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Sharing Economy Should Fear Calif. Ruling On Uber Driver

When a district court judge in San Francisco this summer certified a class of Uber Technologies Inc. drivers seeking compensation for tips, it may have been the most talked about legal story of the summer. Much less noticed, but equally important, was the June 2015 decision of the California Department of Labor’s Division of Labor Standards Enforcement finding that a proper Uber driver was an employee entitled to reimbursement for about $4,000 in expenses.

One would think that such a small award issued by a nonlawyer employed as an administrative judge of a small state agency with just over 500 employees (covering a population of nearly 40 million) would have little impact. In fact, the agency decision has been appealed to the Superior Court of California in San Francisco and will be heard de novo, meaning that the administrative judge’s factual and legal findings have no weight whatsoever.

But this decision has the potential to have far-reaching consequences for Uber and for other sharing economy companies. Uber, of course, is the ubiquitous car service, which is now valued at over $40 billion. Through Uber’s mobile app, customers can hail a driver with the click of their thumb. Uber drivers provide services for the company as independent contractors and sign agreements confirming as much. The drivers are free to set the hours that they work, to take or reject customers seeking a ride, and to use their own vehicle, so long as they have a minimum level of liability insurance for it. Uber does not require drivers to take on a minimum number of trips and it allows them to work as frequently as they want. Uber drivers are paid based on the distance and time that they drive.

In Uber’s view, it is merely the medium through which customers are connected with drivers. Its entire business model, and those of other sharing economy employers, is premised on having its workers classified as independent contractors because of the cost savings associated with that status. In particular, by having its drivers treated as independent contractors, Uber avoids the comprehensive burdens imposed by the California Labor Code and also the need to provide benefits, like health care. Those savings allow Uber to provide drivers to customers in a way that is nearly as affordable as a traditional cab ride.

Barbara Ann Berwick, an Uber driver, brought a claim with the DLSE seeking reimbursement for mileage, gas and tolls and she also sought compensation for the time that she drove. The DLSE, notorious for being an employee-friendly forum, found in her favor. It relied heavily on a 1989 decision of the California Supreme Court — the same decision relied on by the district court in this summer’s Uber class action — and a 1991 decision involving taxi drivers to reach its conclusion.

In the taxi case, Yellow Cab Cooperative v. Worker’s Compensation Appeals Board (1991) 226 Cal. App.3d 1288, the California Court of Appeals relied principally on the fact that cab drivers were not “engaged in occupations are businesses distinct from that of the [cab companies]. Rather their work is the basis for the [cab companies’] business. The [cab companies] obtain the clients who are in need of delivery services and provide the workers who conduct the service on behalf of the cab companies.”

Like most courts that have considered the issue in more traditional economies, both the DLSE and district court placed their principal focus on the issue of “control” — how much control and what kind of control does a company need to exert over workers to render itself an employer? Think about the classic independent contractor: the plumber. A plumber has the freedom to choose who he works for, when he works for them and how he will perform plumbing services. He uses his own tools and he is free to work for as many or as few customers as he chooses. The mere fact that a customer hires a plumber to fix a leaky pipe and asks him to come on a particular day does not mean that the customer is employing the plumber.

Uber argued that each of those factors are present with its drivers. They choose when and how much they work, they provide their own equipment (i.e., a car), and they choose the customers they want to service. Uber merely provides its app and sets the rates for the services.

And, of course, Uber is very different from the Yellow Cab Company in the 1991 California Court of Appeals decision. Uber drivers are not dispatched to customers nor do they pick up fares on the side of the street; they choose their customers on their mobile phones. Uber drivers don’t lease a cab from their employer; they use their own car. And, unlike a traditional cab driver, Uber drivers are free to drive for other cab companies or independently. Indeed, many Uber drivers, Berwick included, are paid through corporate entities that contract with Uber.

What’s more, Uber drivers freely enter into an independent contractor relationship with the company free of duress or coercion. While California courts and agencies traditionally place little weight on that factor, it certainly must have some bearing.

None of that makes a difference according to the DLSE. The only element of control that is necessary is that Uber “obtain[s] the clients in need of the service and provid[es] the workers to conduct it.” That is the only element of control which is necessary according to the DLSE.

So, why does this decision bode so poorly for Uber and other sharing economy companies? There are two reasons.

First, regardless of whether you agree with it, this was a well-written decision which looks like it was vetted through several different levels of authority at the DLSE and is probably as close as we will see to being an official statement of policy from that agency. The DLSE, while a small state agency, sets policy for the largest state in the country with regard to issues involving how workers are paid. If Uber’s business model craters in California, the company and the sharing economy as a whole will have to adapt.

Second, the DLSE refers to the “modern tendency to find employment when the work being done is part of the regular business of the employer.” On that, there can be no argument with the DLSE. Class action lawyers smell blood in the water and Uber and other like-minded employers are faced with dozens of class actions seeking hundreds of millions of dollars in damages, penalties and attorneys’ fees. Is this fight one that Uber is prepared to have? Maybe. But not every sharing economy company has a $40 billion valuation and a worldwide presence. Decisions like this may well deter future Ubers from existence.

In their infinite wisdom, or lack thereof, legislatures around the country, including the Congress, made a conscious and nearly uniform decision not to define what an employer is. Ask any legislator and he or she will tell you that the same rules which applied in common law are malleable enough to apply to today’s economy. As the American economy changes from one that is heavily weighted to providing services instead of goods, only time will tell if that proves to be true.

Daniel Handman is a partner in Hirschfeld Kraemer’s Los Angeles office.