If imitation is the sincerest form of flattery, Uber appears to be a real success, as many other industries attempt to copy the on-demand, app-driven, cashless business model.  

For Uber, however, success has come at a price. From issues of liability and insurance, to lawsuits from taxi companies and unions, the company has faced unprecedented challenges as it continues to navigate the sharing economy. However, the biggest issue currently confronting Uber – and the one most instructive to industries and employers nationwide – is whether Uber’s drivers are employees or independent contractors.

O’Connor v. Uber   On September 1, 2015, Judge Chen of the U.S. District Court for the Northern District of California certified a class action lawsuit against Uber by drivers alleging they were misclassified as independent contractors rather than employees. The case began as a 2013 lawsuit by four Uber drivers seeking reimbursement for certain expenses such as gas and vehicle maintenance. Today it involves 160,000 current and former California-based Uber drivers. A decision in favor of the plaintiffs would have far-reaching implications, including a significant devaluation of Uber and a closer look at the practices of other businesses with similar business models.

At the heart of the Uber class action is the plaintiffs’ contention that Uber has violated California labor laws by failing to (i) reimburse its drivers for expenses directly incurred as a consequence of the drivers’ employment duties and (ii) pass on tips left for the drivers by patrons. The class action turns on whether the drivers are in fact employees of Uber.

Alleged Misclassification as Independent Contractors.  Under California law, the determination of whether a worker is an employee or an independent contractor involves a two-part analysis. First, a plaintiff presents evidence that he provided services for an employer. This establishes a prima facie case that the relationship was that of an employer/employee. The burden then shifts to the employer to prove that the presumed employee was an independent contractor.

In its 1989 Borello opinion, the Supreme Court of California enumerated a number of factors indicating an employment relationship exists. The most significant is the putative employer’s “right to control work details” (i.e., the extent to which the employer retains “all necessary control” over the worker’s performance). While the principal’s “right to control” might appear to be a crucial factor, Judge Chen highlighted the “flexibility” and “variability” of the Borello test, making clear that “no one Borello factor is dispositive when analyzing employee/independent contractor status.” Thus, despite facts that seem to point in favor of the Uber drivers, it is difficult to predict how a jury would weigh the factors, particularly in light of contradictory legal precedent.  

Among the more persuasive factors for Judge Chen is the fact that Uber drivers are required to follow detailed requirements imposed on them by Uber, including a monitoring and grading system of feedback provided directly by customers to Uber. Drivers are subject to termination based on their willingness to abide by Uber’s mandates and the grades received from customers. Uber also exercises substantial control over the qualification and selection of its drivers through background checks, city knowledge exams, vehicle inspections, and personal interviews.

Alleged Violation of California Tip Laws.  California Labor Code section 351 governs an employer’s obligation to remit employee-earned tips and gratuities to employees. Uber’s published policy is that riders need not pay gratuity to the driver because it is already included in the total cost of the car service. Plaintiffs contend that Uber has not remitted the total proceeds of gratuities to the drivers who earned them.

In determining liability under section 351, it seems plausible based on the facts that a jury might conclude that Uber both received gratuities from its riders and did not remit said proceeds. In other words, despite representing to customers that a tip was included in all of its fares, Uber never calculated, segregated or remitted any tips to its drivers.

The Uber class action will be brought before a California jury on June 20, 2016. While the litigation is based upon California law, the implications will surely reach far beyond the Golden State. When coupled with the U.S. Department of Labor’s recent “Misclassification Initiative,” the employee/independent contractor distinction will likely be among the primary employment issues facing businesses in the coming years. Attorneys representing small businesses or their workers should review the new DOL document and share with clients, while awaiting the Uber class action decision.

This case highlights the critical importantance of clearly defining and formalizing an employee's status. Business Docx helps you draft both Employee Agreements and Independent Contractor Agreements accurately and efficiently. Learn more about its robust capabilities to help you serve your business-owner clients. 

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Part I of this two-part series considered some of the more significant banking, business and ethical issues related to the legalization of marijuana. Part II will now highlight issues related to employment in states where marijuana is legal.