Even the Government Says Uber Drivers Aren’t Employees
A Deep Dive Into the Gig Battle of Employee vs. Contractor
There is a big question right now as to whether Uber drivers should be considered employees or contractors. Or, if Uber’s CEO is to be listened to, potentially a third option of “gig worker”.
The core reason this is a hot topic is because California is pushing for Uber drivers to be classified as employees, so they can become entitled to benefits. I have to give them credit, because even if they’re wrong, they are still pushing for a better future. If the result of this whole battle is that a third worker classification is created, that would actually be a victory for California, as drivers would still benefit — just under a different designation.
But until that third option exists, the government is clear: Uber drivers are not employees.
There are a number of different agencies providing input into the contractor vs. employee question from their various perspectives. The below is a deep dive into current laws and regulations.
The Federal Government
Even at the Federal level, there’s a lot of text to dig through to determine how businesses should classify their workers. Different organizations have different viewpoints, and the result is a mishmash of guidelines which, even when they seem clear on the surface, may not always be so, especially when they are all considered collectively.
Let’s try to piece it all together.
The National Labor Relations Board (NLRB)
In April 2019, the NLRB weighed in (you can find the memo here).
This ruling considered the “common-law agency test”, which looks at the following factors:
- (a) The extent of control which, by the agreement, the master may exercise over the details of the work.
- (b) Whether or not the one employed is engaged in a distinct occupation or business.
- (c) The kind of occupation, with reference to whether, in the locality, the work is usually done under the direction of the employer or by a specialist without supervision.
- (d) The skill required in the particular occupation.
- (e) Whether the employer or the workman supplies the instrumentalities, tools, and the place of work for the person doing the work.
- (f) The length of time for which the person is employed.
- (g) The method of payment, whether by the time or by the job.
- (h) Whether or not the work is part of the regular business of the employer.
- (i) Whether or not the parties believe they are creating the relation of master and servant.
- (j) Whether the principal is or is not in business.
The tl;dr of this case was that the NLRB concluded that Uber drivers are contractors. They pointed to certain specific factors in this ruling:
- Regarding (a), drivers were able to 1) choose when to work (no upper limit, albeit a minimum of one trip per month), 2) choose where to work (anywhere in any market that Uber serves, with no assigned routes), 3) choose who to work for (an ability to switch to working for a competitor at any time). In short, Uber has almost no control over its drivers.
- Regarding (c), drivers performed their roles without any supervision.
- Regarding (e), drivers supplied their own vehicle and were responsible for their own expenses (e.g., gas, cleaning, maintenance, etc.).
- Regarding (i), drivers and Uber understood the relationship as that of independent contractors.
There were other factors that sided with “employee” status, but none of them were enough to overturn the clear entrepreneurial nature of the Uber driver role.
The Department of Labor (DOL)
The DOL has a few resources that try to help clarify the employee vs. contractor question. In their Fact Sheet 13, they break it down into 7 categories. In their Fair Labor Standards Act Advisor, it’s trimmed down to a similar 6 categories. In both, they point out that the Supreme Court has indicated that there is no simple test for determining whether a worker is an employee or a contractor, so many factors should be considered.
But to make it clear for us, in their April 2019 opinion letter, they state that gig workers are not employees. In there, they use the same 6 factors as those in the FLSA Advisor, namely:
- The nature and degree of the potential employer’s control
- The permanency of the worker’s relationship with the potential employer
- The amount of the worker’s investment in facilities, equipment, or helpers
- The amount of skill, initiative, judgment, or foresight required for the worker’s services
- The worker’s opportunities for profit or loss
- The extent of integration of the worker’s services into the potential employer’s business
Their core reasoning that gig workers are not employees is summarized as follows:
- Control: Businesses have a significant amount of control over employees. For example, requiring workers to have an exclusive relationship with the business, not interacting with competitors, delivering specific amounts of work (whether measured by quotas or hours), etc. Gig employers do not have this level of control over their workers. In fact, workers “routinely [simultaneously work for competitors] in order to maximize their profit”.
- Permanency of relation: Businesses may require workers to agree to a specific amount of work, or to work a specific amount of time, or to disallow working with competitors. While gig workers may end up working for their employers for a long period of time, and may decide to work exclusively for their employer, the reality is that they can come and go as they please, utilizing their “high degree of freedom to exit the working relationship”.
- Investment in facilities, equipment, or helpers: Businesses make these investments and supply them to their employees. Gig workers, however, supply their own equipment, as they are “require[d] to purchase all necessary resources for their work”.
- Skill, initiative, judgment, and foresight required: Businesses often train their employees on specific required skills, and profit from their initiative, judgment, and/or foresight. Gig workers, though, typically do not receive training, and if anything, “choose between different service opportunities and competing virtual platforms and exercise managerial discretion in order to maximize their [own] profits” (i.e., not those of the employer).
- Opportunity for profit and loss: This factor comes down to who is primarily in control of profit or loss — the business, or the worker. In the Gig Economy, the businesses typically set the going rates for services, but it is the workers who are in control of their own destiny. They can “take as many jobs as they see fit” and “can further control their profit or loss by ‘toggling back and forth between different’ competing… platforms”.
- Integrality: This factor asks whether the work being done is the “primary purpose” of the business. While gig workers do perform the main visible component of work for the business, the DOL argues that “the business’s ‘primary purpose’ is not to provide services to end-market consumers, but to provide a referral system that connects service providers with consumers”. In other words, Uber isn’t in the business of driving people around; rather, they are in the business of providing a way for others to drive people around, and then they take a cut.
For all 6 criteria, the DOL declared that gig workers are contractors, not employees.
The Internal Revenue Service (IRS)
The IRS has been less forthcoming with specific “rulings” per se, but they do have guidelines on the employee vs. contractor debate so that employers can make a determination.
First off, they have their May 2007 Present Law and Background Relating to Worker Classification for Federal Tax Purposes. This document includes 20 factors which the IRS identified help determine whether a worker is an employee or contractor.
To try to make it a bit clearer, they simplified this down to three main categories regarding the degree of control and independence:
- 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 payer? (these include things like how 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?
Given the current state of the world, TurboTax provides guidance to Uber drivers on how to deal with their taxes… as contractors, because that’s what Uber drivers are currently considered to be.
Again, the IRS hasn’t exactly said how they expect Uber drivers to be classified — that is up to the employer, and as such the IRS is leaving the decision up to Uber until someone challenges the Gig Economy giant.
And that is exactly what California is doing.
California is known to be quite a pro-worker state. So, who better to lead a change in worker status than California?
The Borello Test
California used to primarily apply the Borello test to make a distinction between employee and contractor. The Borello test came out of the Borello & Sons Inc v. Department of Industrial Relations ruling from March 1989, regarding a question as to whether sharefarmers were independent contractors or employees.
Spoiler alert: The ruling defined them as contractors.
The California Department of Industrial Relations does a good job of talking through the Borello test. It is considered a “multifactor” test because many different factors need to be considered, and no one factor controls the decision. Again, much like the guidance from the NLRB, DOL, and IRS, it’s very much a “look at the big picture” kind of test. The factors are:
- Whether the worker performing services holds themselves out as being engaged in an occupation or business distinct from that of the employer
- Whether the work is a regular or integral part of the employer’s business
- Whether the employer or the worker supplies the instrumentalities, tools, and the place for the worker doing the work
- Whether the worker has invested in the business, such as in the equipment or materials required by their task
- Whether the service provided requires a special skill
- The kind of occupation, and whether the work is usually done under the direction of the employer or by a specialist without supervision
- The worker’s opportunity for profit or loss depending on their managerial skill
- The length of time for which the services are to be performed
- The degree of permanence of the working relationship
- The method of payment, whether by time or by the job
- Whether the worker hires their own employees
- Whether the employer has a right to fire at will or whether a termination gives rise to an action for breach of contract
- Whether or not the worker and the potential employer believe they are creating an employer-employee relationship (this may be relevant, but the legal determination of employment status is not based on whether the parties believe they have an employer-employee relationship)
Let’s compare the above to what we know so far.
Using the factors that the DOL lays out, there is overlap with control (6, 10, 11, 12), permanency (8, 9, 12), investment (3, 4), skill (5), opportunity for profit and loss (7), and integrality (2). The NLRB has slightly different factors, which, e.g., doesn’t include a factor about profit/loss opportunity, but does add in factors for distinct occupation or business (1) and the understanding of the relationship by both parties (13).
The ABC Test
In April 2018, in the Dynamex decision, California decided that the Borello test wasn’t good enough, so they invented a new one: the ABC test, introduced as part of Assembly Bill No. 5 (AB5). Back on the California Department of Industrial Relations site, they provide information on the ABC test, too.
The ABC test aims to make the classification of employee vs. contractor easier. There are three parts, which must all be met to classify the worker as a contractor.
The three parts are:
- Part A: Is the worker free from the control and direction of the hiring entity in the performance of the work, both under the contract for the performance of the work and in fact?
- Part B: Does the worker perform work that is outside the usual course of the hiring entity’s business?
- Part C: Is the worker customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed for the hiring entity?
Part A basically comes down to, how much does the hiring entity control the actions of the worker. If the employer is not controlling the exact details of how the work gets done, then the worker is a contractor.
This is essentially just the “control” factor that we’ve already covered. Both the NLRB and DOL declared that Uber specifically, or gig employers in general, do not have enough control over their workers to consider them employees. Uber drivers can work when they want, where they want, and how they want.
Part B argues that, if the work being done is the typical work that the employer needs done, then the worker is an employee.
As The National Law Review points out, it is this part that causes the most grief, as it is standard practice for businesses to hire contractors to help accomplish typical business goals.
It is quite normal for business to hire contractors to fill needed roles — my own employer has hired contractors to serve as software developers, customer support representatives, and content marketers, all of which are quite important to accomplishing our goals as a company.
Because of the regularity of the use of contractors for important-to-the-business positions, many exemptions to the law were provided, thanks to lobbying from groups who did not feel like the new test properly classified their workers. Of course, the lobbying did not end favorably for all groups. JD Supra catalogued a list of the many exemptions from the law, which includes such workers as lawyers, veterinarians, private investigators, manicurists, and investment advisors, as well as professional service providers (that need to meet yet more requirements) such as graphic designers, grant writers, travel agents, and marketing contractors. And plenty more.
Of course, Gig Economy workers didn’t make it into the exemptions list.
(It’s important to note here that “exemption” specifically means “exemption from the ABC test” — any exemptions must instead go through the Borello test.)
Essentially, California made a law targeted specifically at Gig Economy companies, disguised it as a law for “all companies”, and then proceeded to exempt many industries as long as they weren’t part of the Gig Economy.
Part C says that to be a contractor, someone has to be a part of an existing, independent business operation, or act as if they are an independent business.
In Uber’s case, this means that each individual driver must have, of their own accord, incorporated their drivership “business”, or routinely offer up their services to other customers.
The first part doesn’t hold water. In order to be a contractor, you have to work for a separate business? That means that if a worker doesn’t properly incorporate his business, and he performs work for a company (who likely assumes he incorporated properly), then that worker is an employee of the company. That loophole is so big that it should be discarded immediately.
The second part says that to be a contractor, a worker needs to be advertising or providing their services to other potential employers, or at least have the opportunity to do so.
Of course, many Gig Economy workers perform work for multiple Gig Economy companies — two-thirds, according to The Rideshare Guy’s 2017 survey (the most recent version of that survey didn’t cover this specific question). Drivers these days often switch between Uber and Lyft (and other rideshare services) depending on which is offering the better rides or incentives at any given time. So many drivers do this, that someone created an app — Mystro — to help juggle driving for competing services.
Pulling it all together:
- We already know that the “control” factor alone results in Uber drivers being considered contractors.
- Contractors have a normal place in business. Making a brand new test that arbitrarily (and purposefully) targets primarily Gig Economy workers seems suspect at best — but sure, California can make up whatever laws it wants.
- Uber drivers do very much drive (or have the opportunity to drive) for other ridesharing services, so in that sense they do act like contractors.
All in all, the best argument California has in classifying Uber drivers as employees is the rule that it specifically made, counter to all previously existing laws and guidelines, to try to force Gig Economy companies to classify its workers as employees. That’s a bit of roundabout logic, but it’s the essence of their case, so if the courts accept it, they have successfully gamed the system.
Of course, other states have their own laws, which can make it difficult to come to a firm conclusion nationwide. Texas offers information on worker classification, which comes down to following a 20-point comparative approach which is the same list as the IRS’s 20 factors. Indiana takes a more effortless approach and simply directs readers straight to the IRS website. Maryland recommends that readers reference the DOL’s Fact Sheet 13, which we already mentioned. Nevada’s guidelines mostly focus on control and investment. Kentucky has two methods — the Right to Control Test (obviously about the “control” factor), and the Nature of Business Test (regarding the “integrality” factor).
The distinction between employee and contractor is confusing enough that everyone is just trying to do their best to get through the situation, while they wait for someone (i.e., California) to lead the way.
California, being as progressive as it is, will try to evolve the law — and society — one way or another. One thing is clear, though: under current laws and guidelines, Uber drivers are not employees.
To be fair, the very fact that this employee vs. contractor debate is happening shows that there may not be a perfect way to classify workers in the Gig Economy in the first place, using existing laws. California can try to force gig workers into the “employee” bucket, but if they’re going that far anyway, maybe the conversation should be a bit broader than just employee vs. contractor — e.g., Uber’s argument for a third “gig worker” classification.
At this point, we don’t know exactly what will happen. The next step is to wait until November, when the people of California vote on Proposition 22:
A “yes” would mean that Uber drivers (and the like) will be considered independent contractors (again, quite in line with current guidelines), but the state will also look at adopting policies that are more focused on app-based drivers.
A “no” would mean that we rewind a few months and AB5 can still be used in the determination of contractor vs. employee. To be clear, that wouldn’t mean that app-based drivers would be automatically classified as employees, but it’s more likely that it would go that way.
Or perhaps even more likely, we’d see an even more intense Uber vs. The State of California standoff in 2021.
My eyes are pointed west. And I’ve got popcorn.