Decoding the Debate
The debate over the legal classification of Uber drivers and similar gig economy workers has emerged as a hot topic in recent years. On one side of the dispute are advocates and legal experts who believe that a "gig" worker should be entitled to all the protections of an "employee" under labor laws — which would entitle them to minimum wage, breaks, overtime pay, and other employee protections. They point to the rise of the gig economy in general as incompatible with the well-understood conceptions of employment law, though they may not have much enthusiasm for the implications of potentially broad "employee" classifications.
On the other side of the dispute are companies like Uber that have been built upon the principle that their business model is based upon gigs, not employment. They insist that the classification disputes are unnecessary efforts at judicial activism that seek to impose a pre-existing conception of an employer-employee relationship on a contractual arrangement that simply doesn’t fit the historical conception of employment.
In terms of business operations , the distinction between the two could not be more striking. For Uber and other "gig economy" companies, ever greater numbers of drivers means lower and more predictable downtime and decreased costs associated with recruitment and other barriers to entry. For drivers, "being your own boss" means the freedom to operate on their own schedule, accepting or rejecting rides and determining how far they wish to drive for any particular trip.
Some, however, argue that it is a false dichotomy; whether it is explicitly included in business policies or not, most drivers continue to work for Uber and take few, if any, trips from other companies.
In light of the conflicting opinions about the significance of the distinctions, what is the bigger picture? In which direction is the debate going and, if policymakers do not alter course, how will it affect the "gig economy?"
Legal Language and Litigation Tests
The legal distinction between employee and independent contractor has important ramifications under U.S. labor law. The National Labor Relations Act (NLRA), the Fair Labor Standards Act (FLSA), and other federal and state laws create important rights and benefits for employees that may not be available to independent contractors, such as the right to form unions or to prevent the misclassification of employees as independent contractors. Labor boards and courts look to common law and statutory definitions of the term "employer" and other criteria to apply these distinctions.
At common law, the definitions of "employee" and "independent contractor" are inextricably linked together: "The principle [is] that it is the right to control the manner and means of accomplishing the desired result, not the actual exercise of that right, which determines whether a work relationship exists. If the person for whom services are performed has this right of control, the relationship is that of employer and employee. If not, the relationship is that of independent contractor."
However, courts and labor boards consider various factors in this common law definition. These include the hiring party’s right to control the work, the skill required, the source of the instrumentalities used to do the work, the location of the work, and its duration.
Since Uber drivers are in a service industry dependent on the marketplace to generate income, the NLRB looks to the "entrepreneurial opportunities" or lack thereof when conducting an independent contractor analysis. The NLRB has thus far concluded that Uber drivers are employees, not independent contractors:
"[T]he drivers are performing a part of [Uber’s] regular business—transporting people and their personal belongings. This factor weighs in favor of finding the drivers are employees." "[I]ndependent contractor status typically calls for some type of special skill or training with respect to the performance of the work at issue. None of the business opportunity factors support a finding that the drivers possess any special skills or training." "The [A]ppropriate [U]nits here are the [Uber] subunits operating in each of the cities where the [dr]ivers work. As such, the subunits are of a dimension that is too small to constitute an appropriate economic unit. While the drivers can seek work from every subunit, they cannot guarantee they will receive work from one of the many subunits in each jurisdiction. Thus, a subunit of less than a metropolitan area is not an appropriate economic unit for these drivers." "The evidence shows that [Uber] establishes and enforces a number of policies and restrictions regarding how the drivers interact with their riders. For example, the [drivers] must comply with Uber’s policies concerning their appearance, the type of vehicles they drive, how often they must log on to the Uber application and how much time they spend logged on. The [drivers] also must accept all fares offered by Uber, must pick up and transport the rider to the designated destination, and must rate the rider’s behavior. They also do not independently negotiate rates or bill for services provided." "The [drivers] cannot decide what amounts to fair or unfair treatment by Uber; they can only rate their passengers on a five-point scale and leave written comments. [Uber] can view the [drivers’] ratings of riders—and the ratings of riders of the drivers—and take action such as issuing warnings and suspending access to the application." "The [drivers] have no real opportunity to develop a business reputation that could command higher rates for their services or distinguish them from other similarly situated [drivers]. By signing Uber’s standard electronic Service Agreement, the [drivers], like other independent contractors, agree to give Uber all rights and control over their relationships with passengers—weighing in any issues or disputes themselves—thus diminishing any reputation they build over time." The NLRB is not binding on other regulators or courts, although it can be persuasive. State and federal courts and agencies can draw contrary conclusions when applying different tests. In massachusetts, for example, state courts have taken a much broader view of independent contractor status. The independent contractor definition at Massachusetts law is stricter, requiring proof that the worker performed his duties "outside the usual course of the business of the employer."
Influence of Work Classification on Uber Drivers
The impact of worker classification on Uber drivers
When a driver works with the intention of earning money from her efforts, he or she is an independent contractor and is free to run his or her business as he or she deems fit. The independent contractor is solely responsible for establishing the fee for his or her service and may advertise his or her services to new customers. Moreover, the independent contractor is responsible for paying self-employment tax and does not have taxes withheld from his or her income for federal or state income tax or FICA (Social Security and Medicare) payments. Examples of an independent contractor would be the small business owner, handyman, carpenter, bartender or waitress who receives no benefits from the employer or others who do occasional babysitting or pet sitting. They are responsible for filing their own tax returns and paying quarterly estimated taxes.
Independent contractors are merely paid for the service they render. In contrast, employees are paid on a regular basis, such as every two weeks. Employees can also be paid on a salary basis, provided they meet certain exemptions. Employees are entitled to a minimum wage and must be paid overtime for time spent working beyond 40 hours in a given week. Employees also receive withheld FICA payments from their paychecks, as well as federal and state income tax payments that are otherwise required from self-employed independent contractors. Employers also make FICA and unemployment tax payments for employees. Federal law requires from employers, medical, Social Security, Medicare, Federal Unemployment Tax Act (FUTA) payments, and possibly workers’ compensation and disability insurance, depending on the nature of the work being performed and the jurisdiction/state where the driver is operating.
An employee can be awarded workers’ compensation benefits and unemployment benefits in the event of an unemployment-related loss. An employer also cannot adjust the hours or terms of employment without permission or some terms set forth in a collective bargaining agreement. When a driver is an employee, his or her "services" are defined by the employer, who can delegate certain assignments to other drivers. An employer can divide up work and assign it to employees or can dictate marketing methods in order to develop customer loyalty and brand recognition. Employers may determine who may be on the payroll and the qualifications for that position. Employers can also establish company policies and procedures for its employees. Employees are generally not free to establish fees for service or solicit other customers, unless specifically permitted under the employment agreement.
Examples and Court Rulings
To date, there are no binding judicial decisions in the U.S. addressing the employment classification of Uber drivers. In June 2016, the District of Columbia’s Office of Administrative Hearings found that, as a matter of law, an Uber driver was an independent contractor rather than an employee under D.C. law. See Gray v. Uber Techs, No. 101-1503-2016 (D.C. Off. Admn. Hearings June 28, 2016). Uber successfully argued that its stated rationale for classifying drivers as independent contractors, namely, that it provides drivers with flexible schedules and the freedom to control their own economic destiny, as well as the fact that drivers do not exclusively drive for the company, made the drivers independent contractors under D.C. law. While the decision is not binding on any other court or administrative agency, including D.C. courts or administrative agencies, it does reflect the controlling law in a separate jurisdiction and arguably supports similar results in other jurisdictions.
A number of class actions involving the employee-employer status of Uber drivers have been filed since October 2013. The most notable of these cases is the consolidated case of O’Conner et al. v. Uber Techs., Inc., Case No. 13-CV-3826 (N.D. Cal.). O’Conner is a nationwide class action that includes Uber drivers from California and Massachusetts. In September 2015, the federal court granted preliminary approval of a $100 million settlement agreement in O’Conner. The settlement agreement, however, required the approval of all class members before it can be fully approved, and many class members have opted out. On May 2, 2016, the court approved an order granting final approval to the class settlement for nearly 50,000 Uber drivers in Massachusetts. On March 14, 2016, the federal court granted final approval of the class settlement for over 240,000 Uber drivers in California. The settlements resolved the wage and hour claims alleging, among other things, that the ridesharing company deprived drivers of reimbursement for expenses incurred in the course and scope of their work and paid them nonresponsive wages. Under the settlement agreements, the company is providing drivers with substantial payments per individual driver. The company also has agreed to redefine its business practices. The final settlement in O’Conner provided sufficient incentives for Uber drivers to settle their claims, which allows Uber to move forward without litigation risk and with the ability to maintain its business model. Other legal challenges to Uber’s classification of drivers are ongoing in California, Maryland, New York, and Virginia.
What Uber Thinks and Why
Concomitantly, Uber maintains that all drivers have had a choice whether to drive for Uber, and the great majority chooses to do so, despite the fact that they can leave at any time. As the two recent California courts’ opinions highlight, Uber emphasizes that it provides drivers with a flexible way to earn money, which drivers appreciate. After all, that flexibility is what drives the business model. Uber often notes that it has not constrained its drivers by, for example, having them wear uniforms or enforcing set shift times, and that their "independence" is what makes Uber an attractive employer . In short, Uber argues that it does not control its drivers’ work, but instead merely provides an efficient technology platform that enables drivers to earn income on their own terms, using their own resources and at the rates they set. Drivers only have to pay Uber a five percent fee on each fare, and can log on and off as needed (drivers can block out certain hours or days from their app, meaning they will not get ride requests during those hours). In its preliminary analysis of the California courts’ opinions, we noted that the cases found that Uber’s relative lack of control over drivers proved more significant than similar considerations regarding other companies in employment class actions. We expect Uber to put forth similar arguments as it defends the ongoing litigation and seeks to avoid class treatment.
Shifts in Policy and Their Implications
Whether through legislation or case law, the trend has been towards requiring not only Uber drivers, but many workers in the gig economy, to be classified as employees. The question remains whether the continued policy changes at the state and federal levels will mean a shift in the traditional model of the gig economy, or if a new policy will arise that provides protections to workers while ensuring the current business model of companies like Uber can continue.
At the federal level, one of many more likely policy changes that could affect the gig economy down the line is the repeal of the Trump Administration’s Department of Labor ("DOL") regulations regarding independent contractors versus employees under the Fair Labor Standards Act ("FLSA"). As explained on the DOL website, the FLSA regulations from January 2021 "brought back the control factor, and added a new, integral-nature factor." Under the Trump Administration, the DOL had abandoned the prior twenty-factor test to a more simplified test to determine employment status that focused on the following five factors:
Without the repeal of these DOL regulations, the five-factor test would remain in place,, which permits greater flexibility in the classification of drivers. Should the Biden administration repeal those regulations, there are several things to keep in mind: The effect of this on independent contractor driver classification will likely be that the drivers then have the right to minimum wage, overtime, and other protections of employee status. This will likely result in increased litigation and liability for Uber and similar businesses. At the state level, California Assembly Bill 5 ("AB-5") was enacted in 2019 and codified California Assembly Bill 550 and Dynamex in the California Labor Code. AB-5 codified the "ABC test" and was supposed to make it more difficult for Uber and other gig economy workers to be classified as independent contractors under California’s employment laws. However, AB-5 also contained an exemption for those that are considered professional services; highly-skilled workers like musicians, freelance writers, and doctors. Therefore, it was possible for Uber to argue, and some courts did agree, that the drivers were exempt from the ABC test and are properly classified as independent contractors. As a result, California passed Assembly Bill 2257 ("AB-257"), which further defined what services would fall under the professional services exemption. The exclusion then included choreographers and "systems analysis" consultants, graphic designers, freelance photographers, translators, editors, and many others that did not require a license or degree, which drove down the number of independent contractors who could be classified as such with those exceptions.
Even with these changes, it seems unlikely that in the future, Uber and other rideshare companies will not seek out further exemptions to the ABC test. The gig economy continues to grow, and so do the number of employees that work independently, but contract with apps like Uber. Without further exemptions for ride-sharing apps, their classification as employees rather than independent contractors will likely continue to result in increased litigation, shifting to the company rather than the drivers themselves. The government will then need to decide how it wants to support mega-corporations and the workers that support those companies’ business models in this new economy.
The Next Era of Gig Work
With the current climate in the United States, where shifts in employment classification are occurring in real time, it is impossible to predict what the future will hold for Uber and its drivers. It seems very likely that as the gig economy and app-centered businesses continue to expand, dealing with employee versus independent contractor concerns will become a universal problem and liability. At present, in California, the legislature is considering a bill (AB-5) to address the holding in Dynamex. If passed, the bill would establish a presumption that all workers are employees, even in the gig economy where the worker is booked through an app. Under the bill, a worker could be classified as an independent contractor if the company is able to demonstrate that, among other things, the company has a separate business from that of the worker, that the work the worker is performing is outside the usual course of the company or other hiring entity’s business and that the worker is free from such control and direction. At the federal level, the House Ways and Means Committee has announced that it will be considering the gig economy when they host a four-part "Workers Week of Action" on the Hill. The committee will focus on "un552nd protected classified workers , delivering a new way to classify and payroll workers to workers in the gig economy." Some legal scholars have called the gig economy "new economies of the future" and sighted the need for different classifications that reflect the nature of work provided and the way it is consumed. Those same legal scholars suggest that the government look at Chuck Denn’s "User-Centric Trust Fund" proposal where workers would be classified as independent contractors but paid into a "trust fund" by the employer that covers workers compensation, unemployment, paid sick leave, etc. Becker Legelustsky, on the other hand suggests altering the FLSA definition of "employ" to include workers contracted from employment agencies. One thing both Becker Legelustsky and Chuck Denn would agree on is that the gig economy is here to stay; something Uber has known and capitalized on for years. Which means it’s only a matter of time before other classifications of workers face similar challenges and other industries are in crisis over how to legally classify their workers.
