By: Kevin Lauro
Estimates placed up to thirty-six percent of the United States workforce—and as much as $152.6 billion in economic activity—within the gig economy in 2023 alone.[1] The gig economy comprises independent contractors and freelancers, often utilizing platforms like ride-hailing apps, food delivery apps, or holiday rental apps to offer their services.[2] However, the companies that own those apps have a strong incentive to classify their workers as contractors rather than employees.[3] That incentive is particularly strong because classifying them as independent contractors allows companies like Uber and DoorDash to avoid payroll taxes, bypass worker protection laws, or forgo providing medical insurance or other benefits to workers.[4]
However, misclassification of employees can have huge consequences.[5] In 2022, Uber paid $100 million to the New Jersey Department of Labor and Workforce Development (NJDOL) to settle what the Department claimed was almost $650 million in back taxes and interest.[6] The Department alleged Uber owed the large sum because it failed to pay payroll taxes after classifying its drivers as independent contractors rather than employees between 2014 and 2018.[7]
There are several ways to determine whether a worker is an independent contractor or an employee.[8] The Internal Revenue Service (IRS) provides one method via a three-factor test, which weighs behavioral control, financial control, and the type of relationship between the parties.[9] Behavioral control refers to how closely the business can control the work done by the worker.[10] Behavioral control is about things like when or where work is done, what tools or purchases are used to do the work, and the specificity of instruction for how the work is done.[11] Financial control refers to whether the business has financial control over the economics of the worker’s job through considerations like significant financial investments, unreimbursed expenses, methods of payment, or whether the worker has the opportunity to make or lose money.[12] The type of relationship factor examines how the worker and the business perceive their relationship, and factors assessed include the permanency of the relationship, whether there is a written contract between the parties, and whether the work performed is a key part of the business.[13]
Applying this three-factor test to Uber drivers shows that, while New Jersey is the latest jurisdiction to challenge Uber’s classification of drivers as independent contractors, it is unlikely to be the last.
Examining the first factor of behavioral control, Uber exerts significant control over its drivers through its app.[14] Uber sets fare rates, uses the app to push drivers into working when and where the company wants, and uses a rating system to enforce performance targets.[15] Drivers who fall below a 4.6 out of 5-star rating are at risk of having their accounts deactivated.[16] This level of instruction and evaluation indicates a high level of behavioral control. Looking at the second factor, financial control, drivers may provide their own cars, but Uber retains significant financial authority.[17] The company unilaterally sets ride rates and fees, and drivers cannot negotiate those prices.[18] The drivers’ ability to earn a profit is directly controlled by Uber’s pricing algorithms, demonstrating significant financial control.[19] Lastly, the third factor, the type of relationship, indicates that drivers are integral to Uber’s business.[20] The work performed by drivers is the core of Uber’s business, and without them, the platform has no service to offer.[21]
These misclassifications are important because a number of employees and businesses could be affected by a change in how workers are classified.[22] California and New Jersey are both considering legislation to reclassify gig workers as employees.[23] In late 2024, the Department of Labor under the Biden administration issued a new rule that would have implemented a new six-part test designed to classify more gig workers as employees.[24] However, the new Trump administration announced earlier this year that it would not enforce the rule.[25] Moving forward, every company that relies heavily on a large number of independent contractors should closely monitor these developments, as regulatory changes could have consequences worth hundreds of millions of dollars.
[1] Adam Grundy & Lucie Alleyne, Nonemployer Businesses are Key Contributors to Gig Activities and Economic Growth Nationally, U.S. Census Bureau (July 1, 2025), https://www.census.gov/library/stories/2025/07/nes-gig-economy.html [https://perma.cc/6YK5-CBUX]; Sasha Vidakovic, Gig Economy Statistics in the US [2025 Data], Oysterlink (Oct. 29, 2025), https://oysterlink.com/spotlight/gig-economy-statistics/ [https://perma.cc/8J2X-V84X].
[2] Emma Charlton, What is the Gig Economy and What’s the Deal for Gig Workers?, World Econ. F. (Nov. 22, 2024), https://www.weforum.org/stories/2024/11/what-gig-economy-workers/ [https://perma.cc/LGW6-3FJX].
[3] Tom Spiggle, Uber Paying $100 Million in Back Taxes is a Positive Sign for Gig Workers, Forbes (Oct. 3, 2022, at 10:00 ET), https://www.forbes.com/sites/tomspiggle/2022/10/03/uber-paying-100-million-in-back-taxes-is-a-positive-sign-for-gig-workers/ [https://perma.cc/59KG-S33Y]; see Charlton, supra note 2.
[4] Spiggle, supra note 3.
[5] Id.
[6] Id.
[7] Id.
[8] Id.
[9] Id.; Independent Contractor (Self-Employed) or Employee?, Internal Revenue Serv. (Aug. 7, 2025), https://www.irs.gov/businesses/small-businesses-self-employed/independent-contractor-self-employed-or-employee [https://perma.cc/D4T6-JJDE].
[10] Behavioral Control, Internal Revenue Serv. (Jan. 15, 2025), https://www.irs.gov/businesses/small-businesses-self-employed/behavioral-control [https://perma.cc/LR3U-E6PN].
[11] Id.
[12] Financial Control, Internal Revenue Serv. (Jan. 15, 2025), https://www.irs.gov/businesses/small-businesses-self-employed/financial-control [https://perma.cc/T9F4-MENN].
[13] Type of Relationship, Internal Revenue Serv. (Feb. 25, 2025), https://www.irs.gov/businesses/small-businesses-self-employed/type-of-relationship [https://perma.cc/E9M2-WQG7].
[14] Alex Rosenblat, The Truth About How Uber’s App Manages Drivers, Harv. Bus. Rev. (Apr. 6, 2016), https://hbr.org/2016/04/the-truth-about-how-ubers-app-manages-drivers [https://perma.cc/97X4-DXGK].
[15] Id.
[16] Id.
[17] Id.
[18] Id.
[19] Id.
[20] See AJ Dellinger, Uber Says Drivers Aren’t Essential to Its Business. But If They Aren’t, Who Is?, MIC (Feb. 20, 2024), https://www.mic.com/impact/uber-says-drivers-arent-essential-to-its-business-but-if-they-arent-who-is-18752544 [https://perma.cc/LM4V-XVZJ] (contrasting Uber’s recent representations regarding its drivers not being a central part of the company’s business and its representations that it is a technology company with the reality that drivers are an essential part of the company’s operations, from which Uber makes the majority of its money).
[21] Id. See generally Uber’s Technology Offerings, Uber, https://www.uber.com/us/en/about/uber-offerings/ [https://perma.cc/RBV3-6YPD] (last visited Nov. 22, 2025) (highlighting the services Uber offers, of which its drivers are undoubtedly the core of its business model).
[22] See Spiggle, supra note 3.
[23] Rrita Osmani & Samuel Indermaur, California Gig Worker Misclassification Back in Spotlight with New Legislation, Mondaq (Oct. 29, 2025), https://www.mondaq.com/unitedstates/employee-benefits-compensation/1697514/california-gig-worker-misclassification-back-in-spotlight-with-new-legislation-video [https://perma.cc/YKC4-EGWH]; Nikita Biryukov, Broad Opposition Meets NJ Push to Change Rules on Independent Contractors, N.J. Monitor (Aug. 4, 2025, at 06:52 ET), https://newjerseymonitor.com/2025/08/04/broad-opposition-meets-nj-push-to-change-rules-on-independent-contractors/ [https://perma.cc/M3D3-JE32].
[24] Mike Rahmn & Matthew Iverson, Department of Labor Plans to Rescind Biden’s Gig Worker Rule Making it Easier for Companies to Use Independent Contractors, Nelson Mullins (May 5, 2025), https://www.nelsonmullins.com/insights/blogs/the-hr-minute/employee-compensation/department-of-labor-plans-to-rescind-biden-s-gig-worker-rule-making-it-easier-for-companies-to-use-independent-contractors [https://perma.cc/8GY7-3NGE].
[25] Id.
