One would think it’s so easy. Create a business model where your “workers” are required to buy the assets used to run the business. If not having to tie up your own funds wasn’t enough, you can also lend the workers the money to buy said assets and earn a little interest income to boot.
If you think this sounds like Uber, Lyft, Via, Ola, Careem, Didi, Taxify, Yandex and others, you are exactly right. Yet ride sharing services and similar businesses seem to keep running into more and more barriers to profitability. One of the latest major issues to surface is whether drivers are independent contractors or employees.
Most if not all the ride sharing services have treated drivers as independent contractors. What this means is the company doesn’t withhold federal or state income taxes, pay other employment related taxes, and is not required to provide unemployment insurance, disability, and other benefits. State authorities are aggressively pursuing the companies and, in fact, New Jersey just sent Uber a $650 million bill for unpaid unemployment and temporary disability benefits.
Are drivers self-employed business owners or simply employees of the platform owners? While the tests for deciding have been around a long time, fact-specific inquiries and ever-developing and evolving business models result in fact-specific and ever-developing inquiries to answer the question.
The traditional tests have looked to the degree of behavioral and financial control over the worker as well as the nature of the relationship. Within these categories lies a complicated fact-intensive inquiry that moves the pendulum one way or the other.
As Uber learned from New Jersey, the consequences of misclassification can be crippling. Careful planning and structuring of the relationship between businesses and its most valuable assets, its workers, is crucial to avoiding surprises.
If you have questions contact me at email@example.com or your Berdon Advisor.
Wayne Berkowitz, a tax partner and co-leader of the State and Local Tax Group at Berdon LLP, advises on the unique requirements of governments and municipalities across the nation.