In a strained and tortuous series of decisions, a California federal Judge has perhaps fortuitously forced Uber into going to trial in a significant class action to save its business model along with that of the on-demand economy. Fortuitous only because this may be a case Uber can win.

First the facts: The plaintiffs, Uber drivers, claim that they are in fact employees of Uber, not independent contractors and that they are therefore entitled to “tips” and other compensation.  A California federal judge, Judge Edward Chen, recently certified a class of some of these drivers in a lawsuit in California against Uber.

In a strained and tortuous series of decisions, a California federal Judge has perhaps fortuitously forced Uber into going to trial in a significant class action to save its business model along with that of the on-demand economy. Fortuitous only because this may be a case Uber can win.

First the facts: The plaintiffs, Uber drivers, claim that they are in fact employees of Uber, not independent contractors and that they are therefore entitled to “tips” and other compensation.  A California federal judge, Judge Edward Chen, recently certified a class of some of these drivers in a lawsuit in California against Uber.

By way of background, if a worker is an independent contractor, the worker’s pay can be less than minimum wage and the worker is also responsible for costs incurred while on the job. Generally, the worker receives no benefits. The business, on the other hand provides limited direction or supervision.

If the worker is an employee, the company incurs overhead expenses and must pay overtime, worker’s compensation and benefits, all of which may translate into increase cost for the service. Of course, the employee must submit to the directions of the employer.

The lawsuit in question sought class certification on behalf of 160,000 drivers who worked for Uber in California since 2009. Chen certified the class, though he exempted those drivers who did not opt out of an arbitration agreement and those drivers who work for third party services that contract with Uber to provide drivers. (Uber limo drivers for example.) The class now includes not 160,000 drivers but, according to Uber estimates, around 15,000, still a hefty chunk.

Nevertheless, classifying even this limited number of drivers as employees could have enormous implications for Uber , raising its costs and fares closer to those of traditional taxi cabs and perhaps limiting Uber’s ability to attract drivers many of whom value the freedom and autonomy Uber affords.

The stakes are high not just for Uber, but for all businesses that rely on independent contractors including not just the on-demand providers, but many traditional businesses as well. See our previous post “Haters Goin Hate: Uber, Lyft and Winning the Legal Wars.”

Showing his apparent distaste for Uber and its business model, Chen certified the case and denied Uber’s efforts to dismiss the case despite the fact that:

  • Uber exercises no control over the drivers work schedules, a highly relevant factor to determining independent contractor status. (According to the Court “Uber admits it exercises a uniform amount of control over its drivers work schedules” (i.e. none)).
  • Uber does not exercise any control over its drivers' ability to work for other entities (again its right of control here is, according to the Court, “uniform” since it is “nonexistent.”)
  • Uber drivers can choose where they will work, when, what hours and how long. Uber’s drivers work only when they want; hours and time periods are not controlled by Uber.
  • Uber drivers all signed contracts clearly stating they were independent contractors (according to the Judge, there was “no evidence” that the drivers preferred to be independent contractors and the drivers may not have understood the significance even though there was little evidence so presented). (Huh?)
  • Somewhat inconsistently, according to the Court, “the evidence overwhelmingly indicates that all Uber drivers likely understood themselves to be agreeing to be independent contractors when they first signed up…”
  • Uber’s training of drivers varied over time and from place to place.
  • Uber provides no supervision of its drivers.
  • Uber does not provide the cars for use by drivers or pay for the gas used by the drivers.
  • Uber retained the right to terminate drivers with varying amounts of notice and pursuant to 17 different contracts. (So the fact that you can fire your painter with little notice for whatever reason makes him an employee?)

Chen even went so far as to hold that Uber drivers have a valid claim for some unspecified portion of the fare that is assumed to be a tip, even though there was no question that the fare charged by Uber did not include a tip and there was no proof offered by plaintiffs as to how the damages for failure to pay the tips could ever be calculated. The latter is directly at odds with the Supreme Court’s decision in Comcast v. Behrend, (2013) 569. U.S. __, 133 S.Ct. 1426, 185 L.Ed.2d. 515

And Judge Chen used the simplistic analysis that the presence of a single issue—driver status—was sufficient to certify the case without requiring proof of some key elements of that claim and damage. It was just this sort of analysis that the Supreme Court seemingly rejected both in Comcast and Wal-Mart Stores, Inc. vDukes, 131 S. Ct. 2541 (2011).

The only good news for Uber: the Court refused to certify a class of drivers who had signed contracts with arbitration clauses precluding the use of the class action remedy. But only because there were individual issues as to whether the arbitration clauses are unconscionable and enforceable. (Again somewhat remarkably, in an earlier and related case Judge Chen actually dictated to Uber what its arbitration agreements would have to contain to be valid. Then in another and subsequent related case Judge Chen held that very clause was unconscionable and not enforceable.)

And based on what we have seen so far, even this maybe a pyrrhic victory: I am not sure I would rather have an arbitrator decide the issue of whether Uber’s drivers are independent contractors than a jury. The California Labor Commission has already held that the drivers are contractors and that fact alone could influence arbitrators against Uber. There is little if any opportunity for an appeal from an arbitrator’s decision. 

Moreover, there is still a possibility that a class could be created of certain sub groups of Uber drivers who can show they are similarly situated with respect to the issues surrounding the unconscionability of the arbitration clause. Certainly Uber could face multiple one off arbitrations although that exposure is far less that a class action.

 Perhaps the Court was mindful of traditional thinking that certification of a class action often forces settlement since the exposure of the case to the defendant becomes intolerable. But in its certification Order, the Court stated that Uber could simply restructure its relationship to make sure its drivers are “bona fide” independent contractors (as if there was any question as to the Court’s view of Uber’s position).

Given this statement, it’s hard to see how the case could be settled at this point in a way that would leave Uber’s business model and pricing points intact and still protect it against future suits. Remember: any settlement would have to be approved by the Court—a Court that is so seemingly hostile to the Uber business model, making any settlement that tries to save any portion of that model difficult.

So at the end of the day, this case may have to be tried. But perhaps that’s not the disaster it appears: while juries can be scary, they often do reach the right result if they understand the issues. And Uber has a good case: it provides an overwhelmingly popular product; it provides a means of income for countless people and quite frankly, it can present a good case on the merits.  A victory would preserve and legitimize not only the Uber model, but that of many other portions of the on-demand and traditional economy. And a loss may not leave Uber in a worse position than it already finds itself: being forced into a settlement that may have to gut the business model to get Court approval.