New court cases in California are testing the ability of established labor law to distinguish between employees and independent contractors in the new “sharing economy,” recently focusing on the status of drivers in ride-sharing companies Uber and Lyft.  Both firms, which view themselves as “technology” companies rather than transportation firms, have preferred to categorize their drivers as independent contractors in order to avoid paying driving expenses, overtime, payroll taxes, workers compensation and other costly features of the employee grade. However, a recent ruling by a Deputy Labor Commissioner in California, coupled with at least two federal class action cases currently pending in California, have thrown the debate wide-open as to whether Uber and Lyft can legitimately classify their drivers as independent contractors.

In the state case, serial litigant Barbara Berwick – who has reportedly been a plaintiff many times since 1987 – filed a claim against Uber with the California Labor Commissioner alleging that she was not an independent contractor but rather an employee and was therefore entitled to expense reimbursement and unpaid wages (were she to prove any), despite the fact that Berwick had Uber pay her fees to a separate corporation.  In a 17-page ruling issued in June 2015, Deputy Labor Commissioner Ellen Kennedy concluded that Berwick was in fact an employee in light of how she worked as an Uber driver, and thus was entitled to have expenses reimbursed.  Kennedy based her decision on well-settled, albeit 20th Century, California law which lays out a broad array of considerations to help distinguish between employees and contractors.  While the main test is whether the principal engaging the worker has “the right to control the manner and means of accomplishing the result,” numerous secondary factors assist in guiding this determination.  These include:  (i) whether there is a right to terminate at will; (ii) whether the service provider is engaged in an occupation or business distinct from that of the principal; (iii) whether the work is usually done under the direction of the principal or by a specialist without supervision; (iv) the skill required in the particular occupation; (v) whether the principal or the worker supplies the instrumentalities, tools, and the place of work for the person doing the work; (vi) the length of time for which the services are to be performed; (vii) the method of payment – whether by time or by project; (viii) whether or not the work is a part of the regular business of the principal; and (ix) whether or not the parties believe that they are creating an employer-employee relationship. While these factors are most prominently laid-out in a California supreme court case from 1989, they are based in part on decisions of the court and treatises dated almost fifty years still earlier.

Nevertheless, this is the same law being used by two federal judges in two class actions, also pending in California, in which drivers are suing Uber and Lyft based on the same contention – that they are employees, not contractors – and are therefore entitled to all of the benefits and protections of employees that are not available to contractors. Issuing very similar rulings on the same day in March 2015 (hardly a coincidence), judges Edward Chen and Vince Chhabria each concluded in their ruling that applying traditional, 20th Century tests for employment poses significant challenges to deciding this issue for “sharing economy” companies like Uber and Lyft and that, absent legislative intervention, the question will need to be decided by juries in court cases, which “will be handed a square peg and asked to choose between two round holes.”  To be sure, potentially billions of dollars rest in the hands of these juries, and the stakes are no less in the state matter involving Uber driver Barbara Berwick, where Uber has appealed the regulatory ruling to San Francisco Superior Court.  While it will take time for these and other cases to wind through the legal system, they are forming new tectonic plates beneath the sharing economy.  In all likelihood, state legislatures and regulators will begin jumping into the foray, enacting new rules to address workers rights in this brave new world.  The rules will almost certainly continue to be defined on a state-by-state basis and, if recent developments are any indication, the scales seem to be tipping in workers’ favor.  In late June 2015, it was reported that grocery delivery service Instacart will convert its “shoppers” from independent contractors to employees.  Aside from being good for labor, a trend toward employee status may also not be so bad for the public.  While a pro-employee trend may mean higher prices as companies try to pass on at least some of the new costs to customers, the public should benefit from more reliable and safer services.  This involves complex business, law and insurance issues, which will be the topic of another article.