Labor Classifications in the Sharing Economy Model of Uber and Lyft

by Jillian Levitt

It was a revolutionary concept: no need to hassle with hailing a cab or even carrying cash. Uber and Lyft offer easy smartphone apps that can schedule a pick up at your location and electronically charge your credit card to pay for the ride. Many people find the services faster and more efficient than taxis. The extraordinary success of this start-up technology is reflected in Uber’s $40 billion valuation.[1]

On its website, Uber states that its services “constitute a technology platform that enables users of Uber’s mobile applications… to arrange and schedule transportation… with third party transportation providers.” [2] This economic model of classifying its drivers as third party providers rather than as employees has raised concerns among labor advocates.[3] Since drivers who make the concept of the sharing economy a reality are considered independent contractors, they receive few of the traditional benefits of employees such as minimum wage guarantees, health insurance, worker’s compensation, unemployment insurance, and the right to join a labor organization.[4] In addition, as independent contractors, drivers must pay the full cost of Social Security and Medicare taxes without any employer contribution—a cost of 7.65% of their yearly compensation.[5]

A class action complaint by drivers alleging that Uber has “misclassified [them] as independent contractors” in violation of Massachusetts law was filed on June 26, 2014.[6] Moreover, the issue of Uber’s job classification was also raised in Boston Cab Dispatch, Inc. v. Uber Technologies, Inc.[7] In Boston Dispatch, plaintiff radio dispatchers alleged that Uber was engaging in unfair competition by “operating its service without incurring the expense of compliance with Massachusetts law and Boston ordinances.”[8] Uber claimed it could not be held liable because “it does not own any cars.”[9] However, the District Court of Massachusetts found sufficient evidence that Uber was “exercising control” over the vehicles-for-hire that compete with the plaintiffs.[10]

In California, drivers of Uber and Lyft have each commenced labor classification lawsuits in federal court, alleging they should be treated as employees rather than independent contractors. In Cotter v. Lyft, the plaintiff drivers alleged that California law requires Lyft to treat its drivers as “employees rather than independent contractors” and that Lyft is “depriving them of California’s minimum wage, along with other rights that California law confers upon employees.”[11] The court in Cotter granted Lyft’s motion to dismiss the class action claims outside the state of California with leave to amend to include only the California drivers.[12] Similarly, in O’Connor v. Uber Technologies, Inc., the court, reversing its own prior ruling, concluded that the California Labor Code does not apply to class members who worked outside of California.[13] Plaintiffs in O’Connor have moved for interlocutory review of the court’s ruling to include out-of-state drivers.[14] In addition, a motion for summary judgment by Uber to dismiss based on the level of control Uber exercised over its drivers’ work is currently pending as of January 27, 2015.[15] The district court judges in both Cotter and O’Connor have indicated they are likely to let the suits proceed.[16]

The economic model that attempts to cut labor costs by classifying workers as independent contractors, instead of employees, is not unique to Uber or Lyft. One federal study concluded that “employers illegally passed off 3.4 million regular workers as contractors, while the Labor Department estimate[d] that up to 30% of companies misclassified employees.”[17] Where the law is unclear, however, employers may have a “legitimate disagreement with the Labor Department or I.R.S.”[18] In one recent case, the Ninth Circuit Court of Appeals in California held that FedEx had misclassified its drivers as independent contractors.[19] The court stated “[t]he principle test of an employment relationship is whether the person to whom the service is rendered has the right to control the manner and means of accomplishing the result desired.”[20] In finding that the FedEx drivers were employees, the court examined several secondary factors: the right to terminate at will; whether the worker had a distinct occupation or business; whether the work is performed under the principle’s direction; the skill required by the worker; the provision of tools and equipment; the length of time for performance of the services and the ongoing nature of the relationship between the worker and the principle; the method of payment; whether the work performed is actually part of the principle’s business; and the parties’ beliefs as to the nature of their relationship.[21] Whether the economic model of Uber and Lyft that classifies its drivers as independent contractors can withstand this analysis remains to be seen.

[1] Mike Isaac, Facing Demand, Uber Expands Funding Round by $1 Billion, N.Y. Times (Feb. 18, 2015, 1:17 PM), http://dealbook.nytimes.com/2015/02/18/uber-expands-funding-round-by-1-billion/?_r=0.

[2] Uber, http://www.uber.com/legal/usa/terms (last visited Feb. 21, 2015).

[3] See Rebecca Smith, Will Uber and Lyft make your job obsolete?, CNN (Feb. 10, 2015, 7:47 AM), http://www.cnn.com/2015/02/10/opinion/smith-sharing-economy-uber-lyft; see also Ellen Huet, How Uber’s Shady Firing Policy Could Backfire On The Company, Forbes Blog (Oct. 30, 2014, 10:00 AM), http://www.forbes.com/sites/ellenhuet/2014/10/30/uber-driver-firing-policy.

[4] It has been observed that in the new “sharing economy” state and local regulators are struggling to determine how they fit into their “jurisdiction and regulatory corpus.” Larry Downs and John W. Mayo, The Evolution of Innovation and the Evolution of Regulation: Emerging Tensions and Emerging Opportunities in Communication, 23 CommLaw Conspectus 10, 24 (2014-15).

[5] See Department of the Treasury, IRS, Publication 15 Cat. No. 10000 W (Circular E), Employer’s Tax Guide (2015), available at http://www.irs.gov/pub/irs-pdf/p15.pdf.

[6] Yucesoy v. Uber Technologies, Inc., No. 14-2056C, 2014 WL 2892107 (Mass. June 26, 2014) (alleging violation of Mass. Gen. L.C. 149 § 148B).

[7] Boston Cab Dispatch, Inc. v. Uber Technologies, Inc., No. 13-10769-NMG, 2014 WL 1338148 (D.C. Mass. Mar. 27, 2014).

[8] Id. at *6.

[9] Id.

[10] Id.

[11] Cotter v. Lyft, Inc., No. 13-cv-04065-VC, 2014 WL 3884416, at *1 (N.D. Cal. Aug. 7, 2014).

[12] Id. at *5.

[13] O’Connor v. Uber Tech., Inc., No. C-13-3826 EMC, 2014 WL 4382880, at *12-13 (N.D. Cal. Sept. 4, 2014).

[14] Plaintiff’s Notice of Motion and Motion to Certify Order for Interlocutory Review, O’Connor v. Uber Tech., Inc., No. CV 13-3826-EMC, 2014 WL 6471647 (N.D. Cal. Sept. 10, 2014).

[15] See O’Connor v. Uber Tech., Inc., No C-13-3826 EMC, 2015 WL 355496 (N.D. Cal. Jan. 27, 2015).

[16] Rachel Emma Silverman, Judges Skeptical of Uber- Lyft Claims in Labor Case, Wall St. J. (Feb. 2, 2015, 7:21 PM), http://wsj.com/articles/court-rulings-may-define-ride-sharing-drivers-1422922890.

[17] Steven Greenhouse, U.S. Cracks Down on ‘Contractors’ as a Tax Dodge, N.Y. Times (Feb. 17, 2010), available at http://www.nytimes.com/2010/02/18/business/18workers.html?pagewanted=all.

[18] Id.

[19] Alexander v. FedEx Ground Package Sys. Inc., 765 F.3d 981 (9th Cir. 2014).

[20] Id. at 988 (quoting S.G. Borello & Sons, Inc. v. Dep’t of Indus. Relations, 769 P.2d 399, 404 (Cal. 1989)).

[21] Id. at 994-96.

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