In 2020, the number of drivers in the United States working for Uber was estimated at around 1 million. That’s nothing short of impressive, given the fact that the company was established a little more than a decade ago – in 2009.
However, even though Uber, but also other ridesharing companies have experienced a period of quick growth, it is in no small part a result of the employment status of its workers. In this article, we’ll explain whether Uber drivers are independent contractors or employees. We will also focus on the differences between those two, and the potential consequences of the reclassification.
What’s the Difference Between Employees and Independent Contractors?
Before we can properly understand the current situation of Uber and Lyft drivers in the United States, we must first explain the difference between an employee and an independent contractor.
An employee is someone who works according to the directions given by an employer, with a limited amount of freedom on the employee’s part.
An independent contractor, on the other hand, often doesn’t work for a single employee, but rather, is free to offer their services to anyone. On top of that, independent contractors are not being supervised by their superiors, and they work according to their own schedule. Unfortunately, they are not eligible for unemployment benefits.
Although independent contractors have more freedom in how they work and when they work, they are self-employed, and as such, they have to pay the self-employment tax, which consists of two parts: social security and Medicare. Still, it’s just the tip of the iceberg.
- earn at least the minimum wage (currently it’s $7.25, though in around half of the states, the minimum wage is higher)
- get paid more for overtime
- often receive paid time off
- might receive employment benefits
- are free to join a union
Whereas apart from the already mentioned aspects, independent contractors:
- can work for different companies at the same time (even for competitors)
- have to use their own tools and resources (e.g., cars, laptops, etc.)
- cannot join a union
- have to pay higher taxes
- no paid time off
Now, the tricky part is that the Department of Labor, Internal Revenue Service, and other government agencies differentiate between employees and independent contractors based on a set of different criteria.
When it comes to the IRS, the three most important aspects according to which it decides whether someone is an employee or an independent contractor are: behavioral control, financial control, and relationship.
Workers are classified as employees if they might receive instructions from the other party in regard to their work, which they would then have to follow. Still, it’s not that simple – if the instructions are very detailed, then there is a higher chance that workers are employees, whereas if they are only general, then they might be classified as independent contractors. It’s also worth adding that the employers don’t have to actively exercise their control over the employees – it is enough if they just have the right to do so.
The second aspect, financial control, has to do with the equipment of the workers, but also the way in which they are getting paid. If the workers receive costly equipment that’s necessary for work, like a car, it could mean that they are employees. On the other hand, if they are paid a flat fee, instead of weekly or monthly salaries, then there is a higher chance that they are independent contractors.
When it comes to the final criteria that the IRS takes into consideration when deciding whether someone is an employee, things like insurance, paid time off, or sick leave come into play, as independent contractors are rarely eligible for such benefits. Apart from that, it is also important to consider the nature of the work provided by the worker – is it essential to the type of services provided by a company? Is their help necessary to conduct day-to-day business, or are they needed only occasionally?
On top of that, it is possible for various professions to be treated differently by different federal or state agencies, which certainly adds to the confusion.
What Is the Law on Uber Driver Employment?
Uber, but also other ride-hailing companies have spared no resources for legal battles but also promotion of legislations that would help them avoid having to treat their workers as employees. Now, the status of Uber drivers varies in different parts of the world, and with intense efforts on both sides, new developments are to be expected. When it comes to the United States, Uber drivers are treated as independent contractors. However, even in the United States, the issue isn’t entirely clear cut.
In 2019, the AB 5 Bill codified and expanded upon an ABC test to differentiate between the employees and independent contractors. Workers are deemed to be independent contractors if:
- they are not being controlled or supervised by the hiring entity
- they don’t perform work that is essential to the business
- they can run their own business that would offer similar services to those specified in the contract or work for the competitors
It is also important to note that for workers to be given the status of independent contractors, they have to meet all 3 criteria.
Does it mean that Uber drivers in California now have an employee status? No.
The bill was met with fierce opposition from ride-hailing companies, such as Uber and Lyft, as according to the new law, they would have to raise their wages and provide sick leave, among others. Their initial lobbying efforts against the bill were unsuccessful, just like their later attempts to change the bill so that ride-sharing companies would be exempted from having to follow the new law.
However, that’s not the end of this story. Uber, alongside Lyft, DoorDash, Instacart, and Postmates, were heavily involved in funding a ballot proposition, known as Proposition 22. If it were to pass, the drivers would retain their status of independent contractors, though the ride-hailing companies would have to:
- slightly increase their wages
- provide health insurance to drivers who drive on average for more than 15 hours per week
- provide compensation for the lost income of the drivers if it was a result of the injuries sustained during their work
- provide additional training and prevent discrimination in the workplace
Uber and other ride-sharing companies argued that the provisions of the AB 5 Bill would be bad for both the customers and the drivers themselves. The fares for the rides would have to be increased by 25% to 111%, depending on the area, and the company would have to fire around 80% of the drivers.
Proposition 22 passed with almost 59% of the votes, and as a result, the Uber drivers are treated as independent contractors.
What’s the Employment Status of Other Rideshare Drivers Such as Lyft Drivers?
The employment status of Lyft drivers in the United States is the same as that of Uber drivers – they are independent contractors. For a brief time it seemed like the situation of Lyft drivers in California would change, but a passage of Proposition 22 means that they will retain their status for now.
What Is the Employment Status of Delivery Drivers?
Currently, the drivers in the United States working for companies such as Uber, Lyft, or Instacart have the employment status of independent contractors. The situation is similar in the case of drivers working for Amazon Flex, which is a delivery service.
What Would Happen if Uber Drivers Became Employees?
The long-term consequences of Uber drivers becoming employees are hard to ascertain, though we can certainly mention Uber’s internal reports on the expected consequences of driver’s reclassification. Those include the higher prices for the rides, with the increase ranging from 25% to 111%, based on the region. The more densely populated regions would experience a more modest increase, whereas customers in rural areas would be more affected by the change of the employment status of the drivers.
The higher prices would then result in the decreased demand, as people wouldn’t be as likely to use Uber services. Because of that, the number of drivers in California working for the company would fall by 76%.
Taking those findings into consideration, Uber claims that the reclassification would be bad for the company, its customers, but also for the drivers.
Benefits and Disadvantages of Uber Drivers Becoming Employees
When it comes to the consequences of Uber Drivers becoming employees, those include both the positive and the negative.
As independent contractors, Uber drivers have the flexibility to choose when and for how long they would like to work. Apart from that, they can also work for other ride-sharing companies, or even run their own businesses, apart from working for Uber. If they were classified as employees, they would no longer have such a possibility.
On the other hand, the reclassification would present several benefits for the drivers, such as higher wages, workers’ compensation, paid sick and vacation leave. Apart from that, as employees, their contract could not be so easily terminated, or their pay structure – changed.
Ultimately, some drivers might prefer the flexibility the status of independent contractors offers, though it also means that they are not eligible for many other things. The reclassification would result in the lowered demand, and consequently, in the number of Uber drivers falling significantly.
Recently we have witnessed many attempts to change the employment status of drivers working for ride-sharing companies. Though currently, Uber drivers in the United States are independent contractors instead of employees, it doesn’t mean that there won’t be any pieces of legislation in the near future that would once again attempt to redefine the situation.
However, it is just as likely that such efforts will be fiercely opposed by Uber, Lyft, Instacart, and other ride-sharing companies that would suffer a major blow if they had to start treating their workers as employees instead of independent contractors.
Those companies cite the negative consequences for the customers and the riders that would stem from adopting the provisions of AB 5. Higher prices for the rides would result in less demand for the Uber services, and because of that, the required number of Uber drivers would drop drastically. Still, Proposition 22 also introduced new protections for the drivers in California, though not as strong as if they were to become employees. We are yet to see if other states will not adopt similar measures.