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Are your Workers Independent Contractors or Employees?


At the beginning of this month, a federal judge in California issued a ruling that allows a class-action lawsuit against Uber to move forward that challenges the drivers’ status as independent contractors, as opposed to employees.  Uber is appealing the ruling, arguing that the individuals do not have enough in common to sue as a class, as well as, for other various reasons.  At this time, the class is limited to Uber drivers in California who did not waive their right to class-actions against Uber.  The course of this action could not only have a vast impact on Uber, but also on small businesses and start-ups that utilize independent contractors instead of employees.  Several businesses across the country have already changed their business model in order to protect themselves from the consequences of misclassifying workers, such as tax penalties and lawsuits, and many start-ups are consulting attorneys at the outset in order to determine how their workers should be classified and how to set it up correctly.  In the franchise context, many franchisors require their franchisees to acknowledge and agree that the franchisee is an independent contractor and that no other type of relationship is created between the parties.  This is why many franchise locations have signs that state it is an “independently owned and operated” location.  Having the franchise set up this way is a key aspect of the franchise model and provides many benefits to both the franchisee and the franchisor.  However, it is important to know that an employer-employee relationship can be deemed to exist, even if you expressly label the worker as an independent contractor.

So how exactly are you supposed to know whether your workers are independent contractors or employees?  At its most basic level, the answer to this question is based upon the degree of control you will have over the worker and the amount of independence the worker exercises in performing the work.  The Internal Revenue Service’s resources for small business owners provides the following questions to help determine whether or not your workers should be classified as independent contractors or employees:

  1. Does the business owner control, or have the right to control, what the worker does and how the worker does it?
  2. Are the business aspects of the worker’s job controlled by the payer? This includes such factors as how the worker is paid, whether or not the worker’s expenses are reimbursed, and who provides the equipment used by the worker, just to name a few.
  3. Are there written contracts and/or employee-type benefits?
  4. Will the relationship continue and is the work performed a key aspect of your business?

Since the question ultimately turns on the degree of control an employer has over its worker, the analysis is a fact specific one and the answer is unique to each business and circumstance.  Some answers may lean toward the worker being classified as an employee, while others weigh in favor of the worker being an independent contractor.  This is why it is important to consult a local attorney to assist you in determining which business model is correct and is the most practical for your business in order to avoid misclassifying your workers, as well as, the consequences associated with doing so.

As the Uber class-action lawsuit progresses, it will be one for all business owners to keep an eye on since it has the potential to change the landscape for determining worker classification and how businesses should be set up in relation to their workers moving forward.