Thank you for the information and your question. Although I can address the law of this issue, which is very complex and involves not only the State, but more importantly the IRS, I cannot give you an ultimate opinion. Only the IRS, or a court, should you challenge the State or the IRS, can tell you whether these drivers are considered statutory employees or IC's after they have evaluated several factors for each specific driver or type of driver. Since you are already having an issue with the State, I would highly recommend you consult with a local employment law firm who represents employers to help them guide you through this conflict so that you don't potentially have more legal exposure (back taxes to IRS, etc.), than you have to. At the very least, I would recommend that you submit and SR-8 to the IRS asking them for an advisory opinion on your situation. The State follows the guidelines set out by the IRS.
All that said, there are several factors that are to be considered when making a determination of employee versus IC versus lease driver. You can see an in depth discussion of what the IRS (and the State) will consider in the taxi/cab business specifically when making this decision by going to the following link: https://www.irs.gov/businesses/small-businesses-self-employed/cash-intensive-businesses-audit-techniques-guide-chapter-17#_Toc307217065
But, to summarize a bit, they will look at financial, physical and behavioral controls in the relationship. According to the IRS, this is some of what they look at.
The following items are just a few other examples of other taxicab industry factors indicating control:
- The drivers depend on the dispatcher for customers.
- Drivers are paid according to the number and distance of fares carried rather than setting their own rates.
- The taxicab company’s name is ***** ***** vehicle.
- The driver does not advertise their own services.
- The taxicab company dictates when drivers can take breaks.
Careful consideration should be given to the determination of worker status when there is a lease arrangement between the company and the driver. See the rulings listed at the end of this guide for further discussion.
If the examiner feels proper classification is an issue, very early in the examination discuss with the taxpayer why they are treating drivers as independent contractors.
There is at least one IRS ruling that clarifies part of your issue, which has to do with the 50/50 arrangement. Revenue Ruling 71-572, 1971-2 C.B. 347 held that Taxi drivers who lease their vehicles from a taxicab company in return for a percentage of the fares they collect are to be regarded as employees of the company. However, absent other "control" factors, owner/operators who lease the company’s services and drivers who lease both the vehicles and the company’s service for a fixed amount at regular intervals are not company employees.
So, those 50/50 employees would, very likely be considered by the State and the IRS W-2 employees. The rest of the ruling is closer to your other arrangement, which is the complete lease of the vehicle. However, as you can see from the ruling, it all goes back to the "control" factors.
I would recommend, as mentioned, that you either hire a local employment law firm to assist you or, at least, file an SR-8 with the IRS to get the final say here. What you don't want to do is just tacitly agree or waive your argument with this one driver and their unemployment claim. That will seal the deal with the State and will lead to many tax requirements, not just unemployment. Before you contact the attorney, although it may be confusing, you might want to read the entire information at the link, or at least the part where they discuss evaluating the employee/employer issue, so that you will be ready for your discussion with your attorney. But again, I think it is fairly safe to say that the 50/50 drivers would be consider W-2 employees under the law.
Please feel free to ask for clarification after you have read the guidance at the link. If none is needed, then if you could take a moment to leave a positive rating in the box above, I will receive credit for assisting you today. Thank you