Uber has long been on the litigation battlefield fighting the claim that its drivers are 1099 independent contractors and not W-2 employees. Thanks to a decision in a similar suit against GrubHub, Inc., Gig-Economy companies can continue confidently classifying their workers as independent contractors.
1099 vs. W-2 – Why does it Matter?
The numbers 1099 and W-2 are federal tax classifications for types of workers within a company. 1099 contractors are responsible for paying their own taxes to the IRS while W-2 employees’ payroll tax is paid for by their employer. Additionally, employers of W-2 workers are subject to federal labor and wage regulations such as overtime, minimum wage, and FLSA guidelines, whereas contractors do not bring with them the same requirements. The question of whether a worker is a 1099 or a W-2 is largely centered around the answer to “how much control does the employer exert over the worker?”
The following factors are largely determinative, although they are not exhaustive:
| Characteristics of 1099 Independent Contractors | Characteristics of W-2 Employees |
| Sets own schedule | Schedule set by employer |
| Uses own personal method for finishing tasks | Training provided by employer for employee to perform tasks a certain way |
| Free to accept or turn down tasks on a task-by-task basis | All work assigned by a manager/supervisor |
| Supplies his/her own equipment to perform work | Tools and equipment necessary to perform tasks are provided by employer |
| Has more than one client | Has one employer |
History of the Fight
Gig economy companies started popping up with the most famous, Uber, making the most headlines. Based on the size of the industry a 1099/W-2 fight was inevitable and finally reached the courthouse floors with a class action lawsuit against Uber. Drivers challenged their classification as 1099s because they alleged that Uber exerted enough control over their responsibilities to justify classification as W-2 employees. The drivers claimed damages for underpayment based on minimum wage laws, overtime pay, employee expense reimbursements, and tax liability penalties. To avoid the risk of receiving a landmark decision against the 1099 classification, Uber settled out of court. As a result, no real decisions came down from any court to set precedent and shed light on how the judiciary would settle this dispute, until the GrubHub Case.
Raef Lawson v. GrubHub, Inc., Case NO. 15-cv-05128-JSC pending in the United States District Court for the Northern District of California
The Court’s opinion, issued on February 8, 2018, states that Raef Lawson was a restaurant delivery driver for Grub Hub for four months during 2015-16. He filed the lawsuit claiming that GrubHub violated California’s minimum wage, overtime, and employee expense reimbursement laws when it misclassified him as an independent contractor instead of an employee. The Court’s central question was whether, under California’s common law test, Mr. Lawson was an employee or an independent contractor.
The Court ultimately concluded Mr. Lawson was properly classified as an independent contractor because of GrubHub’s lack of control over Mr. Lawson’s work including how he performed deliveries, whether he worked shifts at all, the duration of those shifts, and the lack of oversight by GrubHub of Lawson’s work, among other factors.
Future Ramifications for Gig Economy Companies
Lawson’s attorney claims they will appeal this decision to the 9th Circuit Court of Appeals, but for now, this is a huge win for companies like Lyft, Uber, and Door Dash. Aside from the direct precedential value to future court cases, California has a relatively high burden for companies to meet to show their workers are independent contractors. Success in a pro-W-2 state like California will score points for Gig Economy companies in states where the employer is required to show less evidence to win the 1099 argument. This also means that employers involved in the Gig-Economy or similar businesses should pay close attention to the Court’s decision and the factors the Court emphasized that supported GrubHub’s classification as 1099s: no uniforms, freedom of shifts and procedures, lack of control in how tasks are completed, amongst other factors.
For questions regarding the proper classification of 1099s vs. W-2s and how to make sure and protect your company, you need a lawyer experienced in this field to review your policies and advise you accordingly.
