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The 1099 Decision: Part 2

If Uber drivers are employees and not contractors, what will that do to investment dollars pouring into startups?

| BY Kent McDill

Investors all around the world will be watching legal events in California to see what happens with the so-called 1099 Decision against Uber.

The California Labor Commission last week determined that Uber drivers are employees and not freelance contractors as currently constituted and should be treated as such, with employee benefits that include reimbursed expenses and health care benefits.

Why do investors care? Because startups, which is what Uber was initially, are often attractive investments due to their low startup costs. One significant startup cost is labor, and contractors are so much cheaper to hire and maintain than employees, positively affecting the bottom line. Contractors pay all of their own expenses, and in the case of Uber drivers, that includes gasoline and maintenance on their vehicles.

If contractors become employees, the cost of employee benefits, even if limited, make the investment potentially lower. Even if a company does not offer health benefits, it must pay Social Security and Medicare taxes for each employee, which it does not need to do for contractors.

This is big news to the so-called 1099 economy, startups that rely on contractors for services rather than paying more expensive employees. All freelancers must file a 1099 tax form every year to pay their own Social Security and Medicare taxes, which is why the startup industry has been given that moniker.

Startups have been very attractive investments to investors with an eye toward a large payoff when such companies eventually go public. 

The California decision is in regards to one employee in one state currently, but Uber faces class-action suits elsewhere that could be affected by the decision. A hearing is scheduled in August to begin a jury trial related to the issue.

The economy could be greatly affected if the California decision is upheld through all of hits possible court steps. According to slate.com, the U.S. Government Accountability Office has determined that 40 percent of all American workers as of 2010 were temporary, part-time or independent contractors, an increase from 35.3 percent in 2006.

Many of these people work in the 1099 economy, and many of them perform a service similar to Uber drivers; they deliver things. Many of the contracting workers end up making well below the poverty line and require government assistance for living expenses.

The defense against the employee argument, a defense Uber used in the California case, is that the company does not own anything. It says it is nothing more than a software platform that joins two parties in need, in Uber’s case a person needing a ride somewhere and a driver looking to make money driving.

So many of the startups have grown so significantly that they are not multi-billion dollar enterprises: Uber is said to be worth $50 billion today. That they are making so much money on the backs of contracted workers with no rights or benefits is drawing the attention of the government, who thinks something needs to be corrected.

“(The ruling) from the California labor regulators demonstrates why federal policymakers need to re-examine the 20th century definitions and employment classifications we’re attempting to apply to a 21st century workforce,” said Sen. Mark Warner of Virginia in a statement released last week. “We have a responsibility to provide clarity and predictability instead of allowing inconsistency and confusion as these issues are litigated on a case-by-case and state-by-state basis.” 

The American news organization The Guardian presented an argumentative piece last week on the two sides of the argument. Sarah Saez, who works with the United Taxi Service of San Diego in labor rights debates, explained the driver’s side of the argument.

“Uber has built a whole empire on the backs of these drivers, getting them to buy cars and take on expenses, telling them how to dress, how to talk, how to have their cars a certain way,’’ she said. “What these companies represent is a form of super-capitalism. It’s all based on consumer convenience, but that comes at a price. We have drivers out there competing for scraps.”

To which the business community responses accordingly.

“The commission’s ruling could force sharing-economy companies to scale back their offerings and increase prices, which could also rob consumers of the flexibility and broad range of choices currently offered by these companies,’’ said Berin Szoka of TechFreedom to The Guardian.

As of June 22, 2015, similar claims have been filed against Uber, its competitor Lyft, or both, in Georgia, Pennsylvania and Texas, and in Florida, an Uber driver recently won a claim from that state’s employment regulators.

 

 



About the Author


Kent McDill

kmcdill@spectrem.com

Kent McDill is a staff writer for Millionaire Corner. McDill spent 30 years as a sports writer, working for United Press International and the Daily Herald of Arlington Heights, Ill. From 1988-1999, he covered the Chicago Bulls for the Daily Herald, traveling with them every day through the nine-month season. He also covered the Bulls for UPI from 1985-88, and currently covers the team for www.nba.com. He has written two books on the Bulls, including the new title “100 Things Bulls Fans Should Know And Do Before They Die’, published by Triumph Books. In August 2013, his new book “100 Things Bears Fans Should Know And Do Before They Die” gets published.

In 2008, he resigned from the Herald and became a freelance writer. The Herald hired him to write business features and speeches for the Daily Herald Business Conferences and Awards presentations.

McDill also writes a monthly parenting column for the Herald’s Suburban Parent magazine.

McDill is the father of four children, and an active fan of soccer, Jimmy  Buffett and all things Disney.