Ride-share giant Uber is currently facing a labor law suit by former freelance workers, claiming they were “employees” and not, as Uber categorized them, “independent contractors.”
This is a distinction that often vexes business owners. There are significant tax benefits to employers that hire independent contractors instead of traditional employees. However, claiming your workforce consists of independent contractors when they are, in fact, employees can cause headaches with the IRS.
But what are the differences between an employee and an independent contractor?
According to the IRS, anyone who performs services for an organization is an employee if the organization can control what will be done and how it will be done. Specifically, if an organization decides 1) a defined wage or salary, 2) an implied or written contract and 3) maintains control of the person’s work by the employer, then the worker is an employee. This applies even if the individual is given “freedom of action.”
By contrast, a worker is an independent contractor “if the payer has the right to control or direct only the result of the work and not what will be done and how it will be done.” Independent contractors do NOT have the legal right to control the details of how the services are performed.
There is often a fine line between the two, but the wrong choice can cost your business thousands of dollars in taxes and legal fees. If you are unsure where your staff falls, contact me at 618-659-4499 or firstname.lastname@example.org.
As for Uber, it will be interesting to see what the federal court will decide. Think about this: the Uber Driver Terms & Conditions states, “You will not, in your use of the Services, cause nuisance, annoyance, inconvenience, or property damage, whether to the Third Party Provider or any other party.” Given the definitions mentioned above, who do you think is right?