BY JEFF SCHMIDT
A recent study conducted by Intuit showed use of independent contractors is on the rise across the United States, accounting for roughly 25-30 percent of the U.S. workforce, and that more than 80 percent of corporations plan to substantially increase their adoption of a flexible workforce in coming years.
In fact, Intuit estimates that independent contractors will exceed 40 percent of the workforce by 2020. The passenger transportation industry has been at the center of these shifting employment dynamics, as the growth of Uber and Lyft has raised new questions about the efficacy of the independent contractor model, and more importantly, the legal implications of it. While Uber and Lyft maintain that their drivers are independent contractors, a number of recent lawsuits have argued that the behavior of these companies and their drivers resembles a more traditional employer-employee relationship. (Editor’s note: While suits are pending in several states, U.K. courts recently ruled that Uber drivers should be classified as employees.) Chauffeured ground transportation operators who use—or are considering using—the independent contractor model need to be educated on the differences between an independent contractor and employee, including the potential exposures involved when using this model.
While no standard definition for an independent contractor exists, business owners can find guidance from the IRS and their local labor boards. While guidelines and interpretation vary by state, a universally significant factor is whether or not you as the business owner have control over, or the right to control, a worker both in regard to the work done and the manner and means in which the work is performed. For a chauffeur company, evidence of control can come in a number of areas that deem them to be employees, which could expose you or your insurance carrier to a workers’ compensation claim.
Schedule & Compensation
Are your chauffeurs able to set their own schedules, or do you control the shifts or hours per day that they work? Exercising control over a person’s working schedule can indicate an employer-employee relationship. The compensation structure you use is also important. Do your drivers get paid hourly, per day, or per trip? Generally, employees are paid on an hourly or salaried basis and independent contractors are paid based upon the completion of a job. Leasing arrangements also help make the distinction: For example, if the contractor leases a car from you, and the agreement spells out that they are not employees and not subject to workers’ compensation, tax withholding, or unemployment compensation.
Vehicle
Do you provide a vehicle to your chauffeurs, or do they own and operate vehicles registered in their own names? If you do provide the vehicle, again the terms of a leasing agreement could help distinguish your relationship with that party. Generally, if a business is supplying a worker with the equipment necessary to perform a job or service, that worker is more likely to be considered an employee. Conversely, if a worker provides their own equipment (in this case, a vehicle), they are more likely to be classified as an independent contractor.
Exclusivity
Do you allow your chauffeurs to work for your competitors, or are they required to drive only for your company? Independent contractors are typically free to choose who they work with, while employees are restricted to working only for their employer. Uber has successfully used this point, arguing that their drivers should not be classified as employees because they are free to drive for Uber, Lyft, or other transportation companies.
While these are the primary areas that an employer should focus on when distinguishing between an employee and independent contractor, there are others that warrant attention too, including what type of training is provided to an individual and whether or not they are expected to look or dress a certain way. The actual determination of whether a worker is considered an employee or independent contractor is based on all of the above factors and more, but no one factor is considered controlling on its own (this is to say that the presence of one factor/criteria is not enough to call someone an employee). It is important to note that just as the U.S. court system presumes someone innocent until proven guilty, many state labor boards and regulatory agencies begin with the presumption that an individual is an employee and not an independent contractor. This can place the burden of proof on the business owner, and can make it more difficult to justify or defend classifying a worker as an independent contractor.
Chauffeured ground transportation operators who use—or are considering using—the independent contractor model need to be educated on the differences between an independent contractor and employee..."
Utilizing independent contractors as chauffeurs can have significant benefits, primarily in terms of cost savings. Businesses that work with independent contractors are not responsible for payroll taxes, healthcare and other benefits, unemployment and disability payments, and do not need to adhere to minimum wage and other labor laws. The most serious cost savings can come from reduced workers’ compensation insurance premiums, as employers do not need to include payments to independent contractors in payroll figures. These savings often lead employers to misclassify employees as independent contractors, but doing this can lead to serious liabilities and penalties.
If your business uses independent contractors, your workers’ compensation insurance provider will likely be more thorough during your annual premium audit. Your auditor will want to confirm that your chauffeurs are classified properly to reduce their own exposures, and to ensure that they are collecting adequate premiums from your business. If the auditor concludes that an independent contractor should have been classified as an employee, that payroll can be added at audit and you may be responsible for additional premiums. State and federal tax authorities may also impose significant penalties on employers who misclassify their workers, as this leads to lower tax revenues and reduced contributions to state unemployment benefit and workers’ compensation funds.
There are methods that business owners can use to mitigate these exposures, chief among them the formation of a written agreement between the parties outlining the facts. This agreement should clearly state that the individual is not an employee, that they are responsible for their own insurance coverages, and should include hold harmless and indemnity provisions. Requiring by contract that your independent contractors obtain general liability and workers’ compensation insurance can also reduce your exposure. The mere existence of a contract itself does not define an employment relationship, and an individual reviewing your arrangement may quickly dismiss a written agreement if the actions of either party resemble an employer or employee. Because the potential liabilities and penalties are significant if an individual is treated as an independent contractor and later found to be an employee, each working relationship and contract should be thoroughly vetted by an attorney before being established.
Chauffeur operators can benefit from proper use of the independent contractor model, but should be aware of the potential exposures created through misclassification of workers. [CD1116]
Jeff Schmidt is the Senior Vice President of Research Underwriters. He can be reached at jeff@researchunderwriters.com.