Blog: The California Workplace Advisor

Earlier today, Uber Technologies, Inc. announced the decision of the California Department of Labor, Division of Labor Standards Enforcement (DLSE) finding that a driver was an employee, not an independent contractor.  The case, which has been appealed to the Superior Court of California in San Francisco, will likely have far-reaching consequences for Uber and for other emerging technology companies.Uber, of course, is the ubiquitous car service which is now valued at over $40B.  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 competitors like Lyft, is premised on having its drivers 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, which is notorious for being an employee-friendly forum, found in Ms. Burwick’s favor.  It relied heavily on a 1991 decision involving a cab company who claimed that its drivers were independent contractors and thus ineligible for worker’s compensation when injured. on the job.  In that case, 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.”  The DLSE found that Uber’s lack of control over its drivers — their freedom to drive who they wanted, when they wanted and as much or as little as they wanted — was irrelevant.  It found that only a “minimal degree of control quote was required.”

This decision, which will be reviewed de novo in court, is fundamentally flawed.  In California, as in most states, the critical factor for determining whether someone is an independent contractor is the extent of control that an employer exerts over them. Think about the classic independent contractor: the plumber.  A plumber has the freedom to choose who he works for, when he worked for them, and how he will perform those 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.

Each of those factors are present with an Uber driver. 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 provides its app and sets the rates for the services.

And, of course, Uber is not a traditional cab company.  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.

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.

This misguided decision shows the reflexive nature of judicial bodies in California to offer protection for individuals at the expense of businesses premised on emerging technologies. In just about every major city in the United States and Europe, Uber drivers provide an affordable and easy alternative to the traditional taxi industry.  California, which is home to a large number of emerging technology businesses, should be especially wary of slamming the door in their face.

Is this the end for Uber?  Definitely not.  It is merely the decision of a “hearing officer” who does not appear to be registered as a lawyer with the California bar and, to be sure, DLSE decisions are often reversed.  This decision will be resolved from scratch by a state court judge and may well be reversed.

But, in the end, this bodes poorly for Uber and other like-minded California employers who may have to adapt by charging more for their services and laying off drivers.  It is only a matter of time before the class action sharks smell blood in the water and assert larger statewide claims seeking hundreds of millions of dollars in damages and penalties against Uber.

It also means that California employers seeking to avoid the traditional employment relationship will have to think twice before they do so.  In an economy that is heavily weighted to providing services instead of goods, employers will have to think twice before treating their service providers as independent contractors.