Today was not a good day for Uber. It suffered its second setback from the federal district court judge hearing the independent contractor misclassification class action case brought by Uber drivers against the giant ride-sharing company in its own backyard in Northern California.

Why did Uber lose today?

Because the odds were stacked against it on the motion for “conditional” class certification, which has a rather low legal burden for plaintiffs.

As we noted in our blog post the day the court heard the motion, Uber did not realistically have a great chance at defeating the initial motion for class certification. Indeed, an Uber spokesperson was quoted as saying “we are not surprised by this Court’s ruling.”

The 68-page ruling by the Judge Edward M. Chen did not decide the merits of the case. Rather, it decided that one of the two claims asserted by the drivers could be maintained, at least initially, as a class action. The claim proceeding as a class claim is the “tip claim,” where the drivers argue that they are entitled to the full amount of all tips received and that Uber is not permitted to retain any portion of the tips. The claim that was not permitted to proceed as a class action, at least for the time being, is the expense reimbursement claim, where drivers argue that Uber, as their employer, must reimburse them for all necessary expenses such as car maintenance and fuel.

The court also limited the drivers who may be part of the class. The class will only include drivers for UberX, a ride-sharing service where drivers use their own cars, UberBlack, a high-end car service, and Uber SUV.  Further, the court ruled that the class will only include drivers who began working for Uber before June 2014 and those who work for and are paid by Uber or an Uber subsidiary – not drivers who work and are paid by so-called intermediary transportation companies.

An article published earlier today in the New York Times by tech reporter Mike Isaac quoted the author of this blog post commenting about the significance of the court decision today:

“‘The certification is a prelude to a bigger battle,’ said Richard J. Reibstein, a partner in the labor and employment practice at the law firm Pepper Hamilton. ‘This motion is only a legal skirmish,’ he said. ‘The real issue is whether the drivers are independent contractors or employees. If they are employees, then Uber will be hard-pressed to deliver profits for its investors.’”

Now the real fight starts. Once the class members are notified, there will be a year or two of intensive and costly pre-trial discovery including document demands and depositions of drivers and Uber officials. Uber will likely then try, for a second time, to defeat class certification; it will likely file a motion to decertify the class based on evidence obtained during the pre-trial discovery stage. At that point or earlier, the parties may try to settle the case. Settlements in class action independent contractor class actions are not uncommon.

The court previously ruled that the drivers will be able to present their claims to a jury – that was Uber’s first loss back on March 12 of this year.  After pre-trial discovery is completed, the case will be presented to a jury. There will be many drivers who will testify that Uber treats them like employees and controls almost everything they do once they decide to accept a ride. Likewise, there will be many drivers who say they are independent business owners, want to remain that way, and don’t feel they are employees.

As the court stated in its earlier ruling against Uber, there are some factors that favor independent contractor status and some that favor employee status. So this is not going to be an easy case for the plaintiffs to win, but they certainly have some decent facts to work with. They will likely try to use Uber’s own words against it. A good deal of the language in the contractor agreements that Uber drafted are not independent contractor friendly because, as the court said when it denied Uber’s motion for summary judgment, they give Uber the right to direct and control key aspects of its relationship with the drivers. Uber also created policies and procedures that the drivers claim to be further indications of direction and control over how the drivers do their work. Those may be the deciding factors with a jury – and as drafted and applied, a good deal of that language created by Uber doesn’t favor the ride-sharing firm.

What can Uber do to enhance its independent contractor compliance? 

Savvy companies don’t stand still – even while in the midst of lawsuits. As an example, even though FedEx Ground has suffered many legal setbacks in its decades-old defense of dozens of class action misclassification cases filed against it, the giant courier company sought to restructure its relationships with drivers during the same time the company was seeking to defend itself. It did this to change the facts that were not particularly favorable to FedEx so that it did not perpetuate the factual scenario that was effectively being used against it.

Can a company like Uber restart with a clean slate? Obviously, no company can change the past, but it can and should make changes going forward that reduce the direction and control over the drivers’ work that arguably has been retained by Uber by virtue of its contracts with drivers and then implemented by Uber on a day-to-day basis. Those types of changes can be done through restructuring, re-documenting and re-implementing the independent contractor relationship in the near future.

Some companies have used IC Diagnostics™ to accomplish this restructuring and re-documentation. IC Diagnostics is a process that takes into account the factors set forth in all relevant federal and state statutes governing independent contractors, weighs the factors according to governing court decisions, structures the business consistent with the law, and culminates with a state-of-the-art independent contractor agreement that substantially enhances the workers’ independent contractor status.

Those companies reliant on independent contractors, including many on-demand companies in the sharing or gig economy that use 1099 contractors, would be wise not to wait until they are sued or the subject of regulatory enforcement actions or audits. Restructuring, re-documenting, and re-implementing independent contractor relationships before becoming a defendant makes the most sense.  Although Uber did not appear to take that route, it is not too late for it to enhance its independent contractor compliance.  The same can be said for other companies that have yet to reassess their level of compliance with independent contractor laws.