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The Uber-Important Question: Independent Contractor or Employee?

The Uber-Important Question: Independent 
Contractor or Employee?

The California State Labor Commissioner's Office recently issued a ruling that is likely to be an Uber-headache for the industry's employers (while possibly providing a *Lyft* to the industry's drivers). What industry is that? It depends whom you ask.

On the one hand, companies like Uber say they are a software company—the developer of a popular app that matches people who need transportation with drivers who are available to give rides. But if you ask some of the drivers, like Barbara Ann Berwick, these "software companies" are in the transportation industry, essentially operating a taxi service.

Berwick v. Uber

Ms. Berwick worked as a driver for Uber (her contract with Uber refers to her as an "Independent Transportation Provider") from July 2014 through September 2014. She used her personal vehicle to transport riders who requested her services through the Uber app, driving an estimated 1-2 hours per day for 49 days, also incurring additional expenses such as bridge tolls and parking tickets while working.

On September 16, 2014, Ms. Berwick filed a claim with the Labor Commissioner's office to recover expenses under Labor Code section 2802, which requires employers to reimburse its employees for any necessary expenses reasonably incurred in their duties. Uber argued that Ms. Berwick was an independent contractor and therefore not entitled to be reimbursed for her expenses.

The Labor Commissioner began its analysis of whether Ms. Berwick was an employee or an independent contractor by reiterating the presumption in California that, where there is a question as to whether an independent contract or employment relationship exists, there is an inference of "employment" if personal services are performed as opposed to business services. The Labor Commissioner then applied the "economic realities" test adopted by the California Supreme Court in S. G. Borello & Sons, Inc. v. Dept. of Industrial Relations (1989) 48 Cal.3d 341. Under the "economic realities" test, the most significant factor considered is whether the person to whom service is rendered (i.e. the employer) has control or the right to control the worker, both as to the work done and the manner and means in which it is performed.

Uber argued that it exercised little control over Ms. Berwick's actions as it did not control her hours or the number of trips she made. However, the Labor Commissioner, relying on S. G. Borello & Sons, reasoned that it is not necessary that a principal exercise complete control over a worker's activity in order for the worker to be considered an employee, especially when the work does not require a high degree of skill and it is an integral part of the employer's business. The Labor Commissioner found that by obtaining clients in need of service and providing workers to conduct its business, Uber retained all necessary control over the operation as a whole. Further, Ms. Berwick's work was integral to Uber's business in that she, and all drivers, actually transported the customer that Uber provided: "Without drivers such as [Ms. Berwick, Uber's] business would not exist."

The Commissioner further found that Uber was involved in every aspect of the operation: Uber vets prospective drivers, who must provide Uber with their personal banking information, their residence address, and their Social Security Numbers; drivers are not allowed to use Uber without submitting and passing background and Department of Motor Vehicles checks; Uber controls the tools the drivers use by requiring registration of cars and establishing certain requirements for the cars being used; and only those registered drivers may use the Uber application. The passengers pay a set price for the trip and Uber pays the driver a non-negotiable fee. The only assets that the plaintiff provided were her car and her labor. Ms Berwick's work did not entail any managerial skills that could affect profit or loss and she had no investment in the business. Thus, the Labor Commissioner found, Ms. Berewick was providing personal services as distinguished from business or management services.

Accordingly, the Labor Commission found that Ms. Berwick was Uber's employee and not an independent contractor, entitling her reimbursement of expenses totaling approximately $4,000.00.

Determining Employee or Independent Contractor Status

The Uber decision highlights a common and tricky legal employment issue—classifying workers as employees or independent contractors. There is no set definition of the term "independent contractor" in California and the determination depends on a number of factors. Notably, the fact that the employer has a written agreement stating that the worker is an "independent contractor" or that the employer issues the worker a 1099 form rather than a W-2 does not determine the relationship. The Labor Commissioner and courts will look beyond any such facts and examine the facts that characterize the parties' actual relationship. (Borello, supra, 48 Cal.3d at 349.)

Aftermath and Implications

Uber is appealing the Labor Commissioner's decision.1 Even though this ruling is small in terms of dollar value and only applies to one driver, in it could open the door to larger lawsuits in the future. In fact, in September 2015, United States District Court Judge Edward M. Chen certified a class-action lawsuit by Uber drivers alleging unfair business practices. (O'Connor v. Uber Technologies, Inc., 2015 WL 5138097 (N.D. Cal. Sept. 1, 2015).)2

As employees, workers have the benefit and protections of California's wage and hour laws (e.g., minimum wage, overtime, meal periods and rest breaks, etc.), anti-discrimination laws, and retaliation laws, whereas independent contractors do not. Additionally, employers do not have to cover independent contractors under workers' compensation insurance and are not liable for payments for unemployment insurance, disability insurance, or Social Security.

An employer who misclassifies its workers as independent contractors rather than employees runs the risk of being liable for unpaid wages, reimbursement of expenses, and associated penalties. All employers, whether they employ over 160,000 drivers nationwide or operate on a smaller scale, should be cautious when deciding to treat a worker as an independent contractor and seek legal advice if they are unsure.

Endnotes

1 In September 2015, the San Francisco Superior Court rejected Uber's attempt to compel arbitration of the matter.

2 The Court certified the class pursuing claims that Uber failed to pass tips on to employees in violation of Labor Code § 351, but denied certification of a class action with regard to claims for reimbursement of expenses under Labor Code § 2802.

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