By now, you’ve probably heard the story stemmed from a 2014 complaint filed with the California Labor Commissioner by a California Uber driver. The driver wanted Uber to reimburse her for business expenses, including gas and tolls. In arguing that it shouldn’t have to pay, Uber said that the driver was an independent contractor and therefore not entitled to expense reimbursement.
The Commissioner disagreed with Uber, analyzing an 11-step test used in California to determine whether a worker is an employee or an independent contractor. ( shares some similarities with the (PDF) list at the federal level.)
Ultimately, the California Employment Development Department (EDD), an administrative law judge, and the California Unemployment Insurance Appeals Board all agreed that an Uber driver was an employee and therefore entitled to benefits not available to independent contractors.
The case is interesting on its face, but it doubles as a cautionary tale for anyone involved in running a business. These days, many businesses (especially startups) are misclassifying employees as independent contractors in order to avoid the responsibilities that come with having people on the payroll (carrying workers’ compensation insurance, complying with withholding and payroll requirements, providing benefits, etc.).
While classifying workers as independent contractors may seem like a smart idea in the short term, it can lead to disastrous consequences. Employees who misclassify their workers are exposing themselves to severe financial penalties, and in recent years the IRS has been on . And, of course, even the threat of financial ruin can bring a company down; home-cleaning marketplace Homejoy , citing lawsuits from allegedly misclassified workers as one of the causes.
Perhaps because of the heightened exposure the issue has received in recent years, many startups – especially service-focused startups similar to Uber – have begun as employees. Whether this trend continues is anyone’s guess, but it shows that companies and investors alike are paying attention.