The gig economy is now an accepted part of the American economy, and those who provide services through Uber, Lyft, and many other companies are independent contractors. Curiously, though, some of these contractors are able to collect unemployment compensation. If it sounds impossible, it’s not. Rob Wood explains how it works in this report. He also discussed this curiosity in his Forbes article, “When 'Independent Contractors' Get Unemployment Benefits, What It Means For Employers.”
Wood says that it is an odd situation that some independent contractors collect unemployment. Basically, unemployment benefits are available to employees who lose their jobs and are trying to find employment. There are criteria an applicant must meet to qualify for benefits. The funds to pay claims come from insurance payments made by employers. Wood notes in passing that there have been a number of cases where a company gets into an argument with the IRS or some other governmental agency as to whether someone is an employee or an independent contractor. Both Uber and Lyft have faced these claims.
This becomes important when someone who has been labeled an independent contractor loses their job. The individual may then apply for unemployment benefits. Wood says that “a lot of employers don’t fight these things.” So people may get benefits even though they are not technically eligible for benefits. It is probably a good idea for companies to keep track of unemployment claims so as to stay on top of attempts to characterize independent contractors as employees.
The characterization issue is important for other reasons, including possible workers’ compensation claims by independent contractors who want to claim injury benefits that are by law available only to employees. That’s why, Wood says, it is important for companies to have written agreements with independent contractors spelling out the details of the relationship.
In Wood’s opinion, there really isn’t an easy solution for companies other than to have solid written agreements with contractors. Even then, companies have to be careful of what they try to achieve. Companies can save a lot of money by not paying all the expenses associated with employees, but companies who overreach and try to palm off employees as contractors will end up butting heads with regulators.
Robert W. Wood is the Managing Partner of Wood LLP, San Francisco. Often listed among the best tax lawyers in America, Wood has broad experience in corporate, partnership and individual tax matters. Concerning the tax treatment of litigation settlements and judgments, he is perhaps the preeminent tax lawyer in the United States. He is also an authority on merger and acquisition tax matters, tax opinions, offshore account and entity disclosures, and many types of tax controversies. The Legal Broadcast Network is a featured network of Sequence Media Group.