Uber’s Driver Tax Dilemma Highlights Growing Legal Threat

Uber Technologies Inc.'s multimillion-dollar tax bill in New Jersey underscores a significant legal threat to the company’s core business model—its treatment of drivers as independent contractors.

A state-by-state dismantling of that model could reverberate across the gig economy and have a staggering impact on Uber’s bottom line. The company’s general and administrative costs—18% of sales—already are much higher than other large tech businesses, according to a Bloomberg Intelligence analysis. Uber’s costs per driver, and those of rideshare competitor Lyft Inc., could jump by more than 20% if they’re forced to reclassify workers as employees.

New Jersey recently hit Uber with a $650 million bill for unpaid unemployment and temporary disability benefits taxes. The company is still fighting a possible similar assessment across the Hudson River in New York, where the state labor department also has determined that drivers the company connects with customers are Uber employees.

The tax questions spotlight the risk for Uber, Lyft and other platform companies posed by a growing wave of challenges to their treatment of drivers as self-employed entrepreneurs. The assessments also expose another dent in the legal shield the companies have used to keep driver disputes private. New Jersey and other states aren’t covered by the arbitration agreements that Uber says require drivers to individually settle disputes over their contractor status.

“Agency decisions like this are critical,” says Rebecca Smith, a workers’ rights attorney for the National Employment Law Project. “The company has been using forced arbitration to keep courts from deciding whether Uber should be classifying drivers as employees.”

New Jersey could become a blueprint for states looking to crack down on worker misclassification and bolster revenue.

“I think there will be other states to follow suit and move to collect the taxes they are owed,” Smith said.

Looking for a Fight

New Jersey uses a similar legal test to determine whether workers are employees for jobless benefits purposes that’s used elsewhere across the country. But the state has applied that test more aggressively, says Steven Suflas, a business attorney for Ballard Spahr.

“The state is being particularly myopic in its approach,” Suflas said. “My opinion is that if you ask the New Jersey commissioner of labor if anyone is an independent contractor, he’s likely to say ‘no.’”

That approach may soon be adopted in California, where a new law—A.B. 5—making it harder for companies to classify workers as contractors takes effect in January.

“I think it’s clear that we have a lot of enforcement mechanisms at our fingertips now,” California Assemblywoman Lorena Gonzalez (D), the new law’s primary sponsor, told Bloomberg Law. “We’re hopeful that once A.B. 5 is in place that will motivate the state and district attorneys to hold companies accountable.”

Uber, Lyft and other online platforms that connect workers with customers lobbied unsuccessfully to stop the California measure over the summer. They already have committed $120 million to push a ballot initiative for an exemption to the new law.

Uber has said it will continue to classify drivers as contractors in California, New Jersey, and New York. The company already has an arsenal of high-powered lawyers to help defend its business model as a middleman connecting consumers to individual service providers, similar to job listing services in those and other states.

Attorneys at five large business-side labor and employment law firms declined to speak with Bloomberg Law for this story, citing Uber as a client.