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Are taxi drivers employees or independent contractors? Watch out for labor law potholes.

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Employee or independent contractor?

These tests bear on a state or federal agency’s classification of a worker.

  • Does the person engage in a business or occupation distinct from the principal or alleged employer?
  • Is the work an integral part of the regular business of the principal?
  • How much control does the principal have over how the work is performed?
  • Does the principal or worker supply tools, instruments and a place to work?
  • How much does the worker have invested in equipment or materials required to do the work?
  • Does the service rendered require special skills?
  • In a particular location, is this work usually done by the principal or by a specialist without supervision?
  • Does the worker have opportunity for profit or loss depending on managerial skill?
  • How long are the services performed?
  • How permanent is the work relationship?
  • How is payment made, by time or the job?
  • <<

Andrew Girard pulls a green Yellow Cab Nissan into a gas station on Sebastopol Road in Santa Rosa after an all-night shift that lasted 14 hours.

“We all work for ourselves,” said Girard, who has been driving a cab for five years. Usually he drives nights from 7 p.m. to 7 a.m., including lucrative weekend night shifts. “We go anywhere.” One ride last year took him from Santa Rosa to Oregon and yielded a $1,500 fare.

“On Fridays and Saturdays, if you’re hustling and it’s good — $400 or $500” in fares, Girard said. He pays Santa Rosa-based Yellow Cab company $120 per 12-hour shift, $480 a week, including use of a company cab. The company has 25 drivers.

Girard competes with drivers who find riders through Uber or Lyft, San Francisco-based ride-hailing companies that rear-ended the cab industry. In cases involving Uber and other ride providers, the issue of whether drivers are employees or independent contractors swirls as a threat to the business model.

In 2014, former Uber driver Barbara Berwick in San Francisco filed a claim with the California labor commissioner against Uber, demanding unpaid wages and mileage expenses. In that case the hearing officer determined that Uber’s relationship to Berwick is employer/employee, not an independent contractor. The commissioner awarded Berwick $4,152. Uber hired Littler Mendelson law firm and appealed the case in June 2015. The case settled in November 2016 and was dismissed with prejudice.

A-C Transportation Services in Santa Rosa faced a similar case with the labor commissioner, agreeing in December to pay a $200,000 fine. The company went out of business on Dec. 31. A-C had about 30 drivers misclassified as independent contractors, according to the commissioner, and A-C owners Kevin and Jennifer Kroh failed to provide workers’ compensation insurance.

“My office will not tolerate the misclassification of employees as a business model,” said California Labor Commissioner Julie Su in a December statement. Enforcing labor code sections in the state, the commissioner’s hearing officers as well as courts start cases with the presumption that each worker is an employee, not a contractor, Su said in a Feb. 1 interview with North Bay Business Journal. “It is up to businesses using independent contractors to satisfy this test” and prove a contractor relationship.

Su said the commissioner’s office has more than 30 cases involving Uber, Lyft and other ride-sharing companies. All except the Berwick case settled or are still pending, she said. “We cannot conclude that as a blanket matter” Uber’s relationship to its drivers is as an employer, Su said. “The test of whether someone is an employee or independent contractor is very fact-based. We apply a multifaceted test.”

One key factor in that test is “whether the work is an integral part of the business,” Su said. Berwick’s work was integral to Uber’s business, the commissioner found. How much the company controls the worker is another key factor. Uber “retained all necessary control over the operation as a whole,” the commissioner found. Uber holds itself out as “nothing more than a neutral technological platform, designed simply to enable drivers and passengers to transact the business of transportation,” the commissioner said.

Classifying drivers as contractors may provide a business advantage over ride companies that have employee drivers and pay for mileage expenses, workers’ compensation and unemployment insurance, health insurance, minimum wage, overtime, as well as half of Social Security and Medicare taxes. Employees may benefit from laws that protect them from discrimination or harassment.

Employee or independent contractor?

These tests bear on a state or federal agency’s classification of a worker.

  • Does the person engage in a business or occupation distinct from the principal or alleged employer?
  • Is the work an integral part of the regular business of the principal?
  • How much control does the principal have over how the work is performed?
  • Does the principal or worker supply tools, instruments and a place to work?
  • How much does the worker have invested in equipment or materials required to do the work?
  • Does the service rendered require special skills?
  • In a particular location, is this work usually done by the principal or by a specialist without supervision?
  • Does the worker have opportunity for profit or loss depending on managerial skill?
  • How long are the services performed?
  • How permanent is the work relationship?
  • How is payment made, by time or the job?
  • <<

Girard, the Yellow Cab driver, sees his driving as self-employed. Often on Fridays and Saturdays, Girard takes no leads from the Yellow Cab dispatcher, finding riders entirely on his own. In its business model, Uber drivers usually obtain riders through its app.

“There are various places you want to be depending on what time it is,” Girard said. “Monday nights I go to Hopmonk (in Sebastopol) because at around 1 a.m. there’s nothing else. I go to the jail at around 4 in the morning. They like to release them between four and six.”

Girard and two dozen other drivers for Yellow Cab company in Santa Rosa use cars owned and insured by company owner Mark Neese, who started working for the company as a mechanic and has owned it for the past 20 years.

“In Santa Rosa, I’m the only company left,” Neese said. “They’re not independent. They’re self-employed,” he said of drivers. “They have their own franchise permit with the Santa Rosa police department.”

“I don’t split” fares with drivers, Neese said. “That’s a big no-no. It’s a fixed fee paid up-front per 12-hour slot,” from $90 to $120. A company’s earnings should not depend on the driver’s earnings, he said.

Ever since the state deregulated workers’ compensation in about 1995, “it has been a gray issue in California,” Neese said. “My drivers were employees until that day.” Workers’ comp rates soared in ensuing years, squeezing company profits. “A $10-per-hour employee was going to be $28 an hour before payroll taxes and expenses,” Neese said. He and other cab-company owners “made the transition to independents,” he said.

On Jan. 31, Neese sat in his Roseland office and handled radio communication with drivers for rides throughout Sonoma County except Petaluma, where A-1 Taxi operates. “So far I have been able to prove they’re independents,” Neese said, noting that there’s no guarantee. “It’s unbelievable” uncertainty, he said. Numerous cab drivers operate throughout the county as one-person businesses.

“I don’t feel like I’m in competition with Uber,” Neese said. “They have a lock on the younger demographic. It’s kind of like a video game ordering a cab — a lot more like hitchhiking than taking a taxi. I don’t think they were taking cabs to begin with. It’s a separate group of people using this technology.

“The only thing that bothers me about Uber and Lyft is it’s not a level playing field,” Neese said. “Their vehicles and drivers are not regulated” through such means as taxi permits or medallions, and commercial driver insurance.

In April 2016, Uber offered a settlement of up to $100 million to some 385,000 drivers in California and Massachusetts who filed class-action lawsuits in 2013. The proposed settlement included Uber agreements to give drivers more information on how they are rated or can be deactivated from the app, and to help create drivers’ associations. The settlement is still in limbo as courts determine whether an arbitration agreement blocked drivers from being certified for a class action.

Determining the nature of the company-worker relationship depends on numerous factors, but an overarching factor is how much the company controls the worker. Uber deactivates drivers who have low acceptance rates of riders or who frequently cancel rides they initially accept. That kind of control tips toward employer/employee status. Uber drivers can also be deactivated if customers rate them on average lower than 4.6 stars out of 5, and Uber drivers cannot set the price of rides. Uber, a private company valued in its last financing round at $62.5 billion, has an estimated half million drivers in the U.S.

Jennifer Phillips, a labor-law attorney at Santa Rosa- and Napa-based Dickenson Peatman & Fogarty, sees classification issues with some business clients.

“In the taxicab industry, that has been an issue” for a long time, she said. The Internal Revenue Service may rule differently than the federal Department of Labor or the state labor commissioner, she said, and differently from the state’s Franchise Tax Board, Employment Development Department or Division of Workers’ Compensation. “Everyone has their own say,” she said.

The worker-classification issue goes beyond California.

“Misclassification of employees as independent contractors presents one of the most serious problems facing affected workers, employers and the entire economy,” according to a statement from the U.S. Dept. of Labor.

Most challenges to the classification arise from claims made by workers who were considered independent contractors by the company and would like legal protections offered for employees.

“It has to be very clear that they are independent contractors,” Phillips said. “I view my job as analyzing the risks. I never say one way or the other. I don’t have a crystal ball.”

The safest arrangement with an independent contractor is “if that person or that entity is its own business,” Phillips said. “You are hiring a business, not an individual. They work for other people” as a stand-alone company. Some Uber drivers also drive for Lyft, blurring this distinction.

In considering a company’s control over workers, many factors may be relevant.

“Are you requiring them to do it a certain way,” she said, “to take a certain number of rides, to respond within a certain amount of time.” Uber requires drivers’ cars to be less than 10 years old. “The more control you exercise, even if they are working for other people, it becomes a problem,” she said. “It is really tricky. It is crazy-making.”

“In my conversations with employers over the last five years,” Commissioner Su said, “it is very difficult to operate on an employee status in these industries where competitors are using independent contractors. In my enforcement, our protection is not only for those workers but for employers who are trying to do it right. My job is to ensure that the marketplace is fair, that there is a level playing field,” Su said.

James Dunn covers technology, biotech, law, the food industry, and banking and finance. Reach him at: james.dunn@busjrnl.com or 707-521-4257

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