What would happen if Uber transitioned its drivers from contractors to employees? It’s a question being hotly debated right now, with drivers, companies, and investors all coming down on different sides. So what really could it look like if drivers became employees? Senior RSG contributor Christian Perea weighs in.
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Are Uber Drivers Independent Contractors? What Happens If They Become Employees?
There’s been a lot of debate in parking lots, boardrooms, and court rooms over the last few years over whether or not drivers for companies like Uber, Lyft, or DoorDash are really considered independent contractors. A recent ruling in California has once again brought this question to the forefront by adopting a new legal test known as the “ABC Test” to determine whether or not a company can classify a worker as a contractor.
The new criteria leans heavily in the direction of classifying almost every worker in the on-demand economy as an employee. Under the new rules, a company must prove that the worker in questions satisfies all three conditions before they can be labelled a contractor.
The ABC Test: Is This Worker A Contractor?
A worker in California must now satisfy the three following conditions in order to be labelled as contractor:
Under the ABC test, a worker will be deemed to have been “suffered or permitted to work,” and thus, an employee for wage order purposes, unless the putative employer proves:
(A) that the worker is free from the control and direction of the hiring entity in connection with the performance of the work, both under the contract for the performance of the work and in fact;
(B) that the worker performs work that is outside the usual course of the hiring entity’s business; and
(C) that the worker is customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed.
Uber and Lyft are really worried about part (B) of this test but A and C don’t look that great either. As it turns out, driving for Uber and Lyft is work that is inside (and arguably the primary) course of their business. They aren’t the only ones worried though. Virtually every tech company from Facebook to Google along with the California Chamber of Commerce is now actively lobbying the state legislature to pass a law to save their collective assets.
So what could happen if drivers became employees instead of contractors?
A Few Companies Have Already Switched From 1099 to W-2 Drivers
In 2014, a food preparation and delivery company called Munchery decided to switch from a workforce of independent contractors over to employees. They were the first company within the on-demand economy to do this, and it likely helped them avoid the ire of Shannon Liss-Riordan.
According to this position for a delivery driver on their jobs page, those who deliver with Munchery today receive an hourly rate, $0.54/mile reimbursement for the use of their car, some t-shirts, data reimbursement, and apparently free food:
Eaze Reclassified Drivers as Employees
Eaze is a marijuana delivery company in California that operates in a similar way to food delivery (except they actually deliver weed faster than food delivery delivers food). After recreational legalization in 2016, eaze supported and advocated for the switch in classification from 1099 to W-2 for cannabis delivery drivers. This was part of an overall legislative effort to bring the adult recreational market into existence in 2018. The change affected all delivery drivers in the cannabis industry. Drivers are not employees of eaze – they are employees of retailers.
Editorial Note: eaze is not capitalized as a proper noun because they’re a Bay Area startup that follows annoying branding trends. Please do not correct me in the comments section below. It could be worse. They could be called eaze.ly.
What Happened With Eaze When They Switched From Contractors to Employees?
In the case of eaze, they began contracting through a staffing agency to hire and manage their fleet of marijuana delivery drivers. So the drivers actually never became employees of eaze so much as they became employees of a temporary employment company called Allied Staffing (Note: Bay Area drivers only. Drivers in other areas will be employees of the collectives).
Flexibility also tightened from being able to login and work almost anytime (similar to Uber) to having to sign up for hourly blocks of shifts (more similar to Amazon Flex). According to an eaze driver I spoke with, he misses the ability to turn on the app and do deliveries whenever he had free-time. Now he has to schedule in advance, and he feels like his earning potential is limited because of it.
Furthermore, almost all drivers are now limited to 40 hours a week to avoid paying time and a half. Part-time drivers have to work around 20 hours a week. You must signup for a shift, and if you miss it, you get in trouble. Just like a normal job.
How Did The Shift To Employment Status Affect Driver Pay?
Similar to Munchery, eaze employee-drivers receive an hourly pay rate and a mileage reimbursement. Instead of getting paid per every job completed, the now employee-drivers of eaze receive $15 per hour in addition to a $0.54/mile mileage reimbursement. That’s ALL MILES driven. Not just on delivery runs!
The Mileage Reimbursement Alone Is Similar To Uber
To compare that to rideshare, eaze’s mileage reimbursement alone is actually comparable to the mileage rate for some Uber drivers. For example, I currently only earn $0.728/mile after Uber’s cut for an UberX in the Bay Area, but only when I have a passenger. An eaze driver will earn $15/hour + $0.54 for EVERY business mile driven in their personal vehicle in the same market.
That’s pretty crazy. I don’t know how exactly this compares in pay yet to driving for Uber. I can only tell you that we will know soon thanks to some handy RSG testing by Dash Bridges 😉
There Are More Rules On How You Do The Job
Dash mentioned there are just more rules as an employee and it took some getting used to. They have to show up on time, fill out paperwork, forms, follow procedures, and do all of the monotonous things that any employee has to do.
Those TPS reports aren’t gonna file themselves…
If you’d rather have the flexibility and mileage deductions of an independent contractor while delivering risk-free food, you can still signup for Caviar.
Getting Hired Takes Longer
One of the biggest complaints I’ve heard about driving for Uber and Lyft is that they onboard and hire too many drivers. Flooding the streets with as many humans as possible to become the biggest rideshare company in a race to the bottom. However, when drivers become employees, the motives change a lot for these companies since they become responsible for managing costs that were previously passed on to drivers.
In the experience of RSG Contributor Dash Bridges, it took 5 weeks to get a call back when onboarding as a delivery employee for eaze. He clicked the link 18 minutes after he received the follow and found that all the interview slots had already been taken!
After being able to eventually get an interview slot, Dash actually went through 2 rounds of interviews before getting the green light. This might be special to the medical marijuana delivery space though as I am sure a lot of work goes into hiring trustworthy drivers.
Flexibility & Scheduling
Several of the drivers I spoke to at eaze pointed out they didn’t like being an employee now because they were capped at 30 hours a week. This “30 Hour Ceiling” for part-timers has also been further observed by Alanna Samuels writing for The Atlantic, who interviewed a general manager of a dispensary named Sky Siegel on what happened to his drivers after reclassification:
“Some left because Siegel can’t yet afford to offer them benefits, so he is limiting employees to 30 hours a week so as not to trigger IRS provisions that would categorize employees as full-time. “
Still though, some would argue that employees don’t necessarily need to be scheduled in order to work and that the idea of getting rid of flexibility is a bit of a farce. I think that’s true to an extent – and we still might still see a lot of flexibility in driving if other on-demand companies were forced to make the switch. However, so far companies forced to make the switch have been more in favor of scheduling.
Full time eaze drivers presently receive healthcare benefits, vacation, sick days, etc. I have no word on whether they have a 401K though. I wasn’t able to get any details on what Munchery offers their drivers in the form of healthcare but hey, they offer free food, so that’s pretty good I guess.
Employee Protections & Rights
Being an employee means workers are entitled to a slew of laws and worker protections developed over the last 130 years. This includes things like workers compensation if injured on the job, paid breaks every 2 hours, overtime pay past a certain point of working, the right to organize a union, as well as protections from discrimination in hiring and retaining workers.
Big Tax Changes Going from Contractor to Employee
Save on Self-Employment Taxes
There are several tax ramifications from going from contractor to employee. For example, you no longer have to pay an extra 7.65% in self-employment tax to cover your side of Medicare. It also means that your income taxes are deducted from your paycheck each paycheck.
Lose Standard Mileage Deduction (If Reimbursed)
Both eaze and Munchery delivery drivers receive monetary compensation for the mileage they put on their personal vehicles. Under IRS rules, this means they would not be eligible to claim the standard mileage deduction (or any Schedule C deduction for that matter).
The standard mileage deduction makes a big difference for independent contractor-drivers because it’s often so massive that it reduces Adjusted Gross Income for a rideshare driver to near or below the poverty line (even though real earnings are actually much higher). As employees, this tax loophole wouldn’t be available anymore.
That being said, I’ll take a cash mileage reimbursement over a tax deduction any day of the week. Even if it means I have to pay a little more in taxes.
Still Many More Questions Than Answers
I often hear arguments along the lines of “If we were employees, Uber would be completely ruined!” However, one of the few things that is clear when I look at eaze and Munchery is that it is possible to still operate these companies when your workers are employees.
Another big mystery factor here is how Uber would duck its obligations as an employer. Would they limit us to only 30 hours a week? Would they only hire experienced full-time drivers? Would any of us get healthcare? It’s difficult to know, and one can only guess.
Regardless of how we would be treated as employees, we would finally have a federally recognized right to collectively bargain. Which could be…exciting. And loud!
Assuming the pay were equal or more to it is now, would you still drive for Uber or Lyft if you were considered an employee? Let me know below!
-Christian @ RSG
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