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On September 1, the U.S. Court for the Northern District of California held that a group of California Uber drivers could bring a class action to determine whether they are employees or contractors. The specific issue has to do with payment of tips that were not passed on to them, but the suit may eventually include reimbursement of other expenses.

The ability to treat workers as independent contractors is essential to the business model embraced by various sectors of the economy, including employment staffing, car sharing and teaching because the companies do not have to pay contractors for health insurance benefits, work-related expenses, and certain taxes. That, bluntly put, is the profit margin.

The value of those sectors has been variously estimated, but last year Uber alone claimed a valuation of $40 billion.

Would an adverse decision be the end of Uber? How far out into the sharing economy might the ripples go?

Hyperventilation is probably premature because the state and federal courts where this and similar questions are pending will be applying state law and decisions are likely to be very fact specific.

Nonetheless, it appears that the trend toward the classification of workers as independent contractors may have reached its apex, the top of the S-curve, and may now begin to be legislatively and judicially curtailed. Businesses that depend heavily on contractor labor might do well to re-examine the practice.

O'Connor v. Uber Technologies

On its face, the decision appears to be a procedural one about whether, under the requirements of Rule 23 of the Federal Rules of Civil Procedure, the groups of plaintiffs may sue as a class. The default position is that cases must be brought individually unless the plaintiffs can meet several requirements:

  1. the class is so numerous that joinder of all members is impracticable;
  2. there are questions of law or fact common to the class;
  3. the claims or defenses of the representative parties are typical of the claims or defenses of the class; and
  4. the representative parties will fairly and adequately protect the interests of the class.

If all of these things are true, then the court must also find that

  1. the questions of law or fact common to class members predominate over any questions affecting only individual members, and that a class action is superior to other available methods for fairly and efficiently adjudicating the controversy.

The opinion acknowledges that a review of these issues, especially the second, third and fifth matters involves previewing the merits of the plaintiff’s case.

The decision is damaging to Uber for two reasons. First, class action suits generally give plaintiffs more leverage to negotiate a settlement. Secondly, however, while the court declines to decide the whether the drivers have been misclassified as independent contractors, it is clearly finds that argument plausible.

That argument was set out in detail in a previous decision denying Uber’s motion for summary judgment in the case. The summary judgment decision applies the California common law test for employment, commonly referred to as the Borello test. In essence, the District Court granted the plaintiff’s class status for many of the same reasons that it had previously insisted that the case would have to go to trial.

The Borello Test

The Borello standard, it should be noted, is unique to California, although it shares some of elements with other state and federal law applied to determine whether an employer/employee relationship exists in other contexts.

Borello requires a two part analysis. As a threshold matter, the plaintiffs in O’Connor were required to demonstrate that they “rendered service” to Uber. In denying the summary judgment motion, the court found that the drivers had met that burden.

Uber had hotly contested that point, insisting that it was a technology company, for whom the drivers did not work, rather than a transportation company, for whom the drivers did. The court, however, was not persuaded.

The second part of the Borello test requires the defendant, Uber, to disprove the presumption that the drivers were employees, by demonstrating that it did not have the right to control work details. It is important to note that the standard is the right to control work, rather than the actual control. Unexercised power, under this standard is still sufficient to establish an employment relationship.

Here the evidence was so mixed in the summary judgment phase that the District Court declared that the case would have to go before a jury.

Evidence of Control or Lack Thereof

Perhaps the most important element of control under the second half of the Borello test is the right to discharge a worker without cause. Secondary factors, none of which are dispositive of the issue, might include:

  • whether the one performing services is engaged in a distinct occupation or business;
  • 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;
  • the skill required in the particular occupation;
  • whether the principal or the worker supplies the instrumentalities, tools, and the place of work for the person doing the work;
  • the length of time for which the services are to be performed;
  • the method of payment, whether by the time or by the job;
  • whether or not the work is a part of the regular business of the principal; and
  • whether or not the parties believe they are creating the relationship of employer-employee.

Other factors seem to be imported from federal Fair Labor Standards Act determinations, including:

  • the alleged employee’s opportunity for profit or loss depending on his managerial skill;
  • the alleged employee’s investment in equipment or materials required for his task, or his employment of helpers;
  • whether the service rendered requires a special skill;
  • the degree of permanence of the working relationship; and
  • whether the service rendered is an integral part of the alleged employer’s business.

The jury that ultimately hears the O’Connor case will likely go right to the second half of the Borello question, where it will have mountains of factual evidence to consider.

Is Uber Finished?

In the context of the O’Connor case, Uber has certainly taken a hit, now back on its heels and forced to disprove the existence of employment relationship. However, O’Connor is not the only relevant litigation in California.

A separate state court action has been filed in San Francisco County, appealing a June decision of the Labor Commissioner that Uber drivers are employees. Lyft is embroiled in similar litigation.

Five other state courts, when asked to decide the employee/independent contractor issue with respect to Uber have reportedly reached different conclusions. In May, the Florida Department of Economic Opportunity ruled that a former Uber driver was an employee of the company.

This is likely to be the legal landscape on this issue for a while for two reasons: different states will be applying different legal standards to the same question. The same will be true of the IRS and the U.S. Department of Labor if and when they are asked to determine if Uber workers are employees and thus entitled to the protection of wage and hour laws or subject to employer withholding.

The second reason lies in the number of factors that courts will consider to determine employment status. A uniform here or the ownership of tools there may make all the difference.

Is There Anything that Employers in the Sharing Economy Can Take Away?

There may be three takeaways:

  • The first is that the argument that a given business is a technology business rather than a transportation business, hotel or school because of the use of advanced mobile tools has met with a great deal of resistance.
  • The second is that courts and administrative agencies are increasingly looking at the potential for the exercise of control rather than the actual exercise of control in defining employment. It was an issue recently in an NLRB decision holding that franchisors may be joint employers for collective bargaining purposes. It is an idea that seems to be seeping into much thinking about employment law.
  • In the run-up to an election year, political attention may be focused on the welfare of workers, from minimum wage campaigns to what is perceived as independent contractor abuse.

At the very least, businesses that depend heavily on independent contractors should review the specifics of those contracts, in light of all the factors that courts may consider, to ensure that the independent workers are likely to meet those standards.

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