With over one million drivers worldwide, and a company valuation of over $40 billion, Uber’s success has been due in large part in its revolutionary business model which provides a mobile platform and software to facilitate the transportation of passengers at a lower cost than most standard taxi cabs or executive car services.
Uber’s business model is described by the company as allowing drivers to work with maximum flexibility, with little oversight. Drivers can select their own hours, work as little or as much in a day as they wish and select the trips and passengers they want. Because of this lack of control and freedom, the company has always viewed its drivers not as employees of Uber, but as independent contractors.
As many employers already know, employing W-2 employees vs. 1099 independent contractors has many legal and financial implications. This includes providing for social security, maintaining worker’s compensation insurance, unemployment insurance , reimbursing expenses, providing health benefits, and abiding by minimum wage and hourly work requirements – just to name a few. The costliness of maintaining employees can be evidenced by the fact that one of Uber’s biggest expenses as an organization stems from the expenditures associated with maintaining its relatively small staff of full time corporate employees.
Clearly, if all of its drivers were deemed to be employees, rather than independent contractors, the business model that Uber has been reaping the benefits of would dramatically change, impacting not only its current valuation, but its future growth and ability to continue offering its services to consumers at the rates that has made it so popular among its patrons.
On June 3, 2015 the California Labor Commissioner entered judgment of an award in the amount of $4,152.20 in favor of a former Uber driver, finding that she was an employee rather than an independent contractor.
Specifically, the award was for business related expenses and the accruing interest therefrom pursuant to Cal. Labor Code §2802. Whether or not Uber was obligated to pay this particular driver for these particular expenses all hinged on the Labor Commissioners decision as to whether or not the driver was an employee or independent contractor. While the agreement entered into between the driver and Uber explicitly stated that the relationship was one of independent contractor rather than employee/employer, the commissioner looked to other factors laid down from prior case law to make her determination that the driver was an employee.
The implications of all of Uber’s drivers being classified as employees rather than independent contractors has the online blog and news world in a frenzy, speculating if this decision will cripple Uber’s business model and halt its meteoric rise and success.
Uber has tried to quell the media by putting the recent Labor Commissioner’s ruling in perspective, stating:
“The ruling is non-binding and applies to a single driver. Indeed it is contrary to a previous ruling by the same commission, which concluded in 2012 that the driver ‘performed services as an independent contractor, and not as a bona fide employee.’ Five other states have also come to the same conclusion. It’s important to remember that the number one reason drivers choose to use Uber is because they have complete flexibility and control. The majority of them can and do choose to earn their living from multiple sources, including other ride sharing companies.”
However, the impact of this decision, while not immediately detrimental to Uber, does have implications for many of the similar (and smaller) businesses in California that have taken Uber’s revolutionary business model and adapted it to other services such as dog walkers, cooks, baby sitters, courier and delivery services, hair blow outs, and personal training. The list goes on and on. The saying “there’s an app for that” is more true now than ever before, thanks in large part to the business model of Uber.
Many of the subsequent and currently emerging mobile application services have followed in Uber’s footsteps in drafting a terms of service agreement that attempts to classify its service providers as independent contractors, rather than employees, and stipulating that the company itself is “just an app”.
As a business transactional attorney, our firm has many clients who come to us with mobile app business ideas. In the quickly evolving technology space, where the laws and precedent are still emerging and being set, it is often difficult to provide bright line answers to considerations such as the independent contractor vs employee issue, however, with this most recent Labor Commission ruling, there are some definitive factors to be aware of and consider.
The legal analysis of the Labor Commissioner states that “there is an inference of employment if personal services are performed as opposed to business services”. In making a determination whether or not services are personal versus business, the California Supreme Court in the case Borello & Sons, Inc. v. Dept. of Industrial Relations (1989) 48 Cal. 3d 341 established the following factors for consideration:
- Whether the person performing services is engaged in an occupation or business distinct from that of the principal;
- Whether or not the work is a part of the regular business of the principal or alleged employer;
- Whether the principal or the worker supplies the instrumentalities, tools, and the place for the person doing the work;
- The alleged employee’s investment in the equipment or materials required by his or her tasks or his or her employment of helpers;
- Whether the service rendered requires a special skill;
- The kind of occupation, with reference to whether, in the locality, the work is usually done under the direction of the principal or by a specialist without supervision;
- The alleged employee’s opportunity for profit or loss depending on his or her managerial skill;
- The length of time for which the services are to be performed;
- The degree of permanence of the working relationship;
- The method of payment, whether by time or by the job; and
- Whether or not the parties believe they are creating an employer – employee relationship may have some bearing on the question, but is not determinative since this is a question of law based on objective tests.
The Labor Commissioner also paid great attention to another case, Yellow Cab Cooperative v. Workers Compensation Appeals Board, (1991) 226 Cal.App.3d 1288, stating that the “overriding factor is that the persons performing the work are not engaged in occupations or businesses distinct from that of Defendants. Rather, their work is the basis for Defendant’s business. Defendants obtain the clients who are in need of delivery services and provides the workers who conduct the service on behalf of Defendants.”
Additionally, an employee employer relationship will be found if the defendants “retain pervasive control over the operation as a whole, the worker’s duties are an integral part of the operation, and the nature of the work makes detailed control unnecessary.”
More simply, the Labor Commissioner in the Uber case found the driver to be an employee rather than an independent contractor because, “without drivers such as the Plaintiff, Defendants’ business would not exist.” With this sentence, the door opens for other mobile app service provider’s independent contractors to initiate claims based on improper classification, despite the language of any agreements entered into between them, and provides a persuasive argument that they are in fact employees and are due certain benefits – whether it be overtime, reimbursement of expenses or worker’s compensation. This has huge implications not just for Uber, but for many mobile app service providers in the state of California, many of which cannot afford the time and expense of defending such disputes that come before the Labor Commissioner, let alone an unfavorable award of judgment which finds an employee relationship to exist.