Employees versus independent contractors
Classification Issues: Employees versus independent contractors -
the UberBLACK example
An area where recurring problems arise for businesses and individuals is whether a persons who perform services for a businesses should be properly classified as an employee or an independent contractor. If the individuals are properly classified as employees, taxes have to be withheld, and a number of labor laws may potentially apply to the relationship, including wage and hour laws, unemployment compensation, workers’ compensation, discrimination laws, and other laws. If the individuals are properly classified as independent contractors, they operate as independent businesspersons rather than as employees.
There is no single test to distinguish independent contractors from employees for purposes of all statutes that can come into play. In other words, the test applied under the Internal Revenue Code by the IRS may be different from the test applied by Pennsylvania unemployment authorities, which may be different that the US Department of Labor’s determinations for purposes of the FLSA. One common element, however, is that courts and regulatory agencies look behind any written independent contractor agreements to the underlying realities of the relationship to determine whether the relationship is properly classified as an independent contractor relationship or an employment relationship. The existence of an independent contractor agreement does not by itself determine the nature of the relationship.
Litigation in this area is common. The results turn on the specific facts in each case.
Recently, the United States District Court for the Eastern District allowed a case to go forward on behalf of drivers in Uber’s limousine service, called “UberBLACK”, who alleged they were improperly classified as independent contractors when they should have been classified as employees. Uber sought to dismiss the case at its inception, filing a motion to dismiss the complaint. Rejecting Uber’s motion to dismiss the complaint, the court summarized the relevant test in the Third Circuit for determining employee status under the FLSA (the “economic realities” test), and noted that the drivers’ complaint properly pled questions about whether the drivers should have been classified as employees rather than independent contractors. As stated by the District Court:
In ascertaining the “economic realities” of the relationship, the following factors should be considered:
1) the degree of the alleged employer's right to control the manner in which the work is to be performed; 2) the alleged employee's opportunity for profit or loss depending upon his managerial skill; 3) the alleged employee's investment in equipment or materials required for his task, or his employment of helpers; 4) whether the service rendered requires a special skill; 5) the degree of permanence of the working relationship; [and] 6) whether the service rendered is an integral part of the alleged employer's business.
Donovan, 757 F.2d at 1382-83. Courts applying the Donovan factors are admonished that “[n]either the presence nor absence of any particular factor is dispositive,” and to consider whether, “as a matter of economic reality, the individuals are dependent upon the business to which they render service.” Id. at 1382.
The District Court faced with Uber’s motion to dismiss the case based on the allegations in the complaint had to consider whether what was stated in the complaint, if true, could sustain the claim that the UberBLACK plaintiffs were employees rather than independent contractors. The court concluded that the case should move forward through the litigation process rather than be dismissed on the face of the complaint. Quoting from the opinion:
Plaintiffs' Complaint contains several well-pleaded allegations which the court must consider true, and which weigh in favor of an employee-employer relationship being plausible under the Donovan factors. For instance, with respect to the degree of control exercised by Defendants (factor one), Plaintiffs allege, inter alia, that Defendants “control the number of fares each driver receives,” “have authority to suspend or terminate a driver's access to the App,” “are not permitted to ask for gratuity,” and “are subject to suspension or termination if they receive an unfavorable customer rating [.]” (Compl. ¶ 91). As to whether the services Plaintiffs rendered require a special skill (factor four), Plaintiffs allege that, in order to serve as Drivers, “drivers must undergo PPA training, testing, examination, a criminal background check and driving history check.” (Id. ¶ 51). As to the importance of Plaintiffs' services to the Defendants' business (factor six), Plaintiffs aver that Defendants' business is to “provide on-demand car services to the general public,” and that Plaintiffs are “drivers that perform on-demand transportation services for defendants.” (Id. ¶ 1, 24). Plaintiffs also specifically allege that they are “dependent upon the business to which they render service.” (See, e.g., id. ¶157 (“Plaintiffs and Class members are financially dependent on the fare provided to them by Defendants.”)); Donovan, 757 F.2d at 1383.
Razak v. Uber Techs., Inc., No. CV 16-573, 2016 WL 5874822, at *4 (E.D. Pa. Oct. 7, 2016)
It is important to note that this case only allows the plaintiffs to move forward with their case. It is relatively rare for cases to be dismissed on the face of the allegations in the complaint. As the case moves forward through discovery and possibly to trial, a factual record will be more fully developed upon which employee versus independent contractor status can be determined.