Recent events have thrown into question the definition of a contractor in driving jobs, particularly when it comes to rideshare apps. With the rise of gig economy companies like Uber, Lyft, and DoorDash, many people are working as independent contractors but don’t necessarily know the full extent of what that entails. In Louisiana last year, an Uber Eats driver rear-ended someone while delivering food and was surprised to find out her personal insurance policy didn’t cover the accident—without a rideshare insurance policy, she was on the hook for $25,000. She's not alone, either: incidents like this highlight how unclear the definition of ‘contractor’ can be for these types of jobs, with insurance being just one area that is often overlooked.
The line between employee and contractor is not always clear-cut in this type of work. Rideshare drivers may think they are simply providing a service by delivering food or passengers, unaware that they are classified as contractors held to different rules and regulations. As such, these drivers may not be aware of legal requirements such as having the right type of insurance or paying their own taxes—leaving them vulnerable if anything should go wrong during a job. In other industries, like trucking, the opposite is true: tens of thousands of truckers classified as contractors may have been legally employees this whole time. Misclassified truckers who are owed thousands in overpaid taxes or wages are bringing lawsuits against carriers nationwide.
So what constitutes a ‘contractor’ in these situations? What are the differences between being hired as an employee or signing up as a contractor? And how can someone make sure they are meeting legal requirements when doing gigs? In today's article, we try to answer these questions and what that implies for paid drivers of all kinds.
The Essential Differences Between Employees & Contractors
The essential difference between contractors and employees is that contractors typically operate as independent businesses with their own expenses. They manage their own business resources like materials and equipment, which they are expected to pay for. The freedom to set their own prices comes with the freedom to determine how and when they do their work. Contractors can decide on the specific hours or days they work and what rate they will receive in exchange for those services.
Employees, on the other hand, are usually provided necessary resources and tools for performing a job. They are also required to adhere to a schedule set by the employer and regularly report to work at predetermined times. Additionally, employees have more protection under labor laws than contractors do, such as rights related to minimum wage, overtime pay, and safety standards in the workplace.
Contractors typically have a pre-determined project or assignment that needs to be completed in a specified time frame with certain agreed-upon results. It's usually much easier for employers to terminate contracts than it is for them to terminate an employee’s employment contract if results fall short of expectations or deadlines aren’t met. Contractors also don't normally receive benefits like insurance coverage or paid holidays as employees do.
But one of the most vital differences between a contractor and an employee is the nature of the work they do. Imagine there's a company that sells cars, and they need a logo. They might hire a graphic designer as a contractor to create a logo for them. However, imagine a logo design company contracting with a staff of graphic designers on a semi-permanent basis to design logos. This is a different situation because the contractors in this case are doing work "integral to the business" rather than work that's peripheral. In reality, that group of contractors might be legally classified as employees.
How to interpret these business relationships depends on the situation; it's not always cut-and-dry. That's why legal standards for classifying workers as contractors or employees are based on an array of factors, and why the method of classifying workers has 'put on trial' multiple times in the last few years.
However, recent court decisions have only toughened the standards by which businesses classify their workers.
The Borello Test & ABC Test Change Trucking Landscape
Until 2018, California trucking companies classified their workers using the Borello test: a flexible standard that allowed each carrier to determine how and why it classified drivers as contractors. But in 2018, the Ninth District Circuit Court established the ABC test as a replacement, and it was later codified into law. Its key difference is that the ABC test presumes a worker is an employee unless the trucking company can prove otherwise.
To prove a driver is a contractor, they have to meet all 3 criteria below:
- Contractor is not subject to the company's control regarding how they work
- Contractor performs work outside the hiring company's business (i.e. they have contracts with other carriers)
- Contractor engages independently with a trade, occupation, or business "of the same nature" as the hiring company's (i.e. they have their own legitimate business)
The California Trucking Association sought to bring a lawsuit over the law to the Supreme Court, but the Supreme Court declined to hear it; the ABC test is the law in California for the foreseeable future. Advocates have attempted to bring the ABC test to the federal level, which would overhaul the way trucking companies operate. Currently, carriers save hundreds of thousands of dollars per driver by classifying them as contractors. Contractors are responsible for paying for their own Medicare and Social Security, while carriers are not responsible for covering a contractor with workers' compensation insurance. Business-related taxes are passed onto the contractors.
Most importantly, when a contractor gets into an accident, the carrier is off the hook; legally speaking, they have zero liability when it comes to contractors.
Other Federal Attempts to Toughen Trucker Classification
The Biden administration initially attempted to reverse a Trump administration policy that made classification standards more flexible, but the courts struck down that decision. Now, Biden's Department of Labor is proposing a new standard made of six equally-weighted factors to determine if a worker is a contractor. The Labor Department hopes this will create consistency nationwide as well as clearer worker protections, but trucking associations believe that it will result in a flood of court cases as drivers sue to reclassify themselves as employees.
But there's no doubt that classification practices in the trucking industry have been a little loose for decades.
Let's say there's a trucking company called Example Trucking. They're a carrier with a fleet of operators classified as independent contractors (IC). Example Trucking dictates the order of pickup and delivery, the days drivers are working, the percentage of pay-per-load, and the terms of the contract between driver and company. Most importantly, they own, maintain, and cover the operating cost of the entire fleet of trucks. The drivers only fill out 1099s, pay income, Social Security, and Medicare taxes, and determine their own routes.
Are the drivers really contractors? For years, the law has allowed them to be labeled that way, saving millions for carriers. Trucking industry lawyers are preparing to defend these practices at the state and federal level, but it's worth noting that in any other industry, hiring someone to use company equipment and work on the days assigned to them is called having an employee.
Rideshare Contractors Not Making Minimum Wage
Over the last 13 years, rideshare apps have replaced taxis and created a whole new instant food delivery industry. However, the business model used by rideshare apps has been under fire from both labor advocates and environmentalists.
Rideshare companies defend their contractor classification practices by noting that they exceed minimum wage requirements. However, under California's Prop 22 (a template for the kind of policies they would lobby for nationwide), rideshare companies only pay drivers for “active time” making deliveries or giving rides. The reasoning is that drivers should be paid based on the total amount of work they do, not for any periods of inactivity. This is in line with traditional contract employment, which does not guarantee payment for time not engaging in work-related activities. They also argue that this method of compensation allows them to provide flexibility to their workforce, enabling them to choose when and how often they wish to accept rides or deliver goods.
But there's growing evidence that if rideshare companies only pay for active time nationwide, then they would not meet minimum wage requirements. A study conducted in Massachusetts showed that rideshare drivers would only make $4.82 per hour if they were only paid for active time—far below minimum wage. As a result, a court in Massachusetts threw out a ballot measure that would have allowed Uber to pay drivers according to active time.
Alto Accuses Uber of Oversupplying Drivers, Causing Traffic
Alto, a rideshare app using an employee model, has been critical of Uber's contractor model. According to Alto, classifying drivers as contractors allows Uber to oversupply the market with drivers at no cost to them, driving down wait time but creating higher emissions and more congestion. Drivers are incentivized to stay on the road for long hours to make more money, leading to an increase in traffic volume and pollution. Furthermore, since drivers are not employees, they do not receive benefits such as health insurance or sick days, exacerbating financial insecurity and time on the road.
Though Alto competes with Uber, their observation about the company's effect on congestion is backed by the latest research. A 2019 study in San Francisco found that rideshare companies are the single largest contributors to traffic growth, more than doubling the amount of delay experienced by drivers from 2010 to 2016. This will, of course, increase the number of accidents on the road. There's a potential link between the rideshare industry's contractor classification and worse traffic and poorer road safety.
Highway Accidents, Contractors & Public Safety
At the end of the day, the vagueness of contractor classification protects negligent companies from legal liability.
If someone gets into a serious crash with a semi-truck, their recovery could require over a million dollars just to cover medical care and rehabilitation, much less lost wages and other damages. If the trucker works for a large carrier, the accident will be covered under the carrier's insurance policy. But if the trucker is a contractor, carriers get to insulate themselves—"he's not our employee, he's on his own." It leaves 'independent' truckers on the hook, even if they were driving the carrier's truck.
For rideshare apps, the reality could be worse. The Louisiana Uber Eats driver from earlier is just one of the thousands of drivers who don't realize they need a rideshare insurance policy. Court records show Uber or Lyft won't take responsibility for their drivers unless they're forced to, leaving accident victims in limbo until a lawyer can bring a lawsuit forward. Driver misclassification has real-world consequences for the contractors and the general public.
The legal battle being waged right now isn't just about legal classification; it's about how much responsibility companies bear for their actions. Can rideshare apps and freight carriers continue to hide behind a hard-to-define legal concept while the roads become less safe? Time will tell.
