person negotiating and/or signing contracts on our companyís behalf?
  7. Is the person both participating and making decisions in meetings our company has regarding strategic planning and initiatives?
  8. Is the person supervising our companyís employees and/or giving them direction on what to do?
  9. Does the person have an e-mail account with our company domain, a business card with our company logo, voicemail at our companyís office, or company issued equipment greater than $100 in value?
  10. Do we make a set schedule on when the person is supposed to provide services on a daily basis?

The more "yes" answers, the greater the gray area.

Dozens of tech and startup companies have declared bankruptcy in the past 18 months because of court judgments, fines and penalties stemming from worker misclassification. 

Just as ingenuity is critical for developing new business models and ideas, so is correctly framing independent contractor relationships to pass tougher scrutiny, and keep your businesses profitable.

Originally published in Readwright

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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