Uber is the largest ride hailing service in the world with roughly 3.9 million drivers. People with vehicles from all aspects of life drive for Uber because it simply is one of the easiest ways to make a little extra money.
Uber drivers have been considered independent contractors in the United States since the ride hailing app was created. In recent months, the state of California, which holds the largest number of Uber drivers in the country, reviewed whether or not ride hailing drivers were still independent contractors or employees of their respective companies.
Employees and independent contractors have significant differences when it comes to benefits and how they pay taxes. If you are an Uber driver or plan to be one in the future, here is why your job classification matters.
The Decision in California
In August of 2020, a California judge ruled that ride hailing companies like Uber must reclassify their drivers from independent contractors to employees.
In the months prior to this ruling, California’s Attorney General, Xavier Becerra, alongside the city attorneys of Los Angeles, San Francisco, and San Diego pushed for ride hailing companies to classify their drivers as employees due to the AB5 law that went into effect in January of 2020. The AB5 law creates a test for companies to determine if their workers are being employed or contracted.
Fast forward to November of 2020 and the ruling that would make ride hailing services reclassify their drivers to employees was opposed. California voters supported Proposition 22 which would let Uber drivers classify as independent contractors in the future.
Input From the Federal Level
The ruling in California might have had something to do with the National Labor Relations Board which issued an advice memorandum finding that Uber drivers are independent contractors and not employees under the National Labor Relations Act.
Therefore, Uber drivers can still unionize but will not receive any federal support. The memorandum doesn’t prohibit states from classifying Uber drivers as employees, but it does make it harder for them to do so.
Advantages of Contractor Work
As Uber drivers in the state of California and the rest of the United States are considered independent contractors, here are the main advantages of this classification.
- You are your own boss.
- You have the potential to earn more than employees.
- You don’t pay federal or state income taxes.
The number one perk of being an independent contractor is being in charge of yourself. This allows you to create your own schedule and manage your time how you want to.
As an Uber driver, many use the flexible scheduling to work at their main job during the day, and then drive their vehicle at night (the best time to drive) to create a second income. Or maybe they work the night shift at a restaurant and drive for people during the day. Or maybe they work 10 hour days Monday-Thursday and use the long weekend to make some cash driving an Uber.
Whatever it is, that’s the beauty of flexible scheduling as an independent contractor.
Another advantage of being an independent contractor is because you have the ability to set your own hours, you can drive as much as you want to, making more money than scheduled employees. Plus, drivers can now set their own rates. This means that when you are in high demand, you can charge additional fees to riders to increase your income.
In addition, because those who hire independent contractors don’t have to pay expenses that come along with having employees, they pay independent contractors 20-40% more per hour than employees.
The last large advantage of being an independent contractor is that you don’t have to pay federal or state income taxes. This doesn’t mean that you can just skip paying taxes all together, but it does mean that you pay taxes in a completely different way. As an independent contractor, you pay estimated taxes to the IRS four times a year. This allows you to hold onto your money longer before it is taxed.
Also, this allows you to decide how much you think you should pay instead of having that rate set. Beyond this, independent contractors can take advantage of many business related tax deductions that employees cannot.
Disadvantages of Contractor Work
Being an independent contractor isn’t all sunshine and rainbows however. Here are the two main disadvantages of being an independent contractor compared to being an employee.
- You are not provided employee benefits.
- You are not given any job security.
- You don’t have access to unemployment insurance and workers compensation.
The largest disadvantage of being an independent contractor for a company like Uber is that you don’t receive employee benefits.
Basic employee benefits like paid time off, health, dental, and life insurance, retirement packages, and employee profit sharing don’t exist for independent contractors.
Because you are independently contracted, you must pay for health insurance, cover your pay on sick days, and create your own retirement plan. If you cannot cover these benefits yourself, then you must do without them.
Another large disadvantage of being an independent contractor is that you are not given any job security. Although the ride hailing market is booming, there are instances where the market can also be oversaturated.
As an employee, you must be paid as long as you have your job. As an independent contractor for Uber, if there aren’t enough riders, then you don’t have a stable job or any job at all.
The last large disadvantage of being an independent contractor is that you don’t have access to any unemployment insurance when you do run out of work. Plus, when you are injured, you are not given any workers compensation.
In Uber’s case, drivers could be injured in car accidents; yet, they would not be given any workers compensation.
The Opinion of Current Uber Drivers
The opinions between drivers depends on if they work part or full time for Uber. Part time drivers who use Uber as a second stream of income prefer that they are classified as independent contractors because they can set their own hours. Also, if Proposition 22 in California was reversed, many part time Uber drivers would have to be let go.
This is because Uber would have to spend more money paying for benefits for full time employees. Those who would not be let go would then have to pay federal and state income taxes rather than estimated taxes.
On the other hand, full time drivers would like to be classified as employees because then they would receive benefits. In addition to these benefits, full time drivers would have a guaranteed schedule and pay. They would have to pay federal and state income taxes; however, they wouldn’t have to worry about estimating their taxes quarterly for the IRS, thus not risking estimating their taxes at too low of a rate.
Why Proposition 22 is a Positive
Proposition 22, the proposition that is allowing drive hailing apps to categorize their drivers as independent contractors, is beneficial because it allows both part time and full time Uber drivers to set their own schedules.
The founders of Uber never intended for drivers to count on them for their primary source of income. Uber was founded on the principle of flexibility. Therefore, because their drivers are independent contractors, they don’t have to micro manage and set definite schedules for their workers.
Next, Uber doesn’t have to worry about providing benefits to their drivers, which increases the amount of drivers that they can hire. Uber released a statement in August saying that they would have to lay off a significant number of their drivers if they had to classify them as employees.
This is because providing benefits is expensive. If Uber had to classify its drivers as employees, then there would be fewer drivers on the road, and consequently longer wait times for riders.
Even more, the unemployment rates would have gone up in California without Proposition 22 during a pandemic which has already caused higher unemployment rates.
What You Should Know
In the end, Proposition 22 is a positive for Uber, its drivers, and its riders because it allows for more drivers to work when they want to.
Being an independent contractor has its disadvantages such as not being entitled to employee benefits; however, in Uber’s case, the advantages of flexible scheduling, the potential to earn more, and the unique tax system outweigh the disadvantages.
For current and future drivers, Ubering will be considered a contracting job which will continue to increase the booming drive hailing market.