Protesters hold signs while demonstrating outside the Uber Technologies Inc. headquarters in San ... [+]
New Jersey’s Department of Labor and Workforce Development has hit Uber with a massive $650 million bill. The state contends that the ride-hailing company misclassified its drivers as independent contractors, instead of employees.
The Labor Department asserts that Uber financially benefited by its misplaced characterization of its drivers and now demands that the company pay its fair share of unpaid employment taxes. The monies owed are broken down by $523 million in overdue taxes and $119 million in interest and penalties since 2015. Uber officials, however, dispute these findings. "We are challenging this preliminary but incorrect determination," Uber spokeswoman Alix Anfang told Bloomberg Law.
The rapid emergence of the gig-economy and related job market has substantially altered the way people work. Individuals who need extra money, can’t seem to find a full-time, permanent role or desire a flexible independent lifestyle have taken on these new types of jobs—they act and look like employees, but are treated as independent contractors by the companies they work for. Usually, there is a tech company at the center and the workers carry out the tasks. Companies such as Uber, Lyft, Postmates, Instacart, DoorDash, Grubhub, TaskRabbit, Upworks and Fiverr exemplify this trend.
There is an enormous financial incentive for corporations to classify workers as contractors. They don’t have to pay payroll taxes, such as FICA (Social Security and Medicare), disability, federal and state-level unemployment, health insurance benefits or offer paid sick, personal and vacation days. Employees also have to contribute to pay some of these taxes as well.
As of now, New Jersey’s demands are limited to unemployment and disability insurance, but it could require Uber to provide back pay to drivers for minimum wages and overtime under state law. The numbers could be staggering! If New Jersey alone seeks $650 million from Uber, consider the vast amount of money at stake when you add in all of the other states, along with the other companies built upon gig workers. Uber’s driver costs could spiral higher by more than 20% if they are forced to reclassify workers as employees, according to Bloomberg Intelligence. The stock market negatively reacted to New Jersey’s claims, as the share price of Uber initially declined about 3.9%. Uber’s rideshare rival, Lyft, saw a drop of 3.2% in its stock price.
California previously passed a law in September that could force Uber and other similar companies to reclassify their drivers as employees. Other states, such as New York, Oregon and Washington are considering legislation too. They may have realized all of the tax revenue they’re losing out on.
Since this will severely financially harm Uber, Lyft and other tech companies, they are fighting back against the California law with a $90 million war chest to back a ballot initiative to stop the new law or gain an exemption.
New Jersey Labor Commissioner Robert Asaro-Angelo said, “Cracking down on employee misclassification” is a ‘priority’ for Governor Phil Murphy’s administration.” Asaro-Angelo says in regards to Uber’s business model, “This defiance of the law puts honest business owners at an unfair disadvantage.”
While it may seem innocuous at first sight, worker classification is financially important. When corporations—like Uber—don’t pay their fair share of taxes, taxpayers (like you and me) have to bear the burden. Competing businesses are put at a disadvantage because they are forced to pay all of the appropriate taxes, which add an additional 20% to their cost structure.
In a lightly regulated environment under President Donald Trump’s administration, gig employers present themselves as innocent platform providers that only connect drivers or service providers to customers. Regulators haven’t really fought back against this tactic.
Reclassifying workers as employees is an existential threat to the viability of Uber and similar organizations. Uber, and many other tech companies in this space, are still hemorrhaging money and desperately trying to reach profitability. With the extra costs attended with the pay and benefits associated with contractors becoming employees, questions arise as to how the companies can survive.
The dirty little secret of Uber and similarly situated companies is that they’ve built their hopes on the backs of contractors and skirting the tax loopholes. If other states follow New Jersey’s lead, the companies may be in serious jeopardy. If the worst happens, the companies go bankrupt and the contractors will lose their gigs. There must be a delicate middle-ground solution to ensure fairness (with respect to contractors and paying taxes), while not financially ruining the companies involved.
