Employee or independent contractor? It’s a question many businesses grapple with, and the answer has significant legal and financial implications. Employee vs. independent contractor classification is becoming an increasingly important issue for many “on demand” technology companies such as Uber doing business in the fast growing “gig” or “sharing” economy.

Uber has been involved in a number of legal battles being waged over its practice of classifying its drivers as independent contractors, rather than employees. California has been a hotspot for litigation. 

While several states, including New York, Texas, and Georgia, have considered and rejected the argument that Uber drivers are employees, in June the California Labor Commissioner’s Office ruled that an Uber driver should be classified as an employee. The ruling ordered Uber to pay the driver approximately $4,000 in expenses she incurred during eight weeks driving for the company.

The ruling only binds this specific driver, and Uber has appealed. Yet, the case has broader implications. It could bolster and encourage class-action lawsuits in California and beyond. And individuals may bring more complaints seeking reimbursement for expenses they would be entitled to as an employee. Time recently reported on a case brought by another former Uber driver in California in July, in which the driver seeks payment for approximately $15,000 in expenses. This case, too, hinges on the driver’s classification as an employee or independent contractor.

Uber’s argument against employee status is that it merely operates a software application that connects drivers and passengers, and that it has no control over the hours its drivers work and whether they choose to work for other companies. Should it lose this fight (which is being fought state-by-state), the consequences for Uber - and companies like it such as Lyft,GrubHub and Instacart - will be severe. It will be required to pay drivers in accordance with state wage and hour laws, reimburse them for expenses necessarily incurred while working (e.g., fuel, mileage), reimburse their tips, withhold and pay taxes, and compensate non-exempt employees for overtime hours. Employees, as opposed to independent contractors, are also eligible for unemployment compensation and workers’ compensation benefits.

While the individual California Labor Commissioner’s Office rulings are significant, the real action is in the slew of class action lawsuits being filed against Uber and other on-demand companies. On September 1, U.S. District Court Judge Edward Chen ruled that Uber drivers in California could join a case seeking mileage and tip reimbursement from the company - a decision that Uber is appealing. This case and others like it have the potential to upend the on-demand economy’s basic business model.