Employee or Contractor - Have Uber and Lyft Finally Crossed The Line

4/29/2019 Employee or Contractor? Have Uber and Lyft Finally Crossed The Line?
TAX | EMPLOYEE OR CONTRACTOR? HAVE UBER AND LYFT FINALLY CROSSED THE LINE?
Employee or Contractor? Have Uber and

Lyft Finally Crossed The Line?
CRAIG SMALLEY, MST, EA APRIL 28, 2019
In the last few years, it has been common for companies to treat, what would otherwise be employees,
as contractors. The reason, is simple. As an employee of a company, the employer has to withhold
7.65% in FICA from their employees. In addition, the company on it’s own dime, must match the FICA
withheld, and submit these taxes regularly to the IRS. In addition, companies that offer employee
benefits, such as health insurance, retirement plans, etc., must include their employees in these
programs. These added expenses either cause the company to raise prices, or absorb the costs as a
cost of doing business.
The IRS, has very strict rules deeming which people are employees and ones that are not. The tests are
rather simple to follow. They all boil down to whether the employer has “control” over the employee. If
control is exert then an employee/employer relationship has been established.
https://www.cpapracticeadvisor.com/tax-compliance/news/21078182/employee-or-contractor-have-uber-and-lyft-finally-crossed-the-line 1/7
A contractor is considered self-employed. For example, I am self-employed. I set my own hours,

determine my fees, use my own equipment, purchase my own malpractice insurance, and my clients do
not expect me to be at their office at 9 am every morning. I offer my services to the public at large.
In the past few years, many companies have treated, what are actual employees, as subcontractors.
Typically, these are cut and dry situations, and there is recourse for the contractor that has actually
been treated as am employee. At tax time, the “contractor” files Form SS-8, with their return, and the
IRS will determine the status of the employee or if they are actually a contractor. When filing Form SS-
8, the employee must pay their portion of FICA, and the IRS will determine whom pays the other portion.
I have been in practice for almost 26 years. My first 20 years or so in practice, I filed Form SS-8 a
handful of times. However, in the past six years or so, I am filing at least seven to ten of these forms a
year. I have concluded the reasoning for the increase in the filings of these forms is due to the “Gig
Economy,” or companies that feel Gig Economy Companies get away with treating their workers as
contractors, why can’t they?
Four years ago, I took this dilemma head on. For four months, incognito, I became an Uber and Lyft
driver. My reasoning was to see if I was treated as an employee, or an actual contractor. I wrote an
article, and determined these ride share services were treating their drivers as contractors. My
conclusions were based on the fact that I was never told when to work, never told how to work, provided
my own vehicle, and other things.
---------
When I was a driver, I joined a driver forum on FaceBook. When I was a driver I would use this forum a
lot. However, since my experiment ended, I occasionally check this forum, just to see what is going on.
In four years, both Uber and Lyft have changed their platforms and payouts for drivers. For example,
when a rider requests a ride, these ride share services collect the money, and give a percentage to the
driver. In theory, there is nothing wrong with that, however the payouts to drivers have decreased an
average of 20%. Further, Uber specifically, used to give drivers incentives to drive in certain areas, by
using something called “surges.” These surges were the result of a lot of riders requesting rides in a
certain area, and their not being enough drivers to accommodate the demand. Sometimes, the need
for drivers was so extreme, Uber would raise their prices by ten times the original price, and give the
driver more money than usual to pick these riders up in these locations and deliver them to their
destination.
However, surge pricing has changed for Uber. Mainly because Lyft would be cheaper. As a
consequence, Uber’s fees for surges would be less, therefore the payouts to drivers would be less. This
caused an uproar with most drivers. However, it just led to them complaining in the groups, and not
much more. On the surface, this is just capitalism at work. When there is competition, and your
competitor lowers their prices, all things remaining the same, you as a business have to do the same
thing.
According to CBS News, to protest these pay cuts for drivers, drivers of these ridesharing services are
planning strikes in many major cities. Some strikers are demanding an hourly wage of $28. The drivers
claim this amount was derived as an hourly wage of $17 an hour, with the rest to be used as gas and
tolls.
However, something odd has happened recently. In the last few months Lyft went public. When a
company goes public the set a stock price called an Initial Price Offering (IPO). The IPO price is mainly
limited to certain institutional investors and other companies. It is extremely rare for an individual to
be allowed to buy the stock at the IPO price. Most IPO prices are set by the brokerage firms handling
the IPO. When the day comes that the stock is listed on the exchange, the price of the stock offered to
the public is more than the initial IPO price.
It is typical for companies going public to offer these IPO prices to their employees. The reasoning, is
that most of these employees accept a lower salary, and the incentive of the IPO is a way for the
company to make up for the reduced salary. However, here is where it goes sideways, when Lyft went
public, they offered their drivers a “cash incentive,” based on the amount of rides the driver had
preformed to purchase the stock at the IPO price, before it went public. The driver could either pocket
the cash, or Lyft would refer them to the brokerage house handling the IPO to purchase shares at the
IPO price. Not to be outdone, Uber is set to public in May, and has done the same for their drivers, that
Lyft did.
---------
You may be asking yourself, “what’s the problem?” Let’s go back to my example. I am truly self-
employed. In all my years in practice, a handful of my clients have gone public. I was never offered a
“bonus,” that could be used to buy their stock at the IPO price. I imagine, if I asked to buy at the IPO
price, it would be in lieu of my fee, and not given to me as a bonus. The main reason why I was never
offered a bonus similar to these drivers is that I am self-employed and not an employee. What would be
the incentive of these companies to just give me something with the offer to “get in” on a lower stock
price, with the goal to then sell it when listed to make more money?
These cash incentives offered by these rideshare services, for the purpose of buying shares at the IPO
price, could be construed as Incentive Stock Options (ISO). ISO are usually given to employees of a
company for them accepting a lower rate of pay, with the hopes that once the company goes public
those shares can be sold, thus making up for the lower pay.
In 2015, when the payment company Square went public, they used a similar method. However, they
offered the IPO price to merchants that were either using their payment platform, or began to use the
platform.
I have spoken with some riders, and they have retorted that they signed an independent contractor
agreement, stating that they were not employees, and were responsible for their own taxes. Federal
Tax Law does not allow a person or entity, to convert their tax obligations onto someone else.
To further muddy the waters, at year end riders are issued Form 1099-K. The intention of Form 1099-k is
to report income received by the participant from third party networks, such as credit cards, PayPal,
and the like. Riders do not directly receive third party transactions. The Ridesharing company does.
The riders receive cash. Most contractors receive Form 1099-MISC with Box 7 filled out denoting non-
employee compensation. For example if I outsource some accounting work and my client pays me with
a credit card. When I pay my contractor I pay them in cash. If I pay them more than $600 I am required
to send them a Form 1099-MISC. Sending them a Form 1099-K would entail that my contractor received
the credit card payment.
To go a step further, Form 1099-K reports the total credit card transactions received from the
Ridesharing Company. It does not denote any merchant fees, or transaction fees paid by the
Ridesharing company. Further, it doesn’t denote the difference between what the Rideshare Company
received, and what they paid the rider.
All of these particular situations taken in part wouldn’t denote an employee/employer relationship.
However, taken as a whole it becomes questionable.
---------
The first question would be, is control over the driver exerted by the Ridesharing Company? In one
sense the answer would be no. The driver drives when they want, accepts rides they want. However, if
a rider complains to the Rideshare Company about a rider, the company will, in most cases, not make
the rider pay for the ride, and take away the driver’s cut of the ride. That can be conceived as control.
Further, if a driver elects not to purchase rideshare insurance, Rideshare Companies have a blanket
insurance policy covering situations such as accidents. Again, this treating the driver as an employee.
For example, if I use a contractor, I require them to have their own malpractice insurance in case some
issue arises. I don’t require my employees to do so, as they are covered by my malpractice insurance.
If there is more demand for my services, I don’t incentivize my contractors or employees. I simply
either charge the client more, not sharing the extra fees with my employees or contractors. I may pay
overtime to my employees, but my contractors are not my employees, so I don’t. My other options are
to hire more employees and get more contractors to meet the demand, or just turn the client away.
If I have a major competitor, and choose to lower my prices, I will either layoff employees and
contractors. I won’t change their salaries or amounts paid to contractors.
Finally, it is common to pay employees, not contractors bonuses for doing extra work. However, if my
company were to go public, and an IPO price was determined, I might offer the price of the IPO to the
employee, but I would not give either an employee or contractor a bonus, whose purpose is to purchase
my stock at the IPO price. Of course in the case of Uber and Lyft, the contractors can pocket the cash,
but the purpose is to by the stock.
When Lyft set it’s IPO, the bonuses that were paid were based on the amount of rides the driver
performed at a particular time. Reportedly, drivers that completed 10,000 rides were given $1,000.
Those drivers that had completed 20,000 trips were given $10,000. Uber is following the same model
as their official public offering date is approaching. Not to mention that income received by these
drivers are reported on 1099-K and not 1099-MISC, is all curious.
In 2018 New York was the first state to institute a minimum wage for drivers. They set the minimum
wage at $17.00. This policy has set off discussions in other states about requiring the same.
As a whole, the IRS could construe that these drivers are in fact employees. Especially with the various
lawsuits claiming the same.
Four years after my experiment, with all of these changes these Ridesharing Companies have made, I
would be inclined to file Form SS-8 for any driver, and let the IRS determine whether these drivers are in
fact independent or employees.
======
Craig W. Smalley, MST, EA, has been admitted to practice before the Internal Revenue Service as an
Enrolled Agent, has a Certificate in Taxation from UCLA, and is a Certified Tax Resolution Specialist. He
has been in practice since 1994. He is the CEO and Founder of CWSEAPA, PLLC, Tax Crisis Center, LLC,
and Cannabis Accounting Group. All three companies have offices in Delaware, Florida, and Nevada. He
has been published in the New York Times, Chicago Tribune, NASDAQ, Yahoo Finance, Christian Science
Monitor, and is a columnist for accounting trade publications, including AICPA Tax Insider,
Ganjaprenuer., CPA Trendlines, and Cannabis Business Executive. He specializes in taxation, and is well
versed on U.S. Tax Court rulings. He has appeared as a guest on countless radio shows and podcasts.
He can be reached at craig@cwseapa.com.
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Posted Byjeffkirk Apr 29 2019 13:59

As for insurance: while individual drivers can purchase "rideshare riders" for their personal
auto policies, Uber & Lyft provide blanket liability policies for ALL drivers except for those in
the state of New York (much longer story there). Most taxi franchises have operated in a
similar manner for over 40 years, so I don't think this alone would affect ride-hail drivers'
employment classifications (or suggest any greater level of "control"). As for the bonuses
provided to longer-term drivers in advance of their IPOs: these bonuses were received within
the past couple of months, so wouldn't they go on drivers' 1099s *next* year? (again, I'm not
at all a tax expert) Agreed that offering drivers such bonuses in the first place is unusual, but
knowing the two companies to the extent I do -- including their various, HIGHLY extensive
legal strategies -- I think there's virtually no chance their legal counsel would've signed off on
any such plan if they believed it could in any way impact drivers' employment classification.
(Btw in this case I mean tax-expert lawyers, and both Uber & Lyft routinely hire the best firms
in the country for matters they don't handle in-house.)

Hmmm - any way to add paragraph breaks in comments? My last one's a bit of a jumble. Just
to comment on a few of your own statements: first, Uber didn't reduce or eliminate surge
pricing because of Lyft, which has always had its own form of it (Prime Time). Drivers'
biggest beef in this regard has been both companies' switch to a flat-rate pricing model,
which makes specific surge multiples notably opaque (for drivers and passengers alike)
while at the same time increasing U/L's commissions well beyond the 20% (plus "booking
fees") they originally sought. Worsening matters further, they've continued cutting fares to the
bone in what is plainly a war of attrition neither Uber nor Lyft can possibly "win." It's inevitable
that both companies will have to raise fares in order to have any hope of becoming profitable
-- and btw the economist Steven Levitt already proved, using ridership data from 50 million
Uber rides in four major U.S. cities, that they could do so without a significant decline in
ridership. I also see no other realistic option but for both to significantly increase driver
incomes at the same time, if only because they've burned through such huge numbers of
drivers at this stage (for a variety of reasons, but low pay being likely the main one).

Craig - kudos for writing one of the most insightful articles I've seen to date on this topic. The
ride-hail industry is an area where I have extensive subject-matter expertise -- albeit primarily
from a legal and public policy angle -- and I reached the same conclusion you did (also after
personally engaging in ride-hail driving work): drivers are correctly classified as contractors. I
did, however, want to point out some additional factors that led me to this conclusion, and I'll
note that I'm not a CPA and don't specialize in tax law specifically. First, obviously you know
the IRS has its own definitions for what does and doesn't qualify as "control" in an employee-
versus-contractor context, but what you may not know is that nearly all labor law exists at the
state, not federal, law, and nearly all of the litigation on the topic has been adjudicated on the
basis of the former. Even in the two main class-action cases to date filed against Uber and
Lyft, the plaintiffs initially sought redress in federal court but in each case the judges ended
up hearing them under the auspices of California law. (Both suits were filed in San Francisco,
and under what's known as the Erie Doctrine, federal judges are allowed to adjudicate cases
under state law if they don't merit it under federal law. Since labor laws vary so widely
between states, both judges concluded they would be impossible to decide on a multistate
basis.) While I'm admittedly unfamiliar with how the IRS reaches its own conclusions on the
subject, there's one federal-level court decision -- dating back over 35 years -- that rather
clearly suggests for-hire drivers qualify as contractors, not employees. In the early 1980s a
group of Minneapolis taxi drivers sought reclassification as employees, and filed a complaint
with the NLRB seeking it. The Board ruled in their favor. The taxi-company defendants
appealed the decision to the D.C. Circuit, which reversed (and nullified) the NLRB ruling. You
can read the full decision here: https://law.justia.com/cases/federal/appellate-
courts/F2/721/366/162468/ It's important to note here that the D.C. Circuit is unique in that
it has exclusive jurisdiction over federal agency decisions, and unless the Supreme Court
opts to hear an appeal of one of its cases -- which is a rarity, in large part because most of its
justices come directly *from* the D.C. Circuit -- its decisions qualify as de facto national
precedent: this is what happened here. Further, the ruling stands as valid precedent even
today, and further still, there's no rational basis as a matter of law for treating taxi drivers and
Uber/Lyft drivers any differently in terms of employment classification. If the IRS uses federal
court precedent for devising its own guidelines, this would suggest that it would adhere to
the D.C. court's decision. I'd also note that there's almost no chance any state court ruling
that drivers should be classified as employees would stand regardless. Labor law may
primarily exist at the state level, but arbitration law is a wholly federal matter, and nearly all of
the California plaintiffs in the two class-action suits had previously signed employment
contracts agreeing to a) settle any and all legal claims against the companies under binding
arbitration, not in courts of law; and b) to refrain from taking part in class-action proceedings
against them. The U.S. Supreme Court has, in recent years, adopted a near-absolutist stance
on arbitration clauses in contracts of any sort; they've asserted that they're binding in literally
nearly all cases. Last year the Court heard its first case specific to arbitration contracts in
employment contracts, and concluded they're binding as well. This was the effective nail in
the coffin for both California class-action suits, along with all future ones: the plaintiffs
agreed to settle the cases for a fraction of the amount originally sought, and drop any and all
legal claims -- present *and* future -- that drivers should be reclassified as employees.
Further still, federal law nearly always trumps state law, so even if the California legislature
were to pass a bill reclassifying drivers as employees, the federal arbitration-law decision
would render it immediately moot. I have some other remarks but will go ahead and post this
one since it's gotten rather lengthy!
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4/29/2019 Employee or Contractor? Have Uber and Lyft Finally Crossed The Line?

Employee or Contractor? Have Uber and

A contractor is considered self-employed. For example, I am self-employed. I set my own hours,

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This site requires you to login or register to post a comment.

Posted Byjeffkirk Apr 29 2019 13:59

Posted Byjeffkirk Apr 29 2019 13:45

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