Any first year lawyer could have told Uber management that classifying their drivers as independent contractors – rather than employees — was an extremely risky business gamble.
Now Uber (Uber Technologies, Inc., a Delaware corporation) is having to face the consequences of its calculated bet thanks to an unfavorable decision by the California Labor Commissioner. The Commissioner ruled on June 3 that a San Francisco Uber driver named Barbara Ann Berwick was legally an employee, as she claimed in her complaint, and not an independent contractor, as Uber claimed. The Commissioner awarded Ms. Berwick $4,152.20 as reimbursable expenses, plus interest, incurred during the two months that she drove for Uber during the summer of 2014.
Uber, founded five years ago as “UberCab,” is an international transportation network company headquartered in San Francisco that markets and operates the Uber mobile app. The smartphone app allows consumers to submit a trip request on their mobile phones which is then routed to Uber-affiliated local drivers who may wish to pick up the passenger. The quasi-taxi service is now available in 58 countries and 300 cities worldwide, including Miami, Fort Lauderdale, West Palm Beach, Orlando, and other Florida cities, and is valued at $40-$50 billion.
The company has been so successful so fast that investment bankers are getting in line to now provide it a $2 billion credit line.
Uber’s business model is built around not owning any passenger cars and not having any driver employees. Uber says it is engaged in the business of “providing lead generation” to its affiliated drivers, comprised of requests for transportation service made by individuals using Uber’s mobile phone app. The app, says Uber, “provides a platform” for would-be passengers to connect with Uber-affiliated drivers and arrange for paid trips on a one-to-one basis, with Uber charging a commission for each trip. Thus, Uber claims that it is not a transportation company, but a “neutral technological platform,” designed simply to enable drivers and passengers to transact the business of transportation with each other directly through their mobile telephones.
Along the way, Uber has generated public protests and lawsuits from its own drivers, competing taxi drivers accustomed to monopoly privileges, and traffic accident victims, as well as from a 26-year-old woman alleging that she was raped by her Uber driver in Delhi, India.
At the heart of Uber’s commercial success is its firmly entrenched corporate dogma that all its drivers are not employees, but independent contractors who like to set their own hours and work only when they feel like it. More than 160,000 drivers actively transported paying passengers using the Uber app at the end of 2014 in the United States.
Companies like Uber have a great profit incentive to classify people who work for them as independent contractors. For instance, an employer must generally withhold federal income taxes, withhold, match, and pay over Social Security and Medicare taxes, and pay unemployment tax on wages paid to an employee, but not to an independent contractor. Companies are not liable under respondeat superior principles for the tortious acts of independent contractors. And independent contractors are not entitled to overtime pay, paid vacation or sick days, group medical, dental, disability, or life insurance, or to any of the benefits flowing from the many federal, state, and municipal laws that protect employees, such as the FLSA, FMLA, Title VII, and state unemployment and workers’ compensation laws. Also, independent contractors are not covered by the National Labor Relations Act and cannot unionize under its protection.
The decision by the California Labor Commissioner is not the first legal hole in the Uber conceptual bulwark.
On May 5, Uber suffered a similar administrative defeat in Florida in the case of a driver named Darrin McGillis, 46, of Cutler Bay, a community southwest of Miami. While dropping off a passenger earlier this year, a scooter rammed McGillis’ car, and he tried to get Uber to pay for the repairs with its insurance, but Uber refused. Out of work, McGillis decided to file for unemployment benefits (now called reemployment assistance) with Florida’s Department of Economic Opportunity, which are only available to employees and not to independent contractors. After considering how Uber’s relationship with its drivers worked, the state agency decided that Gillis was Uber’s employee, making him eligible for unemployment compensation. Uber has now filed an administrative appeal of that decision, insisting that McGillis was an independent contractor. The dispute might well move later into the Florida court system.
In California, before the Labor Commissioner, Uber argued – as it has steadfastly maintained in every similar dispute — that it exercised “very little” control over Ms. Berwick’s activities, and that she was an independent contractor, and, therefore, she was not entitled to recover any claimed wages or to be reimbursed for her work-related expenses such as gas and tolls. But it was to no avail. Hearing Officer Stephanie Barrett ruled in favor of Ms. Berwick.
Uber, ruled Ms. Barrett, does control the drivers and is “involved in every aspect of the operation.” It vets prospective drivers, who must provide to Uber their personal banking and residence information, as well as their Social Security Numbers, and who cannot pick up passengers unless they pass Uber’s background ant DMV checks.
Uber, according to the hearing officer, controls the tools the drivers use; they must register their cars with Uber, and none of their cars can be more than ten years old; they must submit to passengers’ five-star rating submissions, and lose their Uber privileges if the rating falls below an average of 4.6 stars.
Further, the drivers are prohibited from accepting tips because Uber considers that such additional discretionary compensation from customers would be counterproductive to its advertising and marketing strategy.
IRS and U.S. Labor Department regulations, as well as multiple decisions by the U.S. Supreme Court (notably in its 1992 decision in Nationwide Mutual Insurance Co. v. Darden) and other federal and state courts have long established that employers must conduct a common sense economic reality check when making an independent contractor classification.
The IRS, for example, focuses on three principal aspects of the worker’s relationship with the business to determine employee versus independent contractor status: (1) the degree of behavioral control that the business can exercise over the individual; (2) the degree of financial control that the business can exercise over the individual; and (3) the parties’ views and perceptions of the relationship (whether they view it as an independent contractor or an employment relationship).
What is most puzzling about Uber’s strategy in California is this: Rather than pay Ms. Berwick the $4,152.20 she was awarded, Uber decided to appeal the ruling to the California Superior Court in San Francisco. If it loses there, Uber will then be faced with a much more compelling court decision on the independent contractor issue than the administrative decision applying only to Ms. Berwick. A negative ruling could also expose Uber to sanctions under California Senate Bill 459 of 2011, now part of the state’s Labor Code, which prohibits the willful misclassification of individuals as independent contractors and allows civil penalties of between $5,000 and $25,000 per violation.
Uber, however, apparently is already planning a way to extricate itself from the independent contractor legal quagmire by simply doing away with all its drivers.
Uber co-founder and CEO Travis Kalanick recently said that Uber plans to eventually move to using driverless cars, and it is already developing its own self-driving car technology in Pittsburgh.
Über, after all, is the German word for “above,” “over,” or “beyond”. The driverless car may well turn out to be an uber-cool idea for Uber. Although Uber’s current drivers may not see it that way.