The Difference between an Employee and an Independent Contractor and its Legal Ramifications
The following article was written by Samuel S. Saltman from Callagy Law’s Legal Team, and will focus on many common questions and concerns surrounding new developments, legal matters, and other procedures within the business and commercial litigation. Our mission is to answer any questions and give knowledge to many different aspects of these matters.
Uber is finding out the hard way that formal written employment contracts are … uber important.
The booming ridesharing company has lost recent legal battles over the classification of its drivers as either employees or independent contractors. The drivers sued for, among other things, unemployment benefits and outstanding business expenses. In these cases, whether Uber drivers are classified as employees or independent contractors makes all the difference: If the former, they are entitled to the compensation they seek; if the latter, nothing.
Clearly, the law treats employees much better than it treats independent contractors. Unlike independent contractors, employees are covered by a multitude of state and federal laws, including minimum wage, overtime, antidiscrimination, workers’ compensation benefits, and, of course, business expenses and unemployment benefits. There are also significant tax withholding differences between the two.
So what distinguishes an employee from an independent contractor? While there is no bright-line rule, courts focus on a variety of factors, including:
- whether the worker can earn a profit or suffer a loss from the work (if so, more likely an independent contractor);
- whether the worker earns a wage or is paid per job/project (if the former, more likely an employee; if the latter, independent contractor);
- whether the worker invests in equipment (if so, more likely an independent contractor); and
- whether the worker provides services that are integral to the company’s day-to-day operations (if so, more likely an employee).
From a company’s perspective, both classifications have pros and cons. For Uber, having to pay, for example, overtime and worker’s compensation benefits to its thousands of drivers across the country is clearly an expense inimical to its business model – or so it thinks. But Uber does exert significant control over its drivers in the form of sole discretion over fares, the right to charge drivers a cancellation fee if they reject a passenger, prohibitions against picking up passengers without using the Uber app, and the right to suspend or deactivate drivers’ accounts. Uber drivers appear to be telling their “employer” – you can’t have our cars and drive them too.
Despite the recent Uber driver victories, states across the nation are split on the issue of their classification. Georgia, Pennsylvania, Colorado, Indiana, Texas, New York, Illinois, and California have found them to be independent contractors, although a recent case in California is challenging that. The lesson to be learned here is that whatever classification you decide is right for your business model, it’s best to put the terms of employment into a formal written agreement signed by the worker.
Even written agreements, however, are not fail-proof. The actual circumstances of the relationship matters more. Of course, a carefully worded written employment agreement should dictate those circumstances and will strongly support the company’s position in court. At Callagy Law, we have years of experience drafting such agreements and enforcing them in court, and can advise you every step of the way to ensure that you and your workers have an uber-clear understanding of your relationship.
We hope you found the information provided in this article helpful to your everyday life and business. Please free to reach out to Sean Callagy or the Callagy Law team at any time for questions you may have concerning personal and business matters. Callagy Law’s headquarters is located conveniently in Paramus, NJ. Beyond the scope of information, Sean Callagy has developed multiple areas of business legal practice and business coaching, if you need help with anything, please reach out to us by calling 201-261-1700 or by emailing us here. Feel free to connect with us on Facebook, Twitter or LinkedIn! Additionally you can subscribe to our daily videos on YouTube by clicking here.
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Uber-Important: Employee Contracts! | Callagy Law
