By Cliff Ennico

It’s amazing to me how many significant new legal and tax developments take place during the summer months. Each year, while most of us are baking on a beach, walking through the woods or treating ourselves to truffles at a trattoria in Taormina, lawmakers and judges are quite busy making disruptive changes to our world.

Two summertime developments are especially worthy of note:

  • A decision by the California Franchise Tax Board saying that Uber drivers should be classified  “employees” rather than “independent contractors” for tax purposes; and
  • A decision by the National Labor Relations Board saying that employees of franchise outlets fall under its “joint employer” rule, enabling them to sue not only the local franchise owner but the national franchise company in labor/employment lawsuits.

For the past two decades, employers have been playing fast and loose with the rules distinguishing between employees and independent contractors, creating a grey area known as “contract employees”. If these two decisions signal (as I think they do) a new era of stricter enforcement of these rules, the good times for America’s small businesses are over, and your Big Mac or Whopper is going to get a lot more expensive.

Let’s review the basics. If you have people working with you in your small business, they fall into one of three broad categories: partners, employees and independent contractors.

“Partners” share in the profits and losses of the business. Companies don’t pay or withhold taxes on payments to partners, and cannot direct or control their activities. Partners have no rights as employees. If they withdraw from the company, they may receive payment for their stock but don’t qualify for unemployment benefits.

“Employees” receive a regular salary or hourly wage, and qualify for benefits. They work a regular schedule, dictated by the employer. Companies must pay and withhold taxes on their wages. They also have lots of legal rights, including the right to unionize. In return, companies get to direct and control their employees’ activities in the workplace. If they are fired, they qualify for unemployment benefits.

“Independent contractors” work on their own schedules, often on a project basis. Companies are not required to pay or withhold taxes on amounts paid to contractors, but cannot direct or control the contractors’ activities – the contractors get to decide what projects they will work on for whom, and when. Independent contractors have no rights as employees. They cannot unionize, and they don’t qualify for employee benefits. If they are terminated, they don’t qualify for unemployment benefits.

So how do you tell the difference? Rather than give a straight answer, the IRS uses 20 vague and ambiguous “criteria” in determining whether a worker is an employee or an independent contractor ( Add to the lack of clarity the fact that the IRS in recent years has lacked the staff to audit aggressively, and it’s no surprise many small (and large) business owners feel they have “carte blanche” to treat all their workers as independent contractors – even key executives who work 50 hours a week and more.

The California Franchise Tax Board (FTB) decision awarded $4,000 in expense reimbursements to an Uber driver who claimed she was an employer of the popular social media driven taxicab service. Uber argued that it did not exert any control over its drivers’ hours, but the FTB found that “by obtaining the clients in need of the service and providing the workers to conduct it, [Uber] retained all necessary control over the operation as a whole.” The FTB compared an Uber driver to a pizza delivery person, who in a prior case was held to be an employee of the pizzeria notwithstanding the fact that the delivery person was required to provide his own car and pay for gasoline and insurance. The FTB went on to note that the driver’s work was integral to Uber’s business, for without drivers to provide transportation services to passengers, the business would not exist.

The FTB found conclusive evidence that Uber was, in fact, involved in every aspect of the operation: Uber vets prospective drivers, requesting drivers’ personal banking and residence information, Social Security numbers, and conducting background and DMV checks. Drivers must register their cars with Uber, and Uber requires that the cars be less than 10 years old. The passenger pays Uber a set price for the trip, and Uber pays the drivers a non-negotiable service fee. Only Uber may negotiate a cancellation fee with a passenger who cancels a trip, and Uber discourages its drivers from accepting tips. On these grounds, the FTB found that drivers are Uber’s employees rather than independent contractors

Uber has appealed the FTB decision in federal court, as its very business model is under an existential threat. But the principal thrust of the FTB’s reasoning – that a worker’s ability to schedule her own hours by itself does not make her an independent contractor – is likely to stick.

More next week . . .

Cliff Ennico ([email protected]) is a syndicated columnist, author and host of the PBS television series ‘Money Hunt’. This column is no substitute for legal, tax or financial advice, which can be furnished only by a qualified professional licensed in your state. To find out more about Cliff Ennico and other Creators Syndicate writers and cartoonists, visit our Web page at COPYRIGHT 2015 CLIFFORD R. ENNICO. DISTRIBUTED BY CREATORS SYNDICATE, INC.  Follow him at @cliffennico.