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Avoiding the contractor vs. employee legal debate?

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On-demand workers for companies like Uber and Lyft are constantly debated. As the founder of a startup that also relied on contracted workers (not in the transportation market), what can I (and others like me) do to avoid the contractor vs. employee legal debate? Our product isn't live yet so we want to take and and all precautions so as to preempt any potential ambiguity about the status of our contracted workers.


21 Replies

Roger Wu
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Roger Wu Entrepreneur
co-founder at cooperatize, native advertising platform
I think (and I'm no lawyer) that it depends on timing. What I mean by that is that Uber is saying you must go work NOW because the customer wants to go somewhere NOW. Oh the other hand, information services are not as time sensitive (think Elance) and the contractor can do the job at their own time within a certain deadline. That's the way that I'm construing it but I could be wrong.
Roger Royse
3
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Roger Royse Advisor
Royse Law Firm
You need to plan into this carefully. The consequences of getting it wrong care be life-ending for a startup, especially in California. This IRS has some good resources on this but the question is fact specific and requires analysis of your situation. seehttp://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Independent-Contractor-Self-Employed-or-Employee

see our posts on this also athttp://www.royseuniversity.com/misclassification-of-company-workers1/

I will tell you that at a high level, you want to be merely the platform, not the business, if you want to stay out of this issue. By the way, this determination is not the end of it, you then have reporting requirements to deal with, and that area can be quite confusing. I have an extensive white paper on this that you can read if you don't mind the brain damage.http://www.rogerroyse.com/PDF/Section6050Article.pdf
Amir Yasin
2
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Amir Yasin Advisor
Developer, Architect
Homejoy and to a lesser extent Uber and Lyft are in hot water not because they blurred the line between employee and contractor, they just flat out ignore the difference and call employees contractors.

For a good example of a "marketplace" look at Angie's list. Angie's List will connect you to a plumber, but they don't set the plumber's rate, they don't make the arrangements for when the plumber will come to your house, they don't collect money from you to give to the plumber (paying the plumber on some fixed schedule...say every 2 weeks), and when the plumber shows up at your house, he's not wearing an Angie's List uniform. The plumber is a legitimate independent business and Angie's List is a legitimate facilitator. Compare this with Homejoy and I dare anyone to claim with a straight face that Homejoy cleaners aren't Homejoy employees in everything but name.
Stephen Cataldo
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Stephen Cataldo Advisor
Drupal | Startups | Green Conferences | Carpooling | Strategic Planning During Conflict
There are detailed lists, but a shortcut may be: are they already contractors, or are they people looking for jobs who you want to call contractors for your reasons? People working for Uber were generally looking for jobs, not taxi-contractors looking for an app. The news-headline entanglements are coming when companies try to find loopholes to get around the law, rather than companies that tried to figure out whether they had employees or contractors.
Mark Dostie
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Mark Dostie Entrepreneur • Advisor
CTO of Artificial Intelligence Dev
A good rule of thumb at least in Canadian law is that the contract employee should have at least 3 clients (including you) or more. If they are providing services to you and 2 other companies then it would be difficult for the tax authorities to argue they are your employee. On the other hand, if you are the only employer, you set their wage and assign all of their work then they are your employee no matter what the contract says and you'll need to pay all the employer taxes due.
Antone Johnson
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Antone Johnson Entrepreneur
Social/Digital Media/Mobile Startup Lawyer, Advisor, Board member, Commentator
Roger gave some great advice above. I would also emphasize, as a California lawyer, these issues (and all employment law issues, for that matter) can be highly state-specific. Not just the law itself, but enforcement by state authorities varies widely. In that sense, California is notoriously one of the most aggressively pro-employee states in the US. (It's testimony to the strength of the startup ecosystem here that we're able to thrive anyway.)

Pragmatically, most early stage startups don't run into this problem simply because they have such a small headcount they don't make the radar screens (yet) of state agencies or plaintiffs' class action lawyers. I would say the same about other common risks such as failure to obtain workers' comp insurance, misclassifying employees as overtime-exempt, or hiring unpaid interns. That doesn't mean it's OK to ignore these laws; companies that do are often in for a rude awakening when they become large or prominent enough, or if a disgruntled employee files a complaint that sparks an investigation by state regulators.

California has a good 10-question FAQ on employee vs. contractor status here:http://www.dir.ca.gov/dlse/faq_independentcontractor.htm.

Juan Ramon Zarco
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Juan Ramon Zarco Entrepreneur
Managing Director, Silicon Valley Ventures Growth Partners llp
The so-called contractor-employee issue is not novel. It is just that Uber has been misinformed by its own counsel. Years ago my firm represented a car accident victim in Texas where the faulting party, a truck driver, was a supposed contractor .. So that the trucking company would avoid master-servant liability. That Texas company lost. In fact I thought that Uber had the same strategy since it would avoid such insurance premiums. Stating that its employees are contractors does not fool the authorities. As noted by other commentators, , each state -- even foreign countries - has some yardstick to determine employer vs. contractor relationship. My own blogs anticipated this legal issue. Mind you that outside the USA, the legal systems are more severe. Now companies such as Uber must set aside reserves in order to comply in each jurisdiction.
Juan Ramon Zarco
0
0
Juan Ramon Zarco Entrepreneur
Managing Director, Silicon Valley Ventures Growth Partners llp
Let me add that I have worked in many startups whose founders attempt to avoid costs for fees/taxes, to register or get a license. Recently a Y combinator company in international money transfer wanted to avoid registrations. I said you have to comply or the penalties are too great. Seasoned investors know this as well. And these risks are found during due diligence. This process is part of the costs of doing business -- hiring counsels, filing or registering the company. Otherwise you are risking investors capital.
James Sadrianna
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James Sadrianna Advisor
Certified Circuit Civil Mediator at Sadge Mediation Services
To avoid the debate you have to take into consideration the 20 factor test that the IRS uses in evaluating whether an individual is an employee or an independent contractor. Those factors are:

Instructions - the company instructs individual what to do
Training - Company provides training
Integration - Company provides individual services to others
Services rendered personally
Hiring, supervising and paying assistants - if the company does then employee
Continuing relationships - the longer more like an employee
Set hours of work
Full time required
Working on employee premises
Order or sequence set - company sets pattern, priority and schedule
Oral or written reports
Payment by the hour, week or month - pattern
Payment of expenses -
Tools and materials - company provides
Significantinvestment - individual does not have own office
Realizationof profit or loss - does individual have risk of loss
Multiple assignments - does individual have other clients
Making services to the public
Right to discharge - cannot be fired if honors contract
Right to terminate - individual can end relationship without liability.

I always look at the degree of control the company has over the individual.

With that said defining the relationship always works and making the independent contractor fill out a Form W-9 will not hurt your cause as would a contract incorporating the factors above.
Roger Royse
0
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Roger Royse Advisor
Royse Law Firm
BTW, this has become a political issue as Hillary has characterized the sharing economy as unfair to workers.http://www.tylerpaper.com/TP-Editorials/221921/hillary-clinton-doesnt-understand-the-sharing-economy
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