Big Red Car here. Ah, it’s finally summer in the ATX. It is a little warm, to be sure. But, then it is almost August, no?
So, The Boss was helping a brilliant young CEO and the issue of what exactly is going on with independent contractors came up.
The Independent Contractor defined
The independent contractor is not an employee. The independent contractor is a vendor.
The implication — and attraction, for an employer — is that vendors do not receive benefits nor require the collection and payment of payroll taxes, including the employer’s match for certain of these. You pay them their fee and that’s the end of it. Clean, easy, and cheaper.
When you use a vendor to provide a service, the employer does not have to make tax withholdings, collect payroll taxes (unemployment insurance, medicare insurance fees, social security payments), match payroll taxes, and provide benefits (such as Obamacare or health care, vacation time, sick pay or maternity leave).
Employers like vendors — independent contractors — because it is cheaper.
The IRS View
The IRS — which has the primary role in dealing with independent contractors — does not like employers using independent contractors. This is not a new development. This has been settled law for a long, long, long time.
The IRS therefore makes rules which make it very difficult — almost impossible — to classify an employee as an independent contractor.
Why, Big Red Car?
Well, dear reader, in the case of someone like Uber — the IRS wants Uber to collect all that money and send the IRS a single check rather than being required to hunt down 160,000 Uber “independent contractors” and having to process 160,000 individual files.
Again — IRS wants a single check. Single big check for withholdings, medicare, social security, unemployment. One big check from one big company. More efficient.
Philosophically, the government also knows that they will collect more money in a single check from a big company than they ever will from 160,000 slippery drivers who don’t really want to pay them a penny.
This means it is substantially more efficient for the IRS to insist that drivers — any gig oriented labor in the gig economy — are not independent contractors and are direct employees.
An employee is an individual who works directly for a company.
An independent contractor is a vendor.
Their taxes are dealt with differently.
There is a huge difference in the efficiency of collecting their taxes.
When a company hires, insists on a certain trade dress, sets forth the rates of pay, determines the gratuity, schedules the work, dispatches the work, handles any dispute resolution, disciplines the workers — etc. — it is very difficult to establish the operational differences between an employee and an independent contractor.
There is no “independence” in the relationship. The driver is a rented mule. Rented mules are employees — sayeth the IRS.
It is a very difficult argument for the Ubers of the world to win, given the facts as they truly are. The losses are beginning to pile up.
The gig economy
We got here — the gig economy — because the economy is not good and many people are hustling for work. Most folks would like a steady, full time job. If only there were a few more, no?
Uber and other “gig economy” companies are worthy employers of folks who want and need a second job or a series of full time part time jobs. [Take a second to dissect that idea, y’all.]
There is nothing wrong with this kind of employment relationship though the IRS is not about to reverse a half century of regulations and make this an easy thing to do.
Uber is likely to continue to lose such confrontations until there is a massive intervention.
I am not seeing how Uber, et al, overturns the IRS and their long standing regulations without substantial legislation. New laws spawning new rules.
Still, nobody in government wants the IRS to be chasing 160,000 Uber drivers for their income tax withholding, social security (including the employer’s contribution), medicare premiums, etc.