United States: 1099 Or W-2? How To Classify Workers In The Gig Economy And Why It Matters

Last Updated: October 5 2017
Article by Lindsay C. Sfekas

Uber and other ride sharing companies have been at the forefront of the "gig economy" where websites and mobile applications (commonly called "apps") connect workers to customers who need a temporary service. With the rise of the gig economy, one important question still remains unanswered: are those working in the gig economy employees of the company or independent contractors?

Why It Matters:

For years, Uber drivers have tried to convince a court that they are employees of Uber, rather than independent contractors, because they want to receive the various legal protections which employees are eligible for and independent contractors are not, such as the federal minimum wage, overtime, unemployment benefits, the right to bargain, and other legal benefits.

What the Courts Say:

Few courts get a chance to decide whether an Uber driver is an independent contractor or an employee due to the effect of Uber's arbitration agreement, under which drivers agree to arbitrate any claims against the company, including all class action claims. This arbitration agreement includes a thirty day opt-out period, but few drivers opt out. The courts have routinely enforced the arbitration agreement despite numerous class action suits by drivers attempting to set nationwide precedent establishing that they are employees.

As a result of the arbitration agreement, Uber drivers must independently arbitrate their claims. Recently, one driver did arbitrate this issue, and a California arbitrator determined that the driver was an independent contractor. This decision is not legally binding moving forward, so the question of how to classify these workers remains open. Despite nearly every court case upholding Uber's arbitration agreement, a case in the Northern District of California, O'Connor v. Uber Technologies, 3:13-cv-03826, did not enforce the agreement and certified a class of 200,000 California drivers. This case is currently on hold while Uber appeals the decision to certify the class. On June 22, 2017, these drivers also filed a new class action complaint, James, et. al. v. Kalenick, et. al., BC666055, in California's state court against Uber's former CEO, Travis Kalanick, alleging he and other Uber executives are personally liable for purposefully misclassifying the drivers as independent contractors. It is not known how the state court will handle the issue of the arbitration agreements.

Due to the almost unanimous enforcement of the arbitration agreement in federal court thus far, it will likely be difficult to get any legally binding precedent for how Uber drivers should be classified at the federal level. Notably, the Supreme Court plans to hear a case regarding whether arbitration clauses that include class actions are enforceable in its upcoming term. However, this case likely will not impact whether Uber's arbitration clauses are enforceable because the clauses before the Court do not include an opt-out period, and thus are substantially different from the one Uber uses.

Surprisingly, the area that has been creating binding legal precedent is in claims for unemployment, which the arbitration clause does not reach. In Florida, a state Court of Appeals upheld an administrative law judge and determined that Uber's drivers were independent contractors and therefore were not owed unemployment. In contrast, in New York, an administrative law judge determined that the drivers were employees and were entitled to unemployment benefits. Because these decisions are being made on the state level for individual drivers, the law may be slow to develop and may be different from state to state, causing confusion for both drivers and the employer.

The Ripple Effect on the Rest of the Gig Economy:

Gig economy employers need to keep an eye on the developments in these cases because what happens to Uber likely will set the stage for similar employers. The law may end up being different across state lines, which will cause additional complexities for employers in the gig economy.

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.

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