A CLOSE CALL: How Uber is Changing the 1099

July 14, 2016

Murchison & Cumming Blog: Post 85

The recent upswing in app based driving services like Uber have blurred the line between employees and independent contractors.

At first glance, it would seem that Uber drivers are clearly independent contractors. Drivers enjoy the flexibility of when and where they accept assignments, while Uber is able to minimize business costs since the usual benefits afforded employees are absent (overtime pay, minimum wage, meal breaks, unemployment insurance, workers' compensation, etc.). However, recent holdings have altered any clear distinction between the two classifications. The result is a multitude of so called independent contractors claiming to be employees entitled to benefits that traditional employees are guaranteed.

In June 2015, the California Labor Commission found Uber driver, Barbara Ann Berwick, to be an employee and awarded her $4,000 for reimbursement of business expenses (gas, bridge tolls) and interest (Case No. 11-46739 EK). In doing so, the Commissioner looked to the California Supreme Court case of S.G. Borello & Sons, Inc. v. Department of Industrial Relations (1989) 48 Cal.3d 341, which held that agricultural laborers harvesting crop under a written “share farmer” agreement were employees because the employer retained control over the production and sale of the crop. The Court specifically found that the retention of control the employer holds over an individual’s work is paramount in determining whether one is an independent contractor or employee (i.e. the right to control the manner and means of accomplishing the result desired).

In Berwick, the California Labor Commission rejected Uber’s contention that the driver was an independent contractor because the company still holds a strong control over the entire operation. For instance, drivers: 1) must pass a background and DMV check; 2) can be terminated based upon driver ratings; 3) must utilize a car less than 10 years old; and 4) have no authority in pricing (i.e. passengers pay a price set by Uber for the services provided and then a non-negotiable cut determined by Uber is provided to the driver). See also California Employment Insurance Appeals Board Case. No. 5371509 against Uber.

Despite recent California decisions like the above, other states have either held Uber drivers to be independent contractors or have, or are, in the process of implementing regulation requiring the independent contractor designation.

With bated breath, we have been waiting for the outcome of a California federal class action suit against Uber regarding classification of its drivers and appeals related to its arbitration agreement. (Douglas O’Connor, et al. vs. Uber Technologies, Inc. et al., US District Court, Northern District of California, Case No. 13-cv-03826-EMC). However, in April 2016 Uber settled the case along with a similar Massachusetts based case (Hakan Yucesoy v. Uber Technologies, Inc., et al., US District Court, Northern District of California, Case No. 4:2015cv00262) for a total of $84M, with an additional $16M if the company goes public and meets certain performance metrics. With this settlement, the drivers (California and Massachusetts) will remain classified as independent contractors rather than employees. Interestingly, named Plaintiff Douglas O’Connor objects to the proposed settlement and hired new lawyers in this regard.

Shortly after the O’Connor settlement, another similar class-action was filed against Uber in the Illinois Northern District Court on May 1, 2016 (Lorri Trosper v. Uber Technologies, Inc., Case No. 1:2016cv04842). In this newer case, the Uber drivers (all except California and Massachusetts) seek to change their classification from independent contractor to employee amongst other things. So for now, it looks like the debate will continue on.