Business Litigation: Differences Between Employees And Contractors

News that Uber drivers in California were claiming to be employees rather than self-employed contractors caught my attention this week because the ramifications for many modern business models could be huge as this bizjounals article points out.

Many business models nowadays classify workers as self-employed independent contractors even though those individuals only have a single entity to whom they are answerable. For example, although Uber taxi drivers have many different customers – their passengers – they are arguably only working for a single employer, Uber, given that they receive their work from that source. If they were signed up with a number of different taxi companies, and also found passengers through their own resources, there would be strong grounds for Uber to argue that they are self-employed.

Tech start-ups in particular rely upon hiring independent contractors to develop various stages of larger projects. A finding in these cases that they are in reality employees would entitle the workers to similar benefits to those of an employee, such as minimum wage and overtime.

Extensive Potential Liabilities 

As Shelby Clarke, CEO of peers.org says of the implications of such a ruling, “It’s starting to be a really serious concern. I’ve heard that the liabilities for some of these lawsuits could be for greater than what the companies have ever raised or earned”.

Clearly it is not enough to simply call a worker an independent contractor when in reality they are an employee. The test in both the UK and the USA essentially revolves around how much control an employer exercises over the worker.

US Position

In the United States, the test for whether a worker is considered an employee goes back to the IRS’s 20-factor test. The test whether a worker is an employee hinges on the degree of control exercised by the employer over how the worker does their work, specifically “if the person providing the services ‘is subject to the will and control of the employer not only as to what shall be done but how it shall be done”. Also, if a person providing services is forced to “pay for their uniquely… branded trucks …branded uniforms… Plus, fuel, insurance, tyres, oil changes, maintenance, even workers compensation coverage” as they were in Alexander v. FedEx Ground, the Court will regard them as an employee.

IT and Construction Industries

The IT industry is well known for using self-employed consultants. In 2014, the Inland Revenue tightened up its rules regarding who will be accepted as self-employed because people were avoiding taxes. Prime.org notes that, “it [was] estimated that around 200,000 construction workers and 50,000 others [worked] for agencies under contracts that allow them to be treated as self-employed for tax purposes. However, from April, agencies [were] required to put these workers on payroll, deduct National Insurance contributions and operate PAYE; and pay NICs as though they were employees, unless the agency has evidence that they will not be supervised, directed or controlled by anyone”.

UK Position

In the UK, self-employed status is determined by weighing multiple factors such as whether someone

1. Is in business for themselves,
2. Is responsible for the success or failure of their business
3. Can make a loss or a profit;
4. Can decide what work they do and when, where or how to do it,
5. Can hire someone else to do the work;
6. Is responsible for fixing any unsatisfactory work in their own time
7. Agrees a fixed price for their work…
8. Uses their own money to buy business assets… [and]
9. Whether they can work for more than one client.

The requirements for showing that you are self-employed for tax purposes have now become much more stringent with additional documentation filing requirements.

Reducing risks

To reduce the risks of an adverse decision which could then expose the employer to a large tax liability, it is common for workers at more senior levels to use a service company.

The service company then agrees to provide the service, and to supply a named individual (the Consultant) to do the work.

Uber

Companies like Uber that play the role of “matchmaker”, matching a driver/car with a customer looking for a ride and taking a slice of the fare for providing the service are directly engaging the services of the drivers rather than engaging a service company to supply the driver, and therefore lack this protection.

Many business models in the UK rely upon either being or operating in conjunction with service companies, some examples include the legal industry, the marketing industry and the financial services industry. All of these industries rely heavily on consultants for the day-to-day functioning of the businesses. It is these consultants and senior IT staff that are the type of workers who earn enough to justify the use of a service company.

The federal court for the Northern District of California, in the Uber case has not yet issued a ruling.  Uber’s counsel has requested a jury trial on the merits.

In the meantime, the debate continues at an international level as to whether the drivers are employees or independent contractors.