The last third of 2020 saw several important developments in the arena of worker classification. For a general review of the classification issue, see the article published in the summer edition of ABA Tax
I.\u2002New York Decision on Uber Drivers
In the last weeks of the year, an intermediate appellate court for New York held, in the Matter of the Claim of Colin Lowry (Uber Tech., Inc. - Commissioner ofthat Uber Technologies, Inc. (Uber) exercises sufficient control over the drivers who utilize the company's smart phone application (app) as to establish an employment relationship. This ruling comes in the wake of a decision in June 2020 by the New York Court of Appeals (New York's highest court) in Matter of Vega (Postmates, Inc. - Commissioner of that a courier for an app-based delivery service was an employee for purposes of New York State Unemployment Insurance.
The case resulted from Uber's appeal of two decisions by the New York Unemployment Insurance Appeal Board. The Board ruled, among other things, that Uber was liable for additional unemployment insurance contributions on amounts paid to the Claimant, Mr. Lowry, and others similarly situated to him. As a matter of judicial organization, the Third Department exercises jurisdiction generally over the New York counties surrounding Albany. The Claimant was engaged by Uber as a driver in the firm's upstate New York market and applied for New York unemployment insurance benefits after he stopped participating with the Uber platform. Accordingly, the court cautioned that its decision was limited to drivers in upstate New York markets and expressly does not apply to the separate market that Uber operates in New York City (which lies within the purview of the First Department). Nonetheless, since January 2019 the New York City Taxi & Limousine Commission has imposed a minimum wage on Uber drivers that started at $17.22 perIt is not known at this time whether there will be an appeal to the state's highest appellate court. The Matter of Vega case makes clear, however, that a majority of that court already leans towards employee-status for ride-hailing app drivers, such as the driver at issue here.
Quoting another case, the Lowry court explained the level of deference it granted to the administrative board.
[W]hether an employment relationship exists within the meaning of the unemployment insurance law is a question of fact, no one factor is determinative and the determination of the \u2026 board, if supported by substantial evidence on the record as a whole, is beyond judicial review even though there is evidence in the record that would have supported a contrary
The "relevant inquiry is whether the purported employer exercised control over the results produced or the means used to achieve those results, with control over the latter being the more important
The court noted the basic facts regarding the operation of the Uber app. To become a driver, the Claimant had to provide Uber with a valid driver's license, vehicle registration, and driver history check and was required to sign a technology services agreement (TSA) providing that an Uber driver must use his or her own vehicle that must be less than 15 years old and equipped with certain features (e.g., working windows and air conditioning). An approved prospective driver receives from Uber a driver ID and password to log on to Uber's digital platform using a smartphone app. A driver has no set schedule but chooses, when available, to log onto the Uber app. Uber may, however, deactivate the account of a driver who does not provide transportation services through Uber's app to a customer at least once a month.
The Uber platform uses its GPS navigation system to refer customers by sending the location of a customer who has requested transportation to the logged-in driver who is in closest proximity. The selected driver has 15 seconds to accept the customer's request, or it will be sent to the next closest driver. Uber drivers are not penalized for refusing a customer request. Once a driver has accepted a customer request, the Uber platform sends the customer the driver's location and the estimated fare. Uber calculates the fare and collects it at the end of the trip. After subtracting 20 percent to 30 percent of the collected fare as a "service fee," Uber pays the balance to the driver, who also may keep any tip the customer chooses to include. If, on the other hand, Uber cannot collect the fee, the company absorbs the loss. Uber also pays the driver a "cancellation fee" that Uber charges if a customer cancels a trip after two minutes or does not show up after the driver has waited for more than five minutes. Uber recommends, however, that drivers wait at least 10 minutes for a customer to show up at a requested pick-up site.
A driver does not learn the requested drop-off point until after accepting a trip request and picking up a customer. A driver is permitted to use another navigation system or the driver's personal knowledge to select a route, but the TSA entitles Uber to reduce the charge for an "inefficient" route. Drivers are similarly responsible for all their fuel and maintenance costs, but Uber provides drivers who complete a certain number of trips each month use of a gasoline credit card with discounts for gasoline and other items. Uber incorporates any tolls into the fare charged to the customer and then reimburses the driver. If a customer damages a driver's vehicle, Uber reimburses the driver for repairs.
Uber exercises various controls through prohibitions and rankings. A driver may not transport any individuals other than the customer and the customer's authorized passengers during a trip. Uber forbids a driver from physically contacting customers during the course of a trip, using inappropriate language or gestures, and contacting a customer after the trip is over. In addition to handling all complaints by customers, the company employs an anonymous five-star rating system by which drivers and customers rate each other after a trip has been completed: the scores are available on Uber's digital platform. Customers may rate drivers on navigation, vehicle cleanliness, and the driver's communication with the customer, among other factors. If a driver falls below a 4.6 overall rating, Uber provides improvement tips and may deactivate a driver's account if the driver's score remains below 4.6.
The Lowry court found that there was substantial evidence in the administrative proceedings record to support the finding of the Unemployment Insurance Appeal Board that Uber exercised sufficient control over drivers under the TSA to establish an employment relationship. Uber controls the drivers' access to Uber's customers, calculates and collects the fares, and sets the drivers' rate of compensation. Furthermore, even though drivers may choose the route to use, Uber provides a navigation system, tracks the driver's location on the app throughout the trip, and reserves the right to adjust the fare if a driver takes an inefficient route. In addition, Uber controls the type of vehicle used, precludes certain driver behavior, and uses its rating system to encourage and promote drivers to conduct themselves in a way that maintains "a positive environment" and "a fun atmosphere in the car." Accordingly, the court found no reason to disturb the Board's finding of an employment relationship between Uber and the drivers who use its app pursuant to the TSA.
As was noted in the August 2020 Tax Times article, New York courts and governmental entities generally employ the same "three-pronged" (or common law) test for employment status that the IRS uses. The three categories of factors that this test examines are financial control, behavioral control, and the relationship between the parties. In determining whether the driver in this case was an employee of Uber for purposes of the New York State Unemployment Insurance law, the court appears to have focused primarily on the behavioral control and financial control factors, while placing less emphasis on the nature of the contractual relationship created by the TSA. Based on the TSA's empowerment of Uber to influence a driver's behavior and to dictate the fares that drivers may charge (and collect), the court seems to have treated the TSA title as a misnomer.
Significantly, this holding regarding Uber drivers is expressly limited to application of the New York State Unemployment Insurance laws. Whether a different outcome would result if these same tests were applied in connection with enforcement of the states' wage & hours laws or worker compensation statutes, even in the wake of the holding by the New York Court of Appeals in Matter of Vega, remains an open question.
II.\u2002California Voters Pass Prop. 22 Addressing Gig Workers
In late 2019, the California legislature enacted Assembly Bill 5 (AB 5), effective on January 1, 2020. The chief impact of AB 5 was to force companies marketing ride-hailing apps--such as Uber, Lyft, and DoorDash--to recategorize as employees drivers who use their respective app that they have been treating as independent contractors.
There were outcries from many in the business community that the "ABC Test" in AB5 would cast many who have traditionally been treated as independent contractors as employees, such as freelance writers, cartoonists, and photographers. At the center of business leaders' concerns was category B of the ABC Test, which generally requires that a service provider that is characterized as an independent contractor must perform services that are outside the usual scope of the service recipient's business. In response, California enacted Assembly Bill 2577 (AB 2577) to exempt certain categories of professionals from the ABC Test.
Nonetheless, imposition of this category B to ride-hailing companies, as part of the general adoption of the ABC Test, was enormously disliked by the state's burgeoning technology industry. Consensus coalesced among Silicon Valley companies around the need for a clear-cut exemption from the B category (though these app-based company contractor roles were exactly what AB5 was intended to change). They heavily lobbied for passage of Prop. 22, with several of the prominent Silicon Valley companies that market ride-hailing applications (notably, Uber and Lyft) providing strong financial support for the Prop. 22 effort--estimated to be overOn November 3, 2020, 58 percent of the voters going to the polls in California endorsed ballot Prop. 22.
As enacted into law under California's ballot measure process, Prop. 22 deems app-based ride-hailing and delivery drivers to be independent contractors by exempting the performance of such services from the ambit of AB 5. As a corollary, however, Prop. 22 also entitles these independent contractor service providers to certain employee-like benefits. For example, ride-hailing companies must now pay drivers 120 percent of the prevailing local minimum wage for each hour the driver spends driving (but not for time spent waiting for a customer). This measure is similar in economic effect to the minimum wage requirement imposed in 2019 by the New York City Taxi & Limousine Commission. In addition, ride-hailing companies must provide those drivers who work at least 15 hours a week a stipend good for the purchase of health insurance coverage, with even more to drivers who work 25 hours a week. Furthermore, drivers must now also receive occupational accident insurance, along with coverage for medical expenses and disability benefits. They may not work more than 12 hours during a 24-hour period for the same ride-hailing company. Workplace discrimination is also expressly prohibited, and companies must develop sexual harassment policies, conduct criminal background checks, and mandate driver safety training.
Prop. 22 thus seems to have created a new hybrid status for drivers, a sort of "employee-lite," but without the express protections afforded by the full status of being an employee. Those fuller employee protections include the applicability of federal and state wage & hour laws, the availability of Title VII and other remedial statutes addressing unlawful discrimination, and, significantly, the right to collectively bargain under the National Labor Relations Act (NLRA) and similar law.
III.\u2002U.S. Department of Labor Issues Final Regulations Defining "Independent Contractor"
On January 6, 2021, the U.S. Department of Labor (DOL) finalized the regulations<\/u> it had issued in proposed form in September 2020 defining an independent contractor for purposes of determining applicability of the federal wage & hours laws requiring minimum wage and overtime payments under the Fair Labor Standards Act (FLSA). Prior to these regulations, the definition for FLSA purposes was based on judicial interpretations and related state statutes. The rule was expected to be effective as of March 8, 2021, but the Biden administration has delayed implementation until May 7 to allow further consideration and possible changes to the
Theuses an "economic reality" test to determine whether a service provider is in business for himself (and thus an independent contractor) or is economically dependent on a service recipient for work (and thus an employee) for purposes of the FLSA. Under the new rule, the two core factors most important in making this determination are:
- The nature and degree of control over the work; and
- The worker's opportunity for profit or loss based on initiative and/or investment. <\/ol>
- The amount of skill required for the work;
- The degree of permanence of the working relationship between the worker and the potential employer; and
- Whether the work is part of an integrated unit of production. <\/ol>
The final regulations also point to three other factors that may serve as additional guideposts, especially if the two core factors do not point to the same classification. These factors are:
Under the regulations, the actual practice of the worker and potential employer is more relevant than what may be theoretically or contractually possible.
IV.\u2002Impact of the Pandemic and the CARES Act
To a significant extent, the COVID-19 Pandemic and the bipartisan federal response to it have overtaken the issue of whether gig workers should be afforded the benefits of employee status. For example, Congress made sure that the benefits of the Pandemic Unemployment Assistance Program (PUA) that it enacted under thewere open to gig workers--i.e., individuals, such as independent contractors, who would not otherwise be eligible for assistance from state unemployment insurance programs. As a matter of evolving workforce policy, addition of this feature to the PUA is consistent with both the Prop. 22 model (i.e., an independent contractor with benefits, including entitlement to be paid a minimum wage) and the more narrowly focused mandate issued by the New York City Taxi & Limousine Commission extending a minimum wage floor to ride-hailing drivers.
By the same token, the DOL regulations, if applied to these initiatives from California and New York City, seem to mandate a finding of employee status for ride-hailing drivers, at least for purposes of the FLSA. For example, it is hard to argue that a gig worker who is entitled by state or local law to a minimum payment for each hour of labor that (for now, at least) exceeds the minimum wage amount mandated under the FLSA is not entitled to the status of employee for FLSA purposes. Similarly, it is difficult to ascertain the extent to which a driver who must wait to be connected through a ride-sharing app with a potential customer and who must then accept a fare amount that the ride-sharing app sets (after skimming its own cut off the top) is not economically dependent on someone else's business--i.e., that of the company that owns the ride-share app.
The worker classification law is in a period of intense flux and evolution. As workforce policymakers struggle to adjust to the changing nature of work--as well as to catastrophes imposed by nature--entrepreneurs continue to apply their prodigious energy and talents to introducing new ways of interacting with and compensating those who provide services. Given the unsettled independent contractor vs employee landscape, lawyers will need to exercise creativity tempered with sensitive judgment. ■