Employee vs. Contractor: Is the Sharing Economy Here to Stay?

If one wonders whether the sharing economy is here to stay, one piece of data from “The Economist” will easily answer that question. In March 2015, more than 250,000 rooms were booked by 40,000 people in 192 countries across the globe through Airbnb.

Airbnb provides individuals with the ability to rent or “share” their home, car or other good or service with another for a specified period of time. The complication that arises, though, is whether those providing services in the sharing economy are in fact employees or independent contractors.

Evaluating Employees vs. Independent Contractors

One important point of contention for the sharing economy hinges on hiring employees or independent contractors. With the majority of employers using background checks (60 percent, according to the U.S. Small Business Administration), potential candidates can be screened for their education, work history, criminal, credit and driving histories, along with drug use, increasing the likelihood of job performance. It is much less likely that an independent contractor’s background is checked so thoroughly.

One way to illustrate this is to look at a graphic design portfolio. A portfolio of designs might show impeccable work product, but if files need editing by a more experienced and competent graphic designer at a creative agency, the only way to determine if a graphic designer is truly as talented as their portfolio seems is to do a background check. This might include checking the graphic designer’s education and work background by speaking with past professors and supervisors to determine how much direction and edits each product required. While this can be done with an employee or independent contractor, statistics show that employees are better screened.

 Sharing the Economy with Contractors or Employees?

While the sharing economy has created a new wave of independent contractors, putting increased tax and legal liability on the contractor, some of these “on-demand” workers have challenged their classification status. One of the most important points about the sharing economy rests with how much control businesses have over their workers and contractors, and whether or not they are contractors or employees.

With the connotation of “on-demand” workers in the sharing economy being independent contractors, there has been recent litigation and interpretation by the U.S. Department of Labor, making it necessary for further clarification of this new type of work.

According to new litigation and interpretation, there’s still a fine line between an employee and an independent contractor. One way to test whether a worker is an employee or an independent contractor is the exclusivity and regularity of the relationship. If a driver works with a single car ride-share service using their mobile app, in accordance with their rates, work time-frames, required appearance and other mandated protocols, an employee-employer relationship may exist. However, if the same driver works for multiple rideshare companies, works their own hours and sets their own rates, only using their marketplace to gain clients, an independent contractor relationship may exist.

Only time will tell how this sharing economy will end up classifying its workers as they challenge their status within the “on-demand” economy.

Sources

http://www.investopedia.com/terms/s/sharing-economy.asp

https://www.sba.gov/blogs/conducting-employee-background-checks-why-do-it-and-what-law-allows

http://www.economist.com/news/leaders/21573104-internet-everything-hire-rise-sharing-economy

https://blog.dol.gov/2015/07/15/employee-or-independent-contractor/

https://www.documentcloud.org/documents/2166621-interpretmisclass.html

These articles are intended to provide general resources for the tax and accounting needs of small businesses and individuals. Service2Client LLC is the author, but is not engaged in rendering specific legal, accounting, financial or professional advice. Service2Client LLC makes no representation that the recommendations of Service2Client LLC will achieve any result. The NSAD has not reviewed any of the Service2Client LLC content. Readers are encouraged to contact their CPA regarding the topics in these articles.

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