In a major setback for Uber’s business model, on June 3, 2015, the Labor Commissioner of the State of California ruled that an Uber driver should be classified as an employee and not an independent contractor.

While the ruling applies to only one driver in San Francisco and does not set a precedent for how Uber compensates its 200,000 drivers, it is one of a growing number of decisions that may have far-reaching implications for service oriented businesses in the “sharing” economy. Uber says that its drivers are independent contractors and not employees, which means Uber does not consider itself responsible for paying drivers’ job-related expenses such as mileage and insurance. Moreover, as contractors, drivers are responsible for paying 100% of the federal payroll tax (FICA/FUTA).

Uber Technologies Inc. was ordered to pay a San Francisco driver more than $4,100 to cover the cost of vehicle mileage and tolls. The Labor Commissioner found that Uber is “involved in every aspect of the operation” from vetting drivers and their vehicles to setting rates for trip fares, and therefore is legally an employer of its drivers. Uber plans on appealing the ruling.

To determine whether a worker is an employee, courts and regulators apply various factors to determine whether the company has the right to direct and control a worker. While no one factor is controlling, the following is considered:

  1. the extent to which the worker’s services are an integral part of the employer’s business (examples: Does the worker play an integral role in the business by performing the primary type of work that the employer performs for his customers or clients? Does the worker perform a discrete job that is one part of the business’ overall process of production? Does the worker supervise any of the company’s employees?);
  2. the permanency of the relationship (example: How long has the worker worked for the same company?);
  3. the amount of the worker’s investment in facilities and equipment (examples: Is the worker reimbursed for any purchases or materials, supplies, etc.? Does the worker use his or her own tools or equipment?);
  4. the nature and degree of control by the principal (examples: Who decides on what hours to be worked? Who is responsible for quality control? Does the worker work for any other company(s)? Who sets the pay rate?);
  5. the worker’s opportunities for profit and loss (examples: Did the worker make any investments such as insurance or bonding? Can the worker earn a profit by performing the job more efficiently or exercising managerial skill or suffer a loss of capital investment?); and
  6. the level of skill required in performing the job and the amount of initiative, judgment or foresight in open market competition with others required for the success of the claimed independent enterprise (examples: Does the worker perform routine tasks requiring little training? Does the worker advertise independently via yellow pages, business cards, etc.? Does the worker have a separate business site?).

While the determination of whether a worker is an employee is a fact-based inquiry, the California decision is one of a many cases challenging the independent contractor business model. The alleged “misclassification” of independent contractors has been a focus of the federal Department of Labor during the Obama administration, and the Department of Labor is expected to issue new guidance in this area later this year.