The correct phrase is “Unintended Consequences.”
Some well-meaning activists, and at least one Congresswoman, are trying to get Uber and Lyft drivers to be classified as employees, rather than self-employed sole-proprietors. That may well hurt the drivers more than it can possibly help them.
It’s one thing to let drivers keep more of the fare, and have fewer fees, as many want — though with Uber “hemorrhaging more than $1 billion a year as it subsidizes its service, which is why Uber has been squeezing driver earnings in recent months as it’s made its case to investors,” it may not be able to sustain itself as a viable service. But it’s quite another thing entirely to try to get Uber and Lyft drivers classified as employees, give the drivers W-2’s instead of 1099’s, and take out taxes. This change of status will likely hurt the consumer, who benefits from an increased number of Uber and Lyft drivers competing to pick them up faster. Even more important than what it will do for those waiting for a ride, in advocating for Lyft and Uber drivers, these activists are not only ignoring the taxi industry and the plight of taxi drivers, whose industry Uber and Lyft “disrupted,” but will likely end up hurting the very drivers they are trying to help. By calling them “employees”, they will not be allowed to deduct their gas, tolls, mileage/depreciation, cell phone, car insurance, and all the other expenses that, as self-employed people they can deduct but as employees they cannot.
I am a financial and tax professional. I am an Enrolled Agent, licensed to practice before the IRS, and have been for over 25 years. I have prepared tax returns for cab owners and cab drivers, as well as for Uber and Lyft drivers. To understand this, we first need to understand the difference between employees and non-employees. We need to understand the nature of the taxi industry, as well as the “disruption” of the industry that was allowed by Uber and Lyft. Then we can understand how pretending that they are employees will actually hurt Uber and Lyft drivers.
I have written a few times about this draconian new tax law when it first came out, here and here, and a few times since. One major thing that the law did was to dis-incentivize employment and incentivize Independent-contracting. The law is very business friendly. When one is an employee, the employer has to pay for half of the social security tax, half of the medicare tax, vacations, sick pay, unemployment insurance, workers compensation, disability, etc. The law eliminates all categories of unreimbursed employee expenses. If unless the employee is reimbursed for the expense — that is, repaid by the employer for whatever the employee spent out of pocket — the employee has lost that money. It is not deductible anymore.
The irony here is that, while this is great for employers, there are also many employees who wish they could be classified as self-employed, because they can deduct expenses to substantially reduce their taxes, even with paying both halves of Social Security and Medicare. But there are 50 Departments of Labor, in all 50 states, who say, “Nope. You are an employee — and you, the employer, have to consider this person an employee — unless you can prove otherwise.”
So, what allows someone to be classified as self-employed, aka a Independent Contractor, and as opposed to employee, and visa versa?
The IRS has three categories that determine this:
Behavioral Control: A worker is an employee when the business has the right to direct and control the work performed by the worker, even if that right is not exercised. Behavioral control categories are:
- Type of instructions given, such as when and where to work, what tools to use or where to purchase supplies and services. Receiving the types of instructions in these examples may indicate a worker is an employee.
- Degree of instruction, more detailed instructions may indicate that the worker is an employee. Less detailed instructions reflects less control, indicating that the worker is more likely an independent contractor.
- Evaluation systems to measure the details of how the work is done points to an employee. Evaluation systems measuring just the end result point to either an independent contractor or an employee.
- Training a worker on how to do the job -- or periodic or on-going training about procedures and methods -- is strong evidence that the worker is an employee. Independent contractors ordinarily use their own methods.
Financial Control: Does the business have a right to direct or control the financial and business aspects of the worker's job? Consider:
- Significant investment in the equipment the worker uses in working for someone else.
- Unreimbursed expenses, independent contractors are more likely to incur unreimbursed expenses than employees.
- Opportunity for profit or loss is often an indicator of an independent contractor.
- Services available to the market. Independent contractors are generally free to seek out business opportunities.
- Method of payment. An employee is generally guaranteed a regular wage amount for an hourly, weekly, or other period of time even when supplemented by a commission. However, independent contractors are most often paid for the job by a flat fee.
Relationship: The type of relationship depends upon how the worker and business perceive their interaction with one another. This includes:
- Written contracts which describe the relationship the parties intend to create. Although a contract stating the worker is an employee or an independent contractor is not sufficient to determine the worker’s status.
- Benefits. Businesses providing employee-type benefits, such as insurance, a pension plan, vacation pay or sick pay have employees. Businesses generally do not grant these benefits to independent contractors.
- The permanency of the relationship is important. An expectation that the relationship will continue indefinitely, rather than for a specific project or period, is generally seen as evidence that the intent was to create an employer-employee relationship.
- Services provided which are a key activity of the business. The extent to which services performed by the worker are seen as a key aspect of the regular business of the company.
In other words, if Uber and Lyft drivers decide when and where to work; if they own their own vehicles; if they have unreimbursed expenses like gas, car insurance, car washes, repairs, etc.; and if the relationship remains a relationship, as it is, between independent contractors and the company, then they can only be classified as Independent Contractors. To be considered employees, Uber or Lyft would have to provide them with the equipment (the vehicles), and tell them when and where to show up.
As bad as Uber and Lyft drivers think they have it, traditional cab drivers have it worse. That’s why many Uber and Lyft drivers are former cab drivers.
Taxi drivers come from the same population as Uber and Lyft drivers, many of whom used to drive cabs themselves. Taxi Drivers have been Independent Contractors since the invention of livery services. Here in New York, taxi cabs are owned by people who (until Uber and Lyft disrupted their industry) were lucky enough to own taxi medallions. Because there are a finite number of medallions, and one cab per medallion, the medallions were worth over a million dollars each (now, not so much, but still six figures. Medallion owners rent the cabs out each day to drivers, and earn as income only the rent paid to them for use of the cab and medallion. More important, the driver had to pay rent for the cab every time he or she drove it. If the driver pays $100 to rent the cab, the driver gets to take home only the amount over that $100, less gas, etc., each shift. While we are focused on Uber and Lyft drivers making a minimum wage, it is very possible for a taxi driver to lose money on a shift.
Uber and Lyft found a loophole, a way around owning medallions. They don’t provide livery services. They just connect people who want a ride with people who have cars and can drive them places. I know. It is counter-intuitive. But that’s how they “disrupted” the industry. They are not a “livery service.” They provide a “ride-sharing service.”
And activists are working very diligently to shoot them in the foot. For example, I heard New Mexico Congresswoman Deb Haaland talk on Democracy Now! this morning, talking about introducing a bill that will require Uber and Lyft to pay their drivers as employees. This will hurt drivers more than it will help them.
Let’s say that drivers start getting paid $15 an hour, as employees, regardless of how much they take in. That means that Uber or Lyft will have to take a loss if the driver does not bring in that much. It also means that if the driver brings in more, it all goes to Uber or Lyft.
Let’s say that they drive 75 miles a shift, and they do 5 shifts a week of 8 hours a week. That will get them $600 a week, less $45.90 in FICA taxes withheld (7.65%) which Uber or Lyft would match. That is what activists are pushing for. But the drivers will still have to pay for their gas, repairs, insurance, parking, tolls, tires, and maitenance, and none of that would be deductible!
Most medallion owners, even if they have mortgaged their medallions to a point where they owe more than they are worth (and most have), still earn money renting out the cabs. Most cab drivers for whom I prepare taxes keep about 10% of what they charge, after expenses, if they are lucky. And the “ride-share” business has not helped their bottom-line.
But activists are targeting Uber and Lyft. That’s because they are large and inviting targets. In doing so, they ignore taxi drivers, and those of traditional car services, perhaps because owners of car services and medallions are local, and not monolithic.
Still, livery services, whether they are called “ride-shares” or not, are more or less in the business of “commission sales.” The higher the supply of drivers on the road, the less demand for their services (which is the main reason for the finite number of taxi medallions). It’s a business.
And unless the IRS and 50 Departments of Labor carve out livery services — or just the “ride-share” part of the livery business — and make an exception allowing them to be employees, they are not employees. I heard a Congresswoman They are in the sales business, just like the people with the carts that sell nuts, or fruit or coffee from carts on street corners. The people with carts don’t get a minimum wage either. They have to pay their own Social Security and Medicare taxes. And, just as Lyft and Uber drivers have to pay Lyft and Uber part of their take, These food vendors have to buy the food that gets prepared, which can rot or otherwise go bad.
For better or worse, there is little difference between drivers getting paid to share their cars, and people with carts getting paid to share their food. The main difference is that Uber is about to go public, and they are a very large and convenient target.
And, yes, it seems that their drivers are having trouble making ends meet.
Uber and Lyft like the system as it is. They can hire as many drivers as they want. The drivers know that if they don’t work, they don’t get paid. Uber and Lyft know that If the drivers don’t pick up fares, Uber and Lyft don’t have to pay them. Uber and Lyft also know that if they have to pay the drivers as employees, the drivers get the same pay, whether they pick up any fares or not. Conversely, that minimum wage, as much as it might be an improvement, might not pay their bills, either. Once the wage is set, Uber and Lyft will have no incentive to raise it. The drivers will get no more, and no less, per hour. Uber and Lyft, as employees, can reduce hours, just as McDonalds or Burger King or any employer can do. And if business is bad, the drivers can get laid off. At least they would be able to collect unemployment insurance, yes, but what then?
And, again, Uber currently loses a billion dollars a year. Unless the CEO has a father like Fred Trump, that’s unsustainable. Yesm the IPO will give them a massive cash infusion. We will see what they do with that cash flow. It is a business, after all, which means that they have to do what they can to be profitable or else the stock will eventually plummet, and then they might have no drivers at all.
Human nature dictates that drivers if drivers become employees, they will be less motivated to hustle after fares, knowing that they get paid the same if they do or if they don’t. There will be less demand for Uber and Lyft, because passengers will be waiting longer, as there might not be as many drivers on the road.
I don’t know how this will end. I doubt, regardless of whatever kind of victory the activists win for the drivers, that it will end well.