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Independent contractor battle could cost Uber, Lyft in IPOs

Billions of dollars could be at stake as California moves to curb the use of independent contractors.

The move could affect the initial stock offerings of Uber and Lyft, both of which are valued in the tens of billions of dollars. The decision also affects other app-based companies such as Amazon and Grubhub as well other industries including trucking, construction, home care and exotic dancing.

The case for independent contractors

These companies classify their drivers as independent contractors and therefore are not responsible for Social Security and Medicare taxes, overtime, workers’ compensation, unemployment and disability insurance, as well as family leave and sick pay. Estimates put the additional labor costs at 30 percent.

The issue came from last year’s California Supreme Court decision on drivers for package delivery firm Dynamex Operations which used an app-based distribution model similar to Uber and Lyft. Dynamex’s plan to reclassify drivers as independent contractors was nixed by the court.

The ‘ABC’ test

The Court ruled that a worker can be considered an independent contractor if the worker:

  • Is free from the company’s control and direction
  • Does a job outside the usual course of the company’s business
  • Is customarily engaged in the trade, occupation or business hired to do

Workers and companies across the country are watching the use of the ruling and any new laws that come out of it to determine their own employee status.

Companies say independent contractors are OK

Meanwhile, Lyft and the other companies continue to claim that drivers decide when and where they work and the duration of their shifts, thus making them independent contractors. California law currently exempts doctors, insurance agents, financial advisors and direct sellers for companies such as Mary Kay or Herbalife and the new law would continue to exempt them.

Lawmakers say their interest in the issue is that hundreds of millions in taxes are going uncollected while the costs of treating injured or sick contractors falls often falls on the state.

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