California's Stand on Behalf of Uber Drivers

The state rules that the ride-sharing company must treat one worker as an employee.

Lucy Nicholson / Reuters

Bad news for Uber: On Tuesday, the California Labor Commission filed documents ruling that a driver for the popular ride-sharing company—which was recently rumored to have a $50 billion valuation—is an employee, not an independent contractor, a decision that could mean big changes for the way the company, and their competitors, run their businesses.

The commission ordered that the company pay the plaintiff, former driver Barbara Ann Berwick, a total of $4,152—most of which is reimbursement for business expenses incurred while driving for Uber.

The claim that Uber and other sharing-economy businesses have made to defend their use of contractors is that they are in the business of technology and logistics, finding more efficient ways to connect independent suppliers with those who demand services. The companies argue that workers, (in this case drivers), provide their own supplies (cars), make their own schedules, and have the freedom to pick up work when they want—provisions that would allow them to be classified as independent workers.

But critics have said that such explanations are flimsy at best, manipulative and illegal at worst—denying workers who provide the core functions of these businesses basic labor rights like workers comp, should they get hurt on the job, minimum wage, payment of payroll taxes, access to unemployment benefits, or the ability to unionize.

According to the ruling:

Plaintiff’s work was integral to Defendants’ business. Defendants are in business to provide transportation services to passengers. Plaintiff did the actual transporting of those passengers. Without drivers such as Plaintiff, Defendants’ business would not exist.

The decision in favor of labeling drivers as employees also focused largely on the concept of who really controlled the drivers’ ability to work.

Plantiff’s car and her labor were her only assets. Plaintiff’s work did not entail any “managerial” skills that could affect profit or loss. Aside from her car, Plaintiff had no investment in the business. Defendants provided the iPhone application, which was essential to the work. But for Defendants’ intellectual property, Plaintiff would not have been able to perform the work. In light of the above, Plaintiff was Defendants’ employee.

This decision could have serious ramifications for the company’s business model, since the cost of doing business would increase significantly if Uber is forced to pay for everything from benefits to payroll taxes for more workers. But for now, the ruling only affects a California driver, and not the company’s estimated million plus drivers around the globe. Uber is also appealing the judgment.

Sam Estreicher, a professor of labor and employment law at NYU School of Law says that while the ruling is important, the fate of Uber and other ride-sharing companies and their contractors and employees may be decided more slowly, on a state-by-state basis, and hinge heavily on the interpretation of labor laws within those jurisdictions. In some places that may mean finding a midway point between employee classification and the current policy, which largely absolves the company of responsibility for its drivers. Estreicher says that beefed up regulations that bring the companies into compliance with similar, non-sharing-economy companies in each state might be a plausible solution. “Regulations that apply to local transportation companies don't apply to these guys. That can’t be the case, but that doesn't mean that the drivers are their employees,” he says. “They are gonna have to agree to a bunch of safety and consumer regulations that the existing businesses are subjected to.”

It’s also possible that the question of how to label sharing-economy drivers will eventually be reviewed under existing federal law, says Jeff Kirk, a legal analyst who has studied ground transportation. “Whether or not taxi-like drivers are independent contractors or employees is already well established as a matter of federal law,” Kirk says. “I think, in the end, this will end up being adjudicated in federal, not state court, and assuming the courts follow existing precedent, they will decide that Uber drivers are independent contractors.”

Still the labor commission's decision, especially if it holds up through appeals, has significance, especially as more and more companies rely on the on-demand workforce, says Arun Sundararajan, a professor at NYU’s Stern School of Business who studies technology’s impact on businesses. Prices of services provided by companies in the sharing economy would likely increase. Uber and Lyft would not only survive but continue to thrive, while smaller companies with less revenue to cover the additional exepnse, would likely find that their business models are no longer viable, Sundarajan said in an email.

“[The case] is drawing attention to a critical challenge we face over the next decade: to create a new social safety net as employment is unbundled and our workforce becomes largely freelance,” said Sundarajan. “In the U.S., we have created a safety net that relies heavily on full-time employment. Rather than forcing full-time employment on on-demand work firms, we should instead pursue a policy direction that creates a comparable safety net for workers who are not full-time employees.”