How two lawsuits could destroy Uber and Lyft's business models - and set a precedent for the rest of the sharing economy
Generally, drivers and other independent contractors want full-time pay - or at least predictable pay - but employers have their sights set on maximizing profits.
Employees are expensive for companies. According to the IRS, for common-law employees, employers "must withhold income taxes, withhold and pay Social Security and Medicare taxes, and pay unemployment tax on wages paid" to full-time employees. The same is not necessarily true for an independent contractor.
Benefits are another aspect often extended to employees but not independent contractors. And employers but not independent contractors have the right to control how a worker behaves - how to dress, for example, or specific customer-interaction protocol. You have more labor protections when you're an employee.
From a company mindset, it's easy to see why a fast-growing company like Uber would favor independent contractors.
But hiring laborers as employees not only makes them happy - it gives company more control over their employees. Companies can enforce a dress code or uniform, for example, with employees, or they can dictate on-duty behavior. In a 2013 lawsuit, a judge ruled that FedEx had misclassified its delivery drivers as contractors when they were really employees, saying that it's "beyond cavil that the pickup and delivery drivers are essential to FedEx's business."
"Uber's whole business model is built around having other people take the risks as independent contractors. And I don't know if they can change that; it's built into their business model. It's how they're making so much money," Joseph De Wolf Sandoval, an organizer for the California App-Based Drivers Association (CADA) told Business Insider back in October.
The lawsuits, which are both seeking class-action status in San Francisco Federal Court, would apply to drivers only in California. But a ruling in favor of the drivers would set a precedent for Uber and Lyft, as well as other companies that follow the independent-contractor business model.Here's why.
There has been a rise in on-demand startups recently. You may have heard it called the "1099 economy," so named for the 1099 MISC forms that employers fill out when they hire contractors, as opposed to the W2 forms companies fill out when they hire full-time employees.
Uber and Lyft are chief among these on-demand companies, of course, but there are many others. Postmates, Wunwun, and TaskRabbit are delivery services. Washio and FlyCleaners do your laundry on demand. Handy and MyClean are home cleaning startups. The "Uber for X" category goes on, and it's seemingly endless.
The people who work for these companies - not the executives, but the people who do the dirty work of delivering your laundry and dropping off your bag of potato chips - are not usually employees - they're contractors.
Startups use contractors for the simple reason that they are a lot cheaper than employees. When you're an independent contractor, your employer does not have to consider paying into Social Security or withholding taxes. It saves them money.
When home-cleaning startup MyClean switched from an independent-contractor model to one with full-time employees, the startup saw its labor costs go up 40%, according to Kevin Roose, writing for New York magazine.
From a financial perspective, it makes sense why companies are clinging to the independent-contractor model. But drivers have a lot to gain from rulings in their favor. These drivers are only asking for reimbursement for their expenses.
But if juries rule against Uber and Lyft, drivers stand to gain more than just lost wages. These lawsuits could change Uber and Lyft's business models entirely, increasing their labor costs.
We reached out to Lyft and Uber for comment and will update this post when we hear back.