The Taxman Cometh for (and Killeth?) the Gig Economy
An interesting tax battle underway in New Jersey, highlighted by Toni Sutton-Deangelico on this site yesterday, has the potential to completely upend the still nascent Gig economy. And it appears to be happening without what many would consider due process for the targeted company.
The Gig economy, powered with brash new technologies and most often represented in discussions of rideshare provider Uber, is at its core free and unfettered capitalism. Technology companies facilitate the partnering of people in need of a service with those who have the capacity to provide it. That's it.
Or is it?
Everyone knows that there have been challenges brought regarding the employment status of Gig workers. Uber and Lyft have been sued by drivers who voluntarily entered into agreements to provide transportation services, and then decided that they should be considered employees. Unions and taxi services have also been engaged in these court challenges. The Dynamex decision in California, which was codified by the legislature with the passage of AB5, dramatically reforms the way independent contractors are defined. Gig economy companies are girding for a battle over that new law. But at least in California there was a defining court decision and a legislative process in place to redefine what an independent contractor is. In New Jersey, that is seemingly being done by regulatory fiat.
As reported by Sutton-Deangelico:
The New Jersey Department of Labor and Workforce Development (NJDOL) alleges that the rideshare company Uber has been wrongfully classifying its drivers as independent contractors and is demanding that the company pay $649 million for years of unpaid employment taxes for its drivers. The department has sent letters to Uber's subsidiary Raiser, saying it must pay $523 million in taxes that are past-due over the last four years, in addition to $119 million in interest and penalties on all monies owed.
It should be noted that this move is occurring without any precedent setting court case or legislative decree. It is an agency determining on its own that these workers are not being properly classified. It is a move most likely being watched closely by other states – particularly those with significant budget concerns.
New Jersey just happens to be one of the high tax northeastern states reeling from the flight of some of its wealthiest residents. In 2016, Billionaire David Tepper moved his entire company out of state, declaring low-tax Florida as his new home. The tax revenue generated from his income alone was so significant that legislative budget forecaster Frank Haines warned Tepper's move to Florida could generate “revenue uncertainty” for New Jersey government. At the time, the State Treasurer reported that “the top 100 filers pay over 5.5 percent of all [gross income tax] payments” that the state receives. Tax reforms instituted under the Trump administration have only exacerbated the revenue problems for New Jersey and neighboring high-tax states.
One has to wonder if the aggressive move on the Gig economy is more of an effort to stem the loss and recover needed revenue. In other words, this action could be intended far more for the benefit of the state than the workers they claim to be protecting.
We certainly understand in the workers' compensation industry that the burgeoning Gig economy is creating potentially millions of unprotected workers. Those injured while working on these “gigs” risk becoming dependent on the taxpayer since no safety net is in place for them. We recognize that something needs to be done; but trying to classify them all as traditional employees as we understand the category today simply won't work.
It will instead just kill the Gig economy. We need more innovative solutions.
While the Gig economy now touches dozens if not hundreds of sectors in our economy, transportation is by far the most visible. Road warriors will tell you that companies such as Uber and Lyft have had a profound impact on travel, vastly improving options and service received when “on demand” transportation is needed. Part of that convenience is provided by the “on demand” nature of the business arrangements between the applicable parties. It is not a perfect system, but simply redefining the relationship and applying retroactive taxes is not a solution. Especially when the underlying argument to do so is weak.
New Jersey Labor Commissioner Robert Asaro-Angelo said in a statement that “When independent contractors file for unemployment or disability insurance, their benefits are paid by taxpayers because their employer didn't contribute.” It is a fair concern regarding disability coverage, but personally I have never heard of an independent contractor applying for, much less receiving, unemployment benefits. I would be very curious to know how much the state has paid to “unemployed' Gig workers. In the absence of solid statistics, that argument seems like a stretch.
A stretch that justifies the seizure of capital under the guise of legitimate taxation.
Ultimately this represents yet another battle for Gig economy companies. I suspect it won't be the last. If the state is successful others will follow, and you will see a dramatic change in the way these companies do business, and a severe reduction in the services they provide. In other words, road warriors, prepare to see those dirty cabs with unfriendly drivers once again…..
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Robert Wilson is President & CEO of WorkersCompensation.com, and "From Bob's Cluttered Desk" comes his (often incoherent) thoughts, ramblings, observations and rants - often on workers' comp or employment issues, but occasionally not.
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