United States: Independent Contractor Or Employee?

What Employers Can Learn From Uber's Recent Settlements
Last Updated: September 22 2016
Article by Robyn E. Frick

 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 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.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

Disclaimer

Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

Registration

Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

Cookies

A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

Links

This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

Mail-A-Friend

If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

Security

This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.