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Uber, an extraordinarily successful and technology-driven transportation company, has suffered another setback in its attempt to fend off legal challenges to its practice of classifying its drivers as independent contractors rather than employees. The final outcome of these legal challenges against Uber could have a substantial impact in determining how service workers in technology-driven, on-demand industries are classified.
Uber relies on technological innovation to provide services similar to a taxi service. Uber utilizes software that customers who need a ride may log into on their smartphone and request a ride. The Uber application then matches the customer with a Uber driver, who picks up the customer at the designated location and transports the customer to the requested destination. Uber’s enormous success has been attributable to a large degree to its ability to control labor costs and other business expenses. Uber has done so by classifying its drivers as independent contractors, which enables Uber to avoid paying payroll taxes, workers’ compensation and unemployment insurance. By classifying its drivers as independent contractors, Uber also avoids other significant operating expenses, such as mileage. The appeal for drivers is that they enjoy substantial flexibility in determining when and how much to work and have little or no direct supervision. In December 2014, Uber reported that it had more than 160,000 drivers in the United States who drive at least four times per month.
Uber’s successful business model, however, may be threatened by drivers challenging their classification as independent contractors. For example, the California Labor Commissioner issued a ruling earlier this month finding that a Uber driver was misclassified as an independent contractor and instead must be treated as an employee. The Labor Commissioner emphasized, among other issues, that the drivers are an integral part of Uber’s regular business, which it viewed as a factor weighing heavily in favor of a driver being an employee. The Labor Commissioner also explained that, by obtaining customers in need of a ride and supplying drivers to provide the rides, Uber retained complete control over the operation as a whole. In addition, the Labor Commissioner observed that drivers must register their cars (which must not be older than 10 years) with Uber, that the fee paid by passengers is set solely by Uber, that Uber monitors ratings given to drivers by customers, and that Uber terminates drivers if their rating falls below a certain number. The Labor Commissioner awarded the driver $3,622.08 for mileage and $256.00 for toll charges. The Labor Commissioner rejected the driver’s claims for additional wages, including overtime wages, but only because the driver failed to present sufficient evidence of the amount she was paid or the number of hours she worked. Uber quickly appealed the Labor Commissioner’s decision, and that appeal is pending.
The ruling by the California Labor Commissioner follows a ruling adverse to Uber in a federal class action lawsuit in San Francisco. In March, the federal court denied Uber’s motion for summary judgment, finding that there were fact disputes as to whether Uber’s drivers are properly classified as independent contractors or employees. Courts have issues similar rulings involving workers in other industries. For example, the Ninth Circuit ruled last year that drivers for Federal Express are employees rather than independent contractors.
Consequently, employers should not assume that individuals are independent contractors simply because such individuals may retain control over when they work or how much they work, or because they are not subject to direct supervision in a traditional way. Courts are likely to examine the degree to which an employer controls the manner and means of performance when someone is actually working, and also whether someone is subject to supervision in a less traditional or direct manner utilizing innovative technology.