Uber, the FTC, and Taxi Drivers (Oh My!)

This post was originally published on February 3, 2017 by SiouxSays

It is 2017 and, by now, everyone with even the most tenuous link to global connectivity has at least heard of Uber, the app-based ride-hailing company that has been connecting private drivers with private riders since the company’s founding in 2009.  More formally known as Uber Technologies, Inc., the company seeks, screens, and approves individuals as Uber Drivers, provided they meet certain criteria for their geographic area.  For example, the driver’s vehicle must be a particular model year or newer, and must seat a specific number of passengers comfortably.  Some cities, such as Myrtle Beach, have even more specific requirements for the vehicle, including an initial vehicle inspection and annual follow-up inspections, before a driver from that city can be approved to drive.

Through the use of a mobile app available from the Apple Store, Google Play, or Microsoft, people who need to get from Point A to Point B can hail an Uber Driver and enjoy a comfortable ride to their destination.  Uber also offers luxury and SUV services, as well.  Passengers provide payment at the end of their ride and Uber distributes fares to drivers on a periodic basis, minus their cut for connecting drivers to riders (which typically amounts to 20% of the total fare).

Many people who use public transportation (buses, taxi cabs, commuter trains, and so on) and do not own their own vehicle have found that using Uber to go to work, shopping, out on the town, or over to their friends’ house is significantly preferable to taking a bus or calling a cab.  A large number of those people enjoy using Uber for transportation so much that they have recommended it to friends, arranged transport for family members through Uber’s app, and refuse to go back to the other transportation options (especially taxi cabs) ever again.

Reasons Why Passengers Prefer Uber Instead of a Taxi Cab

There are several reasons why a significant number of public transportation passengers prefer Uber over a taxi cab.

Uber Drivers respond more quickly than most cab companies, and do so in a more personable and ‘friendly’ manner.  Uber Drivers will contact you via text or call to introduce themselves and describe their vehicle, give you an ETA on their arrival, and find out exactly where you want to be picked up; they will also let you know when they have arrived to pick you up and where they are parked and waiting (and in what type/color vehicle).  You can even track your Uber driver using the Uber app.  Cab drivers just show up at or near the pick-up address, honk their horn a couple times, and then leave to find another fare.

An Uber ride is in someone’s privately-owned vehicle, which means the ride is much more comfortable.  Most taxi cabs are either a minivan or large mass-production car similar to a Ford, Buick, or Oldsmobile sedan, and you ‘get what you’re given’ when it comes to the cab that picks you up (unlike Uber, which provides you with an option to even choose the make/model/type of vehicle you want to ride in).  There is often a strange odor unique to taxi cabs (not to mention the ever-present stale cigar/cigarette odor), a less-than-loquacious driver who may barely speak English, and a notable lack of creature comforts like spacious and plush seats, heat or air conditioning, or even operable windows.  Because an Uber vehicle is a privately-owned vehicle, the driver is naturally and personally invested in maintaining a clean, comfortable mode of transportation simply for their own personal use, let alone that of their Uber passengers.  How many people do you know that have bed bugs in their personal car?  Bed bugs have found their way into taxi cabs, which do not get cleaned thoroughly or frequently.  In fact, bed bugs acquired via taxi cab is not as uncommonly rare as you might think.  To further illustrate how easy it is to get bed bugs while riding in a taxi cab, an article citing 67 ways to avoid getting bed bugs in New York City tells you that the most important tip is to avoid taxi cabs altogether.

Uber drivers are motivated by positive experiences (more praise equals more rides equals more money) rather than simple greed (as many trips as possible via the longest routes possible to maximize profit per ride), and thus find the quickest routes to their passengers’ destinations.  Taxi drivers could care less if you have a pleasant trip and they often look for ways to extend the miles-per-trip to increase their earnings, even if only by a few blocks.  Uber ‘rewards’ good drivers and ‘punishes’ bad passengers via a mutual driver-passenger rating system, which motivates both the driver and passenger to be on their best behavior for the duration of the trip.

Uber drivers, because they are driving their personal vehicle and using their personal auto insurance, are generally more attentive and careful while ferrying passengers around town.  This is dramatically different from most taxi drivers, who often spend the entire ride chatting on their phone, texting while waiting at red lights, and performing other ‘distracted driving’ activities; after all, if they get into an accident it is often the cab company that pays for repairs, lawsuits, and increased insurance rates.  You might be interested to know, as a potential passenger of a Chatty Cathy (on a cell phone) cab driver, that talking on the phone while driving – even hands free – has been found to be more dangerous and unsafe than driving while intoxicated.

Uber requires that drivers be able to converse fluently in the native language of the country in which they drive.  For many people this can be an important factor because it is difficult to communicate certain details about your destination if the driver is unable to competently comprehend what you are saying.  While some people argue that this is somehow a ‘racist’ viewpoint, those same people would not move to a foreign country and refuse to learn the local language.

The Federal Trade Commission Versus Uber Technologies, Inc.

On January 19, 2017, the United States’ Federal Trade Commission (FTC) filed a complaint against Uber Technologies, Inc., alleging that the company had engaged in misleading or deceptive trade practices.  The case was filed with the San Francisco Division of the United States District Court, and the court subsequently ordered a $20 million judgment against Uber Technologies, Inc.  (The complaint and order are on the FTC’s website in PDF format, along with a statement of dissent by FTC Commissioner Maureen K. Ohlhausen.)

Uber is referred to in the FTC complaint as a “mobile ride-hailing business.”  This may be technically correct on the most basic level, but it describes only one part of what Uber does, and it also ties them more closely to an industry they are most trying to avoid – the taxi business.  In reality, Uber is a ride-hailing and ride-providing business, despite its claims that it is nothing more than an innovative “technology” company that developed a nifty app.  The complaint describes Uber they way the company itself wishes to be defined, as a company that “distributes a mobile software application that connects entrepreneurial consumers who are transportation providers with consumers seeking those services.”  (Item 9, FTC complaint.)  That description is only one part of what Uber does, however, and much of their activities cast doubt on whether or not Uber drivers are independent contractors (so says Uber) or employees.  That particular question is covered later in this post.

Uber Drivers: Independent Contractors or Employees?

The question of whether or not someone can be legally classified as an independent contractor or employee is one that has been debated for as long as there have been employees (and independent contractors).  The U.S. Internal Revenue Service (IRS) provides official business guidance on whether or not those who perform work at a company’s behest are independent contractors or employees (common law or statutory).  In the United States, this designation is a federal question because labor relations are regulated at a federal level rather than being left in the hands of the individual states, and the U.S. Department of Labor (DOL) offers guidance on status and classification, as well as several myths associated with being improperly classified as an independent contractor and several problems with misclassification.

The basic conclusion is that an individual is not an independent contractor if he/she performs services that are or can be directed/controlled by an employer.  While the determination is generally made on a case-by-case basis when it presents itself to a court of law or a representative of the IRS, the bottom line is that it does not matter what the employer chooses to call those who perform services under that employer’s direction; if certain criteria are met, those individuals are still legally considered ’employees’ at the end of the day, rather than ‘independent contractors.’

Uber Technologies, Inc. claims that those who drive for them are independent contractors.  Even without an in-depth examination of the arrangement, it is obvious that this classification is factually and legally incorrect.  The only ‘freedom’ Uber Drivers have when it comes to offering ride-providing services through Uber is that they choose the times of day (and days of the week) when and geographical location where they will offer their services (and drivers in the U.S. can choose how often they get paid). The United States’ Fair Labor Standards Act (FLSA) defines an employee and criteria that establish the existence of an employer-employee relationship, as opposed to the designation of independent contractor.  The Internal Revenue Service (IRS) has a ‘20 factor test‘ used to determine whether or not an individual is to be classified as an employee or independent contractor; different versions of this test and the criteria used to classify an individual apparently vary from presenter to presenter, with the 20 factors officially used by the IRS provided in a May 2007 report on worker classification prepared by the federal Joint Committee on Taxation.  (As per the report itself, it should be cited as: Joint Committee on Taxation, Present Law and Background Relating to Worker Classification for Federal Tax Purposes (JCX-26-07), May 7, 2007.)

There have been several lawsuits in various courts across the country (and globe) to have drivers classified as employees of Uber rather than independent contractors.  While the facts of the business arrangement are clear and clearly illustrate an employer-employee relationship, courts have continued to permit the ‘independent contractor’ designation.  While Uber and similar companies (like Lyft) are able to circumvent the facts when it comes to having courts continue to permit the definition of worker status as independent contractors, thus enabling the companies to also side-step regulations that cover their business practices, those who drive for Uber are – in fact – employees and should be classified as such.  (Their claim of being a ‘technology company,’ to avoid regulations that apply to livery and taxi companies, is slowly withering away in the face of persistent scrutiny and media attention, as well.)

The true legal test determining the worker classification of Uber Drivers is noted in the next section, which examines a 1997 report by the Internal Revenue Service relating to the limousine industry.  As noted below, there are two critical factors that are first examined to determine worker status and the absence of one of these two factors clearly indicates that the driver is an employee. Because Uber Drivers only meet one of these two critical factors, they must be legally classified as employees.

A 1997 IRS Document About Limousine Drivers Says…

In March 1997 the U.S. Internal Revenue Service (IRS) prepared a report titled Employment Tax Procedures: Classification of Workers Within the Limousine Industry.  The first paragraph of the body of this report states:

The purpose of these guidelines is to enable examiners to make accurate and consistent determinations of employee/independent contractor status in the limousine industry (the “Industry”).  For purposes of these guidelines, the term “limousine” includes sedans, vans and stretch limousines used in a livery service, but does not include any vehicles licensed by any jurisdiction as a “taxi” or “taxicab.”  Taxicabs are generally authorized by this license to pick up customers any time and anywhere within the licensing agency’s jurisdiction, without prearrangement.  Limousines, as a matter of local law, generally are limited to picking up passengers only by prearrangement.

As noted previously, Uber does not offer nor license a ‘taxi’ service.  In general, Uber rides are limited to picking up passengers only by prearrangement, although there are some larger metropolitan areas that have Uber ride-hailing stands where the general public can obtain a ride from a random Uber driver.  That practice, however, is a deviation from the standard mode of operation. The Employment Tax Procedures report goes on to state:

In addition to the worker classification issue addressed by these guidelines, there is an additional compliance issue concerning the reporting by companies to the [Internal Revenue] Service of payments made to workers.  A company that treats a driver as an employee is required to report the wages on Form W-2.  A company that treats a driver as an independent contractor is required to report payments (if they equal or exceed $600 in a year) on Form 1099.  While these reporting requirements are analytically separate from the worker classification issues, an examiner should confirm that payments have been reported for all drivers, even if they have been misclassified.

Either way, Uber is required to provide to the IRS an annual year-end reporting of all payments made to Uber drivers if those drivers have earned $600 or more during that fiscal year.

The legal description of the limousine industry, as stated by the IRS report, provides a clear parallel between limousine services and Uber services.  According to the report, “the limousine industry provides two distinct services: (1) the dispatch service, which links the client to the car; and (2) the transport service, which delivers the client to the destination.”  This is identical to the service provided by Uber’s ride-hailing app.  The report goes on to state, on pages 3 and 4, that those two services create three separate service-delivery models:

  • Pure dispatch service provider
  • Pure transport delivery provider
  • Mixed or typical service provider

Nearly all limousine services provide a mixed, or typical, service provider arrangement. The IRS report refers to the ’20 factor test’ established to help determine whether or not a worker was an employee or independent contractor, and goes on to say (with bold emphasis added):

To meet this goal [of promoting efficiency in classification], the Service tried to identify “critical factors” for determining whether a driver within the Industry is properly classified as an employee or an independent contractor.  Two critical factors were identified: 1) significant investment; and, (2) realization of profit or loss.  The absence of either critical factor indicates that a driver is an employee and no further analysis is necessary.  If both critical factors are present, the driver may be an employee or an independent contractor, and the analysis must proceed to a second level of “significant factors.”  The significant factors consist of factors which generally differentiate between employees and independent contractors.  A third group of factors, which bear the least weight, have been deemed to be generally less significant or not applicable to the determination of driver status in this Industry.

The IRS report provides a detailed description of the operation of pure dispatch and pure transport service providers, and states that nearly all limousine industry entities operate in the middle, conducting business in a way that incorporates elements of both dispatch and transport services.  Where a pure dispatch operation would be able to classify workers as independent contractors and a pure transport operation as employees, the mixed service provider lies in a gray area where definitive classification becomes more challenging.  The report states:

In the usual disputed case, the Service maintains that the limousine company operates a business for which the driver merely provides the driving, while the Industry maintains that both the company and the driver have independent businesses. The disagreement often arises because the activities of the company and the activities of the drivers overlap and blend together.

The report also states that while there may exist certain documents or contracts that define a driver as an independent contractor, the actual classification is determined by ‘all the facts and circumstances,’ which includes but does not wholly rest upon the language used in any written agreements.  (The IRS and U.S. Department of Labor have also stated that a worker is not necessarily classified as an independent contractor simply because a written agreement exists stating that the worker is such.)

On page 8 of the IRS report on the limousine industry, it states:

Under the common law rules, the key question is whether a business has the right to direct and control a worker as to the details of when, where, and how work is to be performed. If so, the worker is an employee. If, instead, the business merely specifies the result to be achieved, the worker will be an independent contractor.

The report emphasizes that it is not necessary that the business actually direct and control a worker, only whether or not it has the right to do so.

Page 12 of the report, within a section relating to determining driver classification, states (with bold emphasis added):

As noted, there are two critical factors that must be analyzed before a limousine driver can be classified. Under the common law standard, these factors alone do not establish the degree of control necessary to treat a driver as an employee. However, in practice, one or both of these factors is absent in situations where the limousine driver is an employee.

The two critical factors are noted above and are:

  • significant investment, and
  • realization of profit and/or loss.

Because a limousine driver, like an Uber Driver, typically owns (or leases in his/her name) the vehicle used to provide services, this constitutes a ‘significant investment’ and is indicative of independent contractor status.  Uber does not own and maintain a fleet of vehicles for use by Uber Drivers, thus the company itself does not have a ‘significant investment’ in the mode of conveyance used to transport passengers to and from their destinations.

The ‘significant investment’ factor is obviously quite straight-forward.  If the driver does not own the vehicle (as is almost always not the case), he/she is an employee.  If the driver does own the vehicle, however, the second factor – ‘realization of profit/loss’ – then must be examined.  The IRS report states (with bold emphasis added):

An employee has no opportunity for a profit or loss because he or she is paid for services rendered on a time basis. An independent contractor, on the other hand, controls the variables which can result in a profit or a loss. This is the second critical factor and is to be evaluated after it is determined that the driver owns or leases the vehicle.

The opportunity for a driver to realize profit or loss must be distinguished from simply generating receipts to compensate the driver for driving. The opportunity to realize profit or loss means that the driver is using his capital investment to generate gross receipts. To realize profit or loss, the driver employs capital, markets services, controls expenses, and makes business decisions.

If it is determined that the driver has a significant investment in the vehicle and can realize a profit or loss [other than profit through generating receipts as compensation for driving], the three [additional] significant factors must be considered.

Beyond the two critical factors noted above, there are additional factors in descending weighted order, that assist in determining if a driver is an independent contractor or employee.  According to the IRS report, if a driver does have a significant investment (through vehicle ownership) and can realize profit or loss (beyond simply generating receipts as compensation for driving), a driver can be classified as an independent contractor if he/she meets at least one of the subsequent three significant factors.

It should be noted at this point, however, that Uber Drivers need not examine any further factors to determine their worker status.

Uber Drivers are employees because they do not have the opportunity to realize profit or loss beyond that which is generated as payment for their driving services.

As previously stated, the IRS report clearly determines on page 12 that the absence of one of the two critical factors (‘significant investment’ and ‘realization of profit/loss’) creates a situation where the driver is an employee.

The Final Word

I do not agree with the $20 million judgment against Uber Technologies from a legal standpoint.  The judgment is compensation for drivers who allegedly did not earn the income advertised as possible by Uber in various advertisements (“make $15/hour driving for Uber”).  The FTC complaint clearly shows that the advertised earning potential is – in fact – possible because it provides a percentage of Uber Drivers who attained that level of income.  Thus the allegation that Uber’s advertising claims are false or misleading is simply not true.  If someone did earn a specific amount of money as an Uber Driver then the claim that it isn’t possible is without any merit whatsoever.

What does have merit, however, is any claim that Uber Drivers should be recognized as and compensated as employees, not independent contractors.  The 1997 IRS report on the limousine industry clearly and unequivocally states that a driver-for-hire who does not have the opportunity to realize profit or loss beyond earnings generated from receipts for driving services is an employee, not an independent contractor.  There is no way around that argument and Uber Technologies cannot classify drivers as independent contractors just because they want to.

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