Uber is unquestionably a very hot commercial brand. Through the use of an app on a mobile phone or smart device, consumers can schedule a driver to pick them up and transport them to a destination. Unlike a traditional taxi company, however, Uber drivers are classified by the company as independent contractors and not employees. Uber drivers use their own vehicles and are free to work for other companies (such as competitor Lyft). Uber steadfastly maintains that it is not a transportation company at all, but rather a software technology company that provides a platform to connect consumers with a service. In multiple lawsuits pending in California, however, drivers for Uber (and in another case its competitor Lyft) have filed lawsuits alleging that they should be considered employees entitled to related benefits and protections under federal and state law.

Employee vs. Independent Contractor

The proper classification of workers as employees or independent contractors is not a new concern for many employers. Unlike employees, independent contractors are not subject to a variety of employment laws, including wage and hour laws, anti-discrimination laws, and unemployment and workers compensation requirements. The misclassification of an employee as an independent contractor, however, can carry steep fines and penalties under federal and state law, as well as claims for unpaid wages and benefits by the misclassified employees. For a company like Uber, misclassification also may have a significant impact on its business model moving forward, particularly if the company (and similar companies like Lyft) is required to undertake greater overhead expenses and assume greater risks in offering services to the public.

(Mis)Classification in the New Economy

Although a number of specific tests are associated with analyzing independent contractor status (“economic realities test”, “20 factor test”, and “ABC Test” just to name a few), ultimately, the critical factor for most, if not all, of these tests is the degree of control the business exercises over the independent contractor/employee. A key consideration is whether the business controls the nature of the work performed by the contractor/employee, or whether that individual is able to determine the manner and method of the work. Other oft-cited factors include whether the job is integral to the operation of the business (more likely to be considered an employee), how dependent the individual is on the business for their livelihood, and whether the individual works exclusively for the business.

These tests (regardless of what they are specifically called) can be problematic for businesses like Uber that operate in a virtual or on-demand economy. Unquestionably, Uber drivers have many of the hallmarks of independent contractors. They use their own vehicles, pay for their own gas, set their own hours, and are free to work for anyone. Many, if not most drivers, also work regular jobs as employees for other businesses. Lawyers for the plaintiff-drivers, however, have focused on how integral the drivers are to Uber’s business, and are dependent on Uber for business. Essentially, their position is that, regardless of how Uber classifies its business, it could not operate without drivers, and the drivers could not operate without Uber.

These cases will ultimately prove a test of not only independent contractor status, but also for businesses, such as Uber, that operate in a “sharing economy” in an online marketplace. Uber, and other “sharing economy” businesses (such as Ebay and Freecycle to name just two) rely not on brick and mortar and a traditional production chain, but rather rely on their ability to connect consumers directly with services. If these businesses are required to undertake or “own” traditional labor burdens, including employee benefits, taxes, and health care costs (as well as ADA compliance in another lawsuit currently being defended by Uber) it has the potential not only to impact operating costs, but also go to the very heart of their business model.

The pending wage and hour claims against Uber (and its competitor Lyft) in California will serve as important test cases regarding how traditional notions of independent contractor classification will operate for new business models that focus on connecting consumers and services through social media and new technology. Although Uber is one of the first such companies to litigate this issue, it mostly certainly will not be the last.