Mark Pestronk
Q: In June, the California Labor Commission ruled that an Uber driver was an employee, not an independent contractor. That ruling surprised me because I know that Uber drivers are free to work whatever hours they want and accept or decline rides as they choose. Is the ruling applicable to the relationship between agencies and their independent contractors? Is it a binding precedent in California? What about other states? Could my agency's ICs get reclassified as employees based on the Uber ruling?
A: The Uber decision is very troublesome. The facts in that case are quite similar to those of many agency-IC relationships, so it strikes at the very heart of an industry practice.
In the California case, the driver had her own corporation, and Uber exercised almost no control over when, where and how the driver worked. To the travel industry, those facts are the essence of a valid relationship.
Nevertheless, the Labor Commission decided that the driver was an employee of Uber because the driver's "work was integral to Defendants' business. Without drivers such as Plaintiff, Defendants' business would not exist."
Other reasons for the decision were that "Defendants control the tools that the drivers use." Further, "While Defendants permit their drivers to hire other people, no one other than the ... approved drivers are allowed to use Defendants' intellectual property."
While the commission threw in some other rationales, the key appears to be the parts quoted above. In other words, if the company would not exist without the workers and if the company controls the tools and access to the system, an IC is really an employee under the law of California. The quoted rationales could be applied nearly verbatim to the agency-IC relationship. The rationales appear to have particular relevance for host agencies, where there is often no other business except that brought in by the ICs.
If a relationship gets reclassified, the company owes withholding taxes, minimum wages, overtime pay, and expense-reimbursement, interest, fines and penalties. Such liability would put many agencies out of business overnight.
The ruling defies common sense. Uber is appealing it, and you can be sure that the court's decision will also be appealed. Strictly speaking, it will have no precedential value until a decision is rendered by a California Court of Appeals or the California Supreme Court, which will take a long time.
California is probably the most anti-IC-relationship state. There is a legal presumption that every labor relationship is one of employment unless the company proves otherwise, and given the criteria of the Uber case, it is always hard to prove otherwise. If your agency is located in another state but you have an IC in California, these considerations apply to you, though I don't know of any enforcement action taken against out-of-state companies with no branches in California.
So, if your agency is ultimately affected by an adverse Uber precedent, you will need to rethink your relationships and either restructure them or simply make every IC an employee, even if your ICs are against such a change. Neither the IRS nor any other state is required to follow or even pay attention to a California precedent. Many states would undoubtedly rule differently, as would the IRS.