Over the last nine months Uber has suffered one legal setback after another in the class action independent contractor class action lawsuit filed against it in federal court in San Francisco. Yesterday was perhaps its worst day, when the court issued a ruling with setback #3: invalidating the arbitration clauses in the drivers’ agreements, which if enforced would have foreclosed thousands of drivers from being covered by the class action and required them to commence individual claims against the company. But, one portion of the ruling that has received only scant attention was that the drivers could also proceed on a class-wide basis with the “expense reimbursement claim” seeking damages for their transportation and cell phone costs, in addition to their “tipping claim” where they allege that they are entitled to the full amount of all tips received. This part of the ruling – setback #4 – is perhaps the more significant aspect of the court ruling yesterday by Judge Edward Chen.

Expense reimbursement claims oftentimes are the most costly aspect of independent contractor misclassification lawsuits. The overwhelming bulk of the $228 million settlement by FedEx in the class action, where its Ground Division drivers in California were found to have been employees who had been misclassified as independent contractors, pertained to the expense reimbursement claim. In the Uber case, Judge Chen initially declined to include the expense reimbursement claim in the class action because it was based on the use of the IRS’s mileage rate formula and telephone expenses and required drivers to forego their claims for reimbursement of such expenses as water bottles, gum, and mints for passengers. But, on further consideration, he allowed the plaintiffs to waive their claims for such minor expenses and confine their expense reimbursement recovery to the larger transportation expenses as reflected in the IRS mileage rate (which takes into account fuel, maintenance, repairs, depreciation, tires, and insurance), and the costs of their cellular phone service or a portion thereof. O’Connor v. Uber Technologies, Inc., No. 3:13-cv-03826-EMC (N.D. Cal. Dec. 9, 2015).

We’ll next revisit the litigation history of the Uber case briefly and look ahead to see what Uber is facing in court.  Then, we’ll alert readers about the lessons to be learned from Uber’s experience and inform companies using independent contractors – whether to supplement their workforce or as part of their business models – how they can minimize their misclassification exposure.

Setbacks #1 and #2 Revisited

The bad news for Uber began on March 11, 2015, when Judge Chen denied Uber’s motion to dismiss the entire case by summary judgment. As discussed in our blog post the following day, the judge stated that while there are numerous factors that bear on whether a worker is an employee or independent contractor, the “principal” test of an employment relationship is whether the person to whom service is rendered has the right to control the manner and means of accomplishing the result desired. To that end, the court focused on Uber’s “Driver Handbook,” which instructs drivers, among other things, to “dress professionally,” send the client a text message 1-2 minutes from the pick-up location, “make sure the radio is off or on soft jazz or NPR,” to “make sure to open the door for your client,” and to “have an umbrella in [their] car for clients to be dry until they get in your car or after they get out.”

The judge also noted that there is evidence that Uber monitors its drivers to ensure compliance with Uber’s many quality control standards by requesting that passengers give drivers a star rating on a scale from 1 to 5 after each completed trip based on the driver’s performance and that Uber uses these ratings “to monitor drivers and to discipline or terminate them.”  In addition, the judge found that Uber’s contract with drivers provides that it may terminate any driver whose star rating “falls below the applicable minimum star-rating,” and that it expressly reserved the right to terminate the drivers’ relationship or to terminate the use the company app if a driver’s customer ratings are deemed unacceptably low or for any reason at all. The court noted that this factor is a key one favoring employee status.

While the court noted that there were some factors favoring independent contractor status, such as the fact that Uber allows drivers to make themselves available for work whenever they want and to accept or reject rides once they have been selected, those facts were hardly sufficient to rule in Uber’s favor as a matter of law. Instead, the judge set the case down for a jury trial, which is now scheduled to begin June 20, 2016.

Setback #2 occurred on September 1, 2015. Our blog post that day noted that Judge Chen ruled at that time that he was granting the motion by the drivers for “conditional certification” as a class action. In his ruling he found that the class will include drivers for UberX, a ride-sharing service where drivers use their own cars, UberBlack, a high-end car service, and Uber SUV. The court did, however, rule in Uber’s favor to the limited extent that the class would only include drivers who began working for Uber before June 2014 and those who work for and are paid by Uber or an Uber subsidiary – not drivers who work and are paid by so-called intermediary transportation companies.

What’s Ahead for Uber in this Court Battle?

In an article published earlier in the New York Times shortly after setback #2 by tech reporter Mike Isaac, he quoted the author of this blog post commenting about the significance of the court decision today:

“‘The certification is a prelude to a bigger battle,’ said Richard J. Reibstein, a partner in the labor and employment practice at the law firm Pepper Hamilton. ‘This motion is only a legal skirmish,’ he said. ‘The real issue is whether the drivers are independent contractors or employees. If they are employees, then Uber will be hard-pressed to deliver profits for its investors.’”

Forbes’ columnist Daniel Fisher focused on the upcoming trial in his column on July 10, noting that in trials of this nature, the case may, for all practical purposes, turn on what the workers want.  The author of this blog post was quoted in that column: “In cases involving drivers and others who are relatively well-paid, you can usually find a huge number who’ll say ‘I’m an independent contractor, I am my own boss, the company does not direct or control me, so please don’t take that away from me, jury.’”

In contrast, the principal lawyer for the drivers, Shannon Liss-Riordan, challenged that view and said in the column: “It’s not just up to the workers to decide how their employer should classify them.”

June 20, 2016 is just over six months away. Unless the trial date is adjourned, there is likely to be a jury verdict sometime in late July or early August 2016. Uber’s investors will not be the only ones who may be worried about this case during the jury trial; other on-demand companies in the sharing or gig economy will be concerned that they may be the next Uber defendant. Instead of worrying, though, such companies may be wise to take steps to enhance their independent contractor compliance.

What Can Companies Do To Minimize Their Independent Contractor Misclassification Exposure?

Many companies that use independent contractors have resorted to IC Diagnostics™ to enhance their level of compliance and determine whether a group of 1099ers would pass the applicable tests for independent contractor status under governing state and federal law. That proprietary process also offers a number of practical, alternative solutions to enhance compliance with those laws, including: restructuring, re-documenting and re-implementing the independent contractor relationship; reclassifying 1099ers as W-2 employees; and redistributing 1099ers – as more fully described in our White Paper on the subject.

Companies that wish to retain an independent contractor business model generally opt for restructuring, re-documenting, and re-implementing their independent contractor relationships. While not all companies can eliminate most control and direction over workers treated as 1099ers, the overwhelming number can effectively restructure their independent contractor relationships to comply with federal and most state laws. The IC Diagnostics™  process provides the means to stress-test the independent contractor relationship. If it can be effectively restructured to comply with such laws, the next step in the process is re-documentation.  What seems like a simple act of dotting your i’s and crossing your t’s, though, is anything but; indeed, many independent contractor statutes and most judicial and administrative decisions in this area are often counter-intuitive.

As we noted in our August 29, 2014 blog post entitled “Earthquake in the Independent Contractor Misclassification Field,” we concluded that FedEx Ground lost a key case because of its misplaced reliance on an independent contractor agreement and its policies and procedures that were good, but not good enough.  Plainly, FedEx is a savvy company, but close scrutiny by a court found one fallacy after another in the very documents FedEx created – sufficient in degree to lead the court to rule against FedEx. As we noted, “IC agreements and policies and procedures that are not drafted in a state-of-the-art manner, free from language that can be used against the company, can cause businesses that use ICs to face class action litigation or regulatory audits or enforcement proceedings they may be able to otherwise avoid.”

Lastly, the implementation of a legitimate IC relationship is essential. As shown in the Uber case, even when its contractual provisions were drafted in a manner intended to be consistent with independent contractor laws, evidence was introduced in setback #1 that it failed to strictly follow in practice the contractual limitations on direction and control it had put into its independent contractor agreements.  There is no reason, however, why a company committed to complying with independent contractor laws cannot, when exercising both rigor and restraint, implement and carry out in practice an enhanced independent contractor relationship.