Uber’s $640 Million Fine Drives at the Heart of Gig Economy Liability
Uber has battled with its drivers in the past over their classification as independent contractors rather than employees. Drivers argue that as contractors, they miss out on certain benefits like workers’ compensation, health care, medical leave, disability and unemployment insurance, a minimum wage and the ability to unionize.
Uber counters that because it is a tech company, not a transportation company, its drivers provide services not central to its usual course of business — a common criteria that workers must meet in order to be considered employees.
But now a new player is entering the quarrel on the side of drivers — state labor departments.
The State of New Jersey is demanding more than $640 million from Uber, including $523 million in overdue taxes and $119 million in penalties and interest that have accumulated over the past four years. The state argues that it misses out on employment tax revenue when drivers are classified as independent contractors, and that taxpayers unfairly shoulder the cost when contractors file for benefits like disability and unemployment insurance.
Uber claims that it satisfies New Jersey’s criteria for classifying workers as independent contractors and therefore is not legally obligated to pay any employment taxes for its drivers.
The State of State Law
New Jersey is considered to have the strictest regulations in place protecting workers from misclassification. Employers in the state must assume that all its workers are employees unless:
- The employer does not exert any control over the worker’s workload and schedule;
- The worker’s services are not integral to the employer’s usual course of business or are performed entirely off-premises; and
- The worker is normally engaged in independent, self-directed work.
All three of these requirements must be met in order for an employer to classify a worker as an independent contractor, but much of the language is open to interpretation.
The battle between Uber and its opponents really hinges on the second criterium. Worker advocates say that drivers are absolutely integral to Uber’s business. Without them, there would be no service to provide.
Uber doesn’t see it that way. It claims its drivers are peripheral to the company’s core function of connecting customers to available cars.
Some states like California have passed laws requiring rideshare companies to classify drivers as employees, but conflict continues in states with more ambiguous language.
What It Means for the Gig Economy
Uber gets the most headlines, but it isn’t the only company under fire. If Uber is required to classify its drivers as employees and pay back taxes in every state where it operates, it means that other rideshare apps like Lyft will likely have to follow suit.
Outside of transportation, there are a number of tech companies serving as the conduit between consumers and gig workers. Whether you want someone to deliver your groceries, walk your dog, or wash your windows, there’s probably an app for that. Uber’s fate could be a harbinger for these other platforms.
What It Means for the Insurance Industry
New Jersey’s fine has rocked investors’ already fragile confidence in Uber. Six months after its IPO, the company’s stock has lost one-third of its initial value. Shareholder lawsuits could potentially follow, hitting the company’s D&O policies.
Further down the road, reclassifying contractors as employees would dramatically shift more liability back onto the employer.
Uber and its ilk would take on expanded employment practices liability and workers’ compensation exposure. They would be exposed to increased wage and hour claims. They may face increased liability for any injury resulting from driver misbehavior. In short, their liability exposure and need for coverage would skyrocket.
Risks associated with a decentralized and mobile workforce are difficult to manage.
Brokers and underwriters would have to dig deep into the details of how these companies plan to keep their new employees safe, protect their customers, and enforce company policies consistently across such a scattered staff. To those carriers who maintain a disciplined approach, however, the upheaval of the gig economy could represent a unique opportunity for growth. &