Uber Settles Misclassification Lawsuits in Two States

Uber AppUber Technologies, the company that uses smartphone apps to connect passengers with “on demand” drivers, has been a litigation magnet. To settle claims made by municipal governments that it misled potential customers about the methods it used to screen drivers, Uber agreed to pay $25 million and to reword its advertising. The company earlier agreed to pay $28.5 million to settle a class action lawsuit that raised similar issues. Uber has settled or is currently defending a variety of lawsuits challenging its authority to operate without taxi licenses, alleging antitrust violations and unlawful interference with taxi drivers, contending that it failed to protect the privacy of app users, and claiming that Uber is responsible for various acts of misconduct or negligence committed by drivers.

A legal issue that has persistently plagued Uber is the claim that it misclassifies its drivers as independent contractors when, in fact, they are employees. The alleged misclassification lowers Uber’s costs because laws governing unemployment compensation, worker’s compensation, minimum wage, overtime, and business expense reimbursement do not apply to independent contractors. Uber recently settled class action lawsuits covering drivers in California and Massachusetts who complained that they were denied employee benefits to which they were entitled.

The Independent Contractor Controversy

Employees are protected by a number of laws that do not apply to independent contractors. In addition to being covered by wage and hour laws and employee benefit laws, employees have the right to unionize, to be free from workplace discrimination and harassment, and to keep their jobs if they need time off for a family or medical emergency or to participate in active military service. In addition, employers contribute half of an employee’s social security payroll taxes, while independent contractors must pay the full tax by themselves.

Two California laws are of particular concern to Uber drivers. One requires employers to reimburse business expenses that employees pay on their behalf. The California class action alleged that Uber was required to reimburse its drivers for gas, vehicle maintenance expenses, and liability insurance. Although Uber provides supplemental insurance coverage, drivers are required to purchase at least the minimum liability coverage required by state law. If Uber drivers were classified as employees, all of those business expenses would be paid by Uber, not by the drivers.

The second law requires California employers to pass through tips paid by customers to the workers who served them. The lawsuit alleged that Uber does not permit tipping but tells customers that gratuities are built into the fees that they pay. The lawsuit contended that Uber remits only a part, if any, of those built-in gratuities to the drivers who earned them.

The Independent Contractor Test

Like many other states, California views an employer’s ability to supervise and to control work performance as one of several factors that determine whether a worker is an independent contractor or an employee. California law also requires courts to examine whether the worker devotes time exclusively to a single employer, whether the work involves highly specialized skills, whether the worker uses his or her own tools and equipment to perform the work, and whether the service rendered is an integral part of the alleged employer's business.

Some of factors associated with the California test favor Uber’s position while others favor the view that the drivers are employees. Uber argues that drivers are free to work as much or as little as they like. Uber does not control their schedules or the routes they choose to drive. In addition, Uber allows drivers to work for competing companies (such as Lyft) without being penalized. Drivers furnish their own cars and Uber does not provide them with a workplace. Finally, drivers are not paid a salary or an hourly wage, but are paid by the job. Those factors are consistent with a business relationship between an employer and an independent contractor.

On the other hand, Uber could not function as a business without the drivers; their work is an integral part of Uber’s business. Uber unilaterally determines the compensation that drivers will receive. Drivers have almost no power to negotiate for higher rates. Driving does not involve a special skill that most people lack, and working as an Uber driver requires only modest managerial skills. Drivers can hire helpers to work for them, but Uber has the right to approve or reject those assistant drivers. Uber adopts rules (which it characterizes as “suggestions”) that it expects drivers to follow (including “no papers in visor,” “front seat forward,” and “rims are spotless”) as well as rules that it insists drivers must follow (such as a prohibition against soliciting a passenger to become a regular customer of the driver). Uber carefully monitors job performance by means of customer ratings and it reprimands or terminates drivers who fail to meet its standards. Uber maintains the right to terminate drivers at any time and without cause. All of those attributes are consistent with an employment relationship.

Uber’s Settlement

Whether a jury would have decided that Uber’s California drivers are employees rather than independent contractors will never be known. Uber has agreed to pay up to $100 million to settle class action lawsuits brought by drivers in California and Massachusetts who claimed that they were misclassified as independent contractors. The company’s initial payment to the 385,000 drivers covered by the lawsuits will be $84 million. If the company is sold or goes public and its value at that time is at least 1.5 times its current value of $62.5 billion, the company will add another $16 million to the settlement fund.

As conditions of settlement, Uber agreed to warn drivers before terminating contracts, to stop terminating drivers who turn down too many rides, to allow termination decisions to be contested in arbitration proceedings, and to permit drivers to solicit tips. While the settlement requires Uber to change some of its policies, it does not alter the status of Uber’s drivers as independent contractors. If Uber decides to go public, investors may view the settlement as clearing a potential roadblock to future growth. Whether the settlement will represent a long-term victory, however, is far from certain.

The settlement affects only California and Massachusetts drivers who have existing contracts with Uber. The settlement does prevent similar claims from being initiated by future drivers in those states or by drivers who work in other states. Still, the settlement might encourage Uber to adopt the same changes in its business practices nationwide with a view to preempting claims that it has misclassified employee drivers as independent contractors.


(Photo Credit: "An UBER application is shown as cars drive by in Washington, DC." by Mark Warner is licensed under CC BY-SA 2.0.)

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