App-based Companies and Worker Classification

As many people know by now, Uber is an American company founded in 2009, which allows users with smartphone to submit a trip request which is routed to an Uber driver who uses their own car and drives on their own schedule.  There are many similar app based companies including Lyft (A direct rival), Postmates, Luxe, Instacart, and Handy.  Most of these companies rely on classifying workers as independent contractors as opposed to employees, which has increasingly become scrutinized and challenged in courts due to their worker classifications. 

What makes an independent contractor?

According to the official IRS website, “the general rule is that an individual 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.”  In other words, if you are an individual contractor if you are self-employed, and not an independent contractor if you perform services that can be controlled by an employer.

There are both benefits and dangers of using independent contractors.  Companies that use independent contractors often have lower expenses and flexibility with staffing.  The dangers of using independent contractors include having less control over workers and scheduling, a high turnover rate, and you can possibly be liable for injuries the independent contractor suffers.  

What does the future hold for these app based companies in regards to worker classification?  Will companies like Uber and Lyft be forced to classify their workers as employees or continue to classify them as independent contractors, or will they decide to change on their own like Luxe and Instacart? 

Uber

As of December 2015, Uber is valued at over $60 billion, and operates in over 58 countries and 300 cities worldwide.  Since Uber’s inception, it has relied on the use of independent contractors as their drivers for the company.  Drivers for Uber work on their own schedule, using their own vehicle, and pay for their own maintenance and fuel.  This applies to the definition from the IRS because Uber has no control over how often or how little the worker drives for them, as long as they are receiving the required ratings from users.

Uber has come under increased scrutiny from cab drivers and companies, as long as its own workers who believe they should be classified as employees.  So far, eight states have ruled that Uber drivers are to be classified as independent contractors, they are: Georgia, Pennsylvania, Colorado, Indiana, Texas, New York, Illinois, and Florida. 

Currently, California is the only state to rule in favor that a driver is an employee, and on December 9, 2015 a California court issued a final order certifying that the case is a class action lawsuit.  The case includes only drivers in California who have driven since before June 2014.  If Uber loses this class action lawsuit, it could see them classify thousands of workers as employees, which could end up costing them billions due to things like reimbursement for miles/gas, taxes, vacation days, and health insurance..

Lyft

Founded in 2012, with a valuation of over $2.5 billion, Lyft is a company built on a very similar model to Uber, where a customer requests a ride, and a Lyft driver takes them to their destination.  Like Uber, Lyft classifies their workers as independent contractors.  In San Francisco, a judge ruled that Lyft was required to reclassify their drivers as employees, and not independent contractors.

Instacart

Instacart is a web/app based grocery delivery service.  Originally for Instacart, the customers using the app would pay an additional markup prices for their groceries, but as the business developed, Instacart has established partnerships with grocers to provide users with “in-store” pricing.  Originally, Instacart classified their employees as independent contractors, but in June 2015 they began giving their “shoppers” the ability to switch from independent contractor to a part-time employee in select cities.  However, this only applies to the “shoppers,” as drivers will still work as independent contractors.  The ones who decide to become employees will work between 20-30 hours a week and make a guaranteed minimum of above minimum wage.  With the recent scrutiny into contractor based apps, only time will tell if they will be able to succeed with employees as opposed to independent contractors.  

Luxe

Luxe is another app-based company that was founded in San Francisco.  The company operates as an on-demand valet service, currently operating in 9 cities throughout the country.  The app aims to solve parking issues by allowing the user to select a drop off location, where they are met by a worker who parks their car, and then return it to you when you request it.  Originally Luxe classified its workers as independent contractors, but in July 2015 it announced plans to convert hundreds of its parking attendants to being classified as an employee.  This will allow the employees the option to set either a part or full-time schedule, and Luxe will also pay for expenses like cell phones, uniforms, and their scooters, and health care for those who work full-time.  Uber for example does not cover any expenses for its workers, which is how the classification of independent contractors has fit their business model and in the justice system.