Ridesharing companies like Uber and Lyft have been front and center in recent media stories and court decisions. All across the country, drivers have brought lawsuits arguing that they are employees of these companies, rather than independent contractors. If you own a business and think these stories have no relevance to you, think again.
What Are the Potential Consequences for Businesses?
All business owners who pay others for services should understand the difference between employees and independent contractors. That’s because a business that employs workers is required by law to do the following things:
- Pay minimum wage and overtime;
- Withhold federal and state taxes; and
- Provide certain benefits such as mandatory meal and break periods.
Independent contractors are their own employers. They are responsible for the above items if they truly not the employee of the business who engages their services. When an employer calls a worker either an employee or an independent contractor, it has “classified” that employee for the purposes of law. Improperly classifying an employee as an independent contractor can have drastic consequences for a business.
The federal Fair Labor Standards Act allows the United States Department of Labor to go back at least two years in evaluating wage issues. The Internal Revenue Service can audit tax returns for three years and can assess civil penalties for payroll tax liabilities for 10 years. As you can imagine, settlements, back taxes, and penalties can add up quickly.
Additionally, if a worker injures a third party, the business may be sued for damages. For example, lawsuits have been brought against ridesharing companies after drivers were allegedly negligent in their driving. Most states allow injured parties to bring lawsuits for two or three years after an injury occurs. That is a long period of worry.
What Can You Do?
How can you reduce your potential liability? Don’t rely on contracts that call workers “independent contractors” unless they really are in control of their work. While most courts will consider what the parties considered the relationship to be when determining classification, many other factors are also considered. For example, courts typically look at who supplies necessary tools and equipment, who determines the methods of work, how work is evaluated, and how payment is made. The core issue is the extent to which the company controls or has the right to control the work and the way in which it is performed.
Don’t be surprised when the Internal Revenue Service, the Department of Labor, or a process server come knocking. Call today to make an appointment for a LIFT Start-Up Session, which includes employment structuring, financial, and tax systems you need for your business.