A common criticism of the gig economy is that companies treat those working in it less favorably than traditional employees due to their status as independent contractors.
Editorial credit: Tero Vesalainen / Shutterstock.com
The classification is important for a couple of reasons. For one, contractors are treated differently for tax purposes. They receive a 1099 from companies they work for at the end of the year, while traditional employees receive a W2. There are important implications involved in the distinction between the two.
Additionally, there are differences in the requirements placed on companies from an employment law standpoint when it comes to the classification of an employee as an independent contractor or a traditional employee.
Employment Status Matters
Lyft, as one of the quintessential gig economy companies, has been in the spotlight recently for issues related to the classification of its drivers. Lyft chooses to classify drivers as “contractors” rather than “employees.” You might be wondering why we use the word “choose” here.
As the Internal Revenue Service (IRS) explains, there are three broad factors for determining the proper classification:
- Behavioral control
- Financial control
- Relationship
Each of these has more specific sub-factors, which we’ll discuss in a later post, but the point is that how to classify workers isn’t always a simple determination. Some of the factors listed by the IRS might weigh in favor of “contractor,” while others weigh in favor of “employee.” And while the choice isn’t always clear-cut, the consequences of getting it wrong can be costly.
Misclassification a Potential Risk
Lyft’s Initial Public Offering (IPO) prospectus cited the classification of its drivers as a potential risk, with the fact that it is “regularly subject to claims, lawsuits, arbitration proceedings, administrative actions, government investigations and other legal and regulatory proceedings at the federal, state and municipal levels” challenging this classification.
So why would a company expose itself to this kind of risk over the classification of its workers in the first place? Arguably, Lyft could reduce this risk by classifying its drivers as employees, but that has its downsides, as well.
In a follow-up post, we’ll discuss some pros and cons of classifying a worker as a contractor versus an employee.