By now, most employers are aware that misclassifying employees as independent contractors to reduce operating expenses is a bad idea.  While not having to pay income taxes, Social Security, Medicare, workers’ compensation and other costs for workers may seem attractive at first, the potential consequences of misclassifying employees as independent contractors can be devastating— obligating the employer to pay for unpaid wages, meal and rest breaks, and business expenses, in addition to hefty statutory fines.  Sometimes, however, whether a worker should be classified as an employee or independent contractor is not entirely clear, especially given the rise of the gig economy.  In hope of greater guidance, many people have closely followed the string of legal challenges that have plagued Uber Technologies Inc.’s (“Uber”) practice of classifying its drivers as independent contractors rather than employees.  Those of us observing the battle from the side line will have to wait for a clear determination, however, because Uber recently settled two class actions brought by California and Massachusetts’ drivers claiming that Uber of misclassified them as independent contractors rather than employees.  Yet, employers can still glean several important tips from examining Uber’s suits and settlements.

The Nature of the Lawsuits and Terms of Settlement

In the two suits Uber recently settled, O’Connor et al. v. Uber Technologies, Inc., et al. and Hakan Yucesoy v. Uber Technologies Inc., et al., 385,000 California and Massachusetts drivers accused Uber of misclassifying them as independent contractors, and sought reimbursement for expenses (such as gas and car maintenance), and compensation for denying them tips (by telling passengers gratuity is included even though tips are not paid to drivers).

Whether the drivers or Uber would have prevailed depends on a variety of factors, bearing in mind that in California, Uber as the employer bears the burden of establishing the drivers are independent contractors rather than employees.  (See, e.g. S.G. Borello & Sons, Inc. v. Dept. of Industrial Relations (1989) 48 Cal.3d 341, 349.)  The “most significant” primary factor in determining whether the drivers are independent contractors or employees is whether the putative employer—Uber—has the “right to control work details”, meaning the “manner and means of accomplishing the result desired.”  (Id. at 350.)  While the right of control need not extend to every possible detail of the work, the relevant question is whether Uber retains “all necessary control” over the driver’s performance.  (Id. at 357, emphasis in original; see also Air Couriers Internat. v. Employment Development Depart. (2007) 150 Cal.App.4th 923, 934 [explaining that “the fact that a certain amount of freedom is allowed or is inherent in the nature of the work involved” does not preclude a finding of employee status].)  Additional factors, often referred to as “secondary indicia”, that are also relevant to the determination include:

(a) whether the person performing service is engaged in an occupation or business distinct from that of the principal; (b) whether the work is a part of the regular business of the principal; (c) whether the principal or the agent supplies the instrumentalities, tools, and place of work; (d) the alleged employee’s investment in the equipment or materials required; (e) the skill required in the particular occupation; (f) the kind of occupation, with reference to whether, in the locality, the work is usually done under the direction of the principal or by a specialist without supervision; (g) the alleged employee’s opportunity for profit or loss depending on his managerial skill; (h) the length of time for which the service is to be performed; (i) the degree of permanence of the relationship; (j) the method of payment, whether by time or by the job; and (k) whether the parties believe they are creating an employer-employee relationship. 

(Borello, 48 Cal.3d at 351.)

 As no one factor is dispositive when analyzing the employee/independent contractor analysis, Uber and the drivers each contended their respective position was proper.  For instance, Uber argued that the “right to control” factor was not met because drivers can work as much or as little as they want, they never have to accept any “leads” for rides generated by Uber, and the drivers can control how they give the rides they do accept.  (O’Connor et al. v. Uber Technologies, Inc., et al., (N.D. Cal. March 11, 2015) 82 F.Supp.3d 1133, 1149, Order Denying Defendant Uber Technologies, Inc.’s Motion for Summary Judgment.)  In addition to arguing it was a “technology company” that only generates “leads” for its “transportation providers” (the drivers) through software, Uber also argued that the fact that Uber does not own or supply the cars weighed in favor of its independent contractor classification.  (Id. at 1137-1138.)

On the other hand, the drivers contended the control factor was met, because among other things, the Uber Driver Handbook stated that Uber expects on-duty drivers to accept all ride requests, instructs drivers to dress professionally, and send text messages to passengers when they are one to two minutes from the pickup location.  (Id. at 1149.)  Further, drivers who do not perform up to Uber’s standards, or those who reject too many trips, could lead to termination from Uber’s service.  (Id. at 1143.)

While additional arguments also supported and negated the parties’ respective positions, both sides had significant skin in the game, as legal fees were mounting, appeals were pending, and the not-so distant June trial date was looming on the lead case.  With this background, in mid-April, the parties reached a settlement, which is still subject to court approval.  If approved, the settlement requires Uber to initially pay $84 million to drivers, with another $16 million contingent on Uber going public and meeting certain performance criteria afterward.  Uber must also make clear that tips are not included in the fares, and allow drivers to put cards in their cars notifying riders that although tips are not included or required, they would be appreciated.  (See Plaintiffs’ Notice of Motion and Motion for Preliminary Approval of settlement in O’Connor et al. v. Uber Technologies, Inc., et al.,  (N.D. Cal. ), Case No. CV 13-03826-EMC, filed April 21, 2016 at pp. 5-11.)  Uber also agreed to provide drivers with more information about their individual ratings, introduce a policy explaining the circumstances under which drivers could be deactivated from the service, and create a drivers’ association comprised of elected driver leaders that will meet quarterly with Uber to express drivers’ concerns.  (Ibid.)  In return, Uber is able to continue classifying the drivers in these lawsuits as independent contractors.

Effect of the Settlement

Many commentators have criticized the settlement because it leaves open the independent contractor/employee determination not only for Uber and its drivers, but for other companies similarly operating in the sharing space or gig economy, such as Postmates (an on-demand delivery service) or Task Rabbit (assists consumers with everyday tasks like cleaning, moving and delivery).  Indeed, in response to discussion about the settlement, the drivers’ counsel maintains that the settlement does not endorse Uber’s classification of drivers as independent contractors, and only settles these two cases which involved drivers in California and Massachusetts (in employee-friendly legal forums).  Thus, whether the determination is correct will have to wait until another day. 

Further, several other cases are pending in other jurisdictions that also challenge Uber’s business model and employment practices.  How the other jurisdictions will determine the issue also remains unknown, as different jurisdictions apply different rubric to determine the classification issue.  Several states, including New York, Texas and Georgia have held in favor of Uber’s classification practices, and other states, including Ohio and Florida are working on regulations governing Uber and other ride services that would designate drivers as independent contractors.

Given the various factors that can affect the classification determination, the jurisdictional differences, and the practical reality that legislation has not necessarily kept pace with changes in technology, the threat of misclassification becomes even more pressing for employers.

Practical Solutions for the Future

What is an employer to do amidst all of this uncertainty?  Understanding the basic differences between independent contractors and employees is the first crucial step in light of the debilitating penalties and liability a company could face for misclassification.  Employers should be careful about classifying workers as independent contractors even in instances where the worker prefers an independent contractor classification.  For example, despite the fact that Uber reportedly submitted declarations of hundreds of drivers supporting Uber’s independent contractor business model, this was not sufficient to convince the O’Connor Court that Uber’s classification was proper as a matter of law.  (See also, Borello, 48 Cal.3d at 340, rejecting notion that labels placed by parties on their relationship is dispositive).  Thus, attempts to contract around the employee classification are problematic and often improper.  (See Alexander v. FedEx Ground Package System, Inc., 765 F.3d 981 (9th Cir. 2014) [ruling independent contractor agreements between FedEx and its deliver drivers were not dispositive and drivers were employees as matter of law].)  Indeed, the enforceability of Uber’s arbitration agreements was on appeal with the Ninth Circuit following an adverse ruling in the lower court when the settlement was reached. 

Given the complexity of classification, consulting with an attorney is always a good practice to maintain compliance with continually evolving laws.  If employers are concerned about their continued profitability, counsel may be able to suggest some creative approaches, such as outsourcing the job function.  Keep in mind, however, that each situation must be evaluated on a case-by-case basis.