What Uber Teaches Us About Contractors v. Employees

Uber last week announced the Department of Labor Standards Enforcement’s (DLSE) decision in favor of a driver who sued the company for misclassifying her as a contractor.

A local blog nicely summed up the facts: “Uber…the ubiquitous car service which is now valued at over $40B… [allows] customers [to] hail a driver with the click of their thumb. Uber drivers provide services for the company as independent contractors and sign agreements confirming as much. The drivers are free to set the hours that they work, to take or reject customers seeking a ride, and to use their own vehicle, so long as they have a minimum level of liability insurance for it. Uber does not require drivers to take on a minimum number of trips and it allows them to work as frequently as they want. Uber drivers are paid based on the distance and time that they drive… Barbara Ann Berwick, an Uber driver, brought a claim with the DLSE seeking reimbursement for mileage, gas and tolls, and she also sought compensation for the time that she drove. The DLSE, which is notorious for being an employee-friendly forum, found in Ms. Burwick’s [sic] favor… The DLSE found that Uber’s lack of control over its drivers — their freedom to drive who they wanted, when they wanted and as much or as little as they wanted — was irrelevant. It found that only a ‘minimal degree of control was required.’”

This particular blog, like many of the others I read, scoffed at the DLSE’s finding:

“This decision, which will be reviewed de novo in court, is fundamentally flawed. In California, as in most states, the critical factor for determining whether someone is an independent contractor is the extent of control that an employer exerts over them. Think about the classic independent contractor: the plumber. A plumber has the freedom to choose who he works for, when he worked for them, and how he will perform those services. He uses his own tools and he is free to work for as many or as few customers as he chooses. The mere fact that a customer hires a plumber to fix a leaky pipe and asks him to come on a particular day does not mean that the customer is employing the plumber. This misguided decision…is merely the decision of a ‘hearing officer’ …and may well be reversed.”

While I’m sympathetic to this point of view, especially since the DLSE officer in question has come to strange conclusions in two of my own cases, I disagree with the conclusion. I think the Uber matter has at best a 50/50 chance of being overturned. Why? Because the DLSE based its decision on something that the courts and administrative agencies are using as a litmus test with increasing frequency: did the contractor in question function as a core part of the employer’s business? If the business cannot get along without the contractor in question, then the person is functioning like an employee.

The plumber example, used above, is illustrative, but I come to a different conclusion. A plumber, carpenter, or painter that you hire for your business is not a core part of your business unless you are in the plumbing, carpentry, or painting fields. The plumber truly has a business separate from yours and is not dependent on your business to survive, nor vice-versa. Most businesses hire a plumber for a discrete period, for a discrete job, and when it’s over the business won’t have contact with the plumber until another plumbing problem arises. Contrast that with the Uber drivers who make up the backbone of the Uber business. Without them, Uber would not be a $40 billion business. It would arguably be a $0 business. That is exactly why the government is using this factor more and more to consider employee status: a company gets massively rich, but doesn’t even pay the social security or unemployment insurance contributions of its workers – the backbone of its business. In fact, when I first heard about this decision, my reaction was to wonder who would possibly have advised Uber to classify those drivers as independent contractors in the first place.

In any case, I hope other modern technology businesses do not make the same choice. This lawsuit is probably just the tip of the iceberg for Uber. Hundreds more will likely follow. All that time and energy and attorneys’ fees will just add up to the millions of dollars and hundreds of thousands of hours for Uber employees, as contrasted with a fraction of that  time and money if Uber had set them up as employees. Perhaps even more importantly, these lawsuits will make Uber look ungenerous and short-sighted, not a great thing in today’s information age.

Here are my top 5 lessons learned from this Uber case:

• If your business can’t function on a day-to-day level without a particular worker, that person is likely an employee, not a contractor. (The one exception to this is someone who is key to a person’s business but has lots of other clients and clearly holds herself out as a business).
• The government continues to find employee status whenever possible. Unless you are a very risk-comfortable business, classify any questionable workers as employees.
• You’ll save a lot of money and time classifying someone correctly the first time. (Did I mention that Uber will pay all of Ms. Berwick’s attorneys’ fees, as well as their own, if they lose this appeal?)
• Get good employment legal advice from the ground up, not when you’re being sued. An ounce of prevention…and all that jazz.
• No matter how innovative your business model may seem, you must still abide by the established classification criteria.