Independent Contractor Business Model Uncertain in ''On-Demand'' Economy


Separate upcoming jury trials will decide drivers’ claims that the on-demand ride services Uber and Lyft misclassified them as independent contractors rather than employees who are entitled to minimum-wage, overtime, reimbursement for business expenses, and other protections of the California Labor Code.

The business implications for all kinds of technology-driven, “on demand” firms are substantial, and it is possible that the uncertainty and the consequent risk of adopting an independent contractor business model will be increased, regardless of the outcome of these trials.

Employee/Independent Contractor Status Goes To the Jury

On March 11, 2015, U.S. District judges in California ruled in O’Connor v. Uber Technologies Inc. and Cotter v. Lyft that they could not decide as a matter of law whether drivers for these companies should be classified as independent contractors or employees, and the question must be decided by a jury.

Uber and Lyft both provide an on-demand ride service that is accessed by smartphone. Judges in both cases rejected the company’s contention that it was unnecessary to categorize their drivers because the firm was merely a “technological intermediary” between potential riders and drivers.

The Uber court found that the drivers provided services for the benefit of the company, noting that they provide rides rather than software and that the company only makes money if the drivers actually transport riders. The Lyft court noted that the argument that the company merely furnished a platform that allows drivers and riders to connect “is obviously wrong” because it “markets itself to customers as an on-demand ride service, and it actively seeks out those customers.”

Both courts also found that the most important factor in the common law multi-factor test applied to establish employment status—the right to control the manner and means of accomplishing the desired result—was disputed. They noted, for example, that although drivers have great flexibility when and how often they work, the company retains significant control over how they proceed once they accept a ride request, and that the company says it “suggests” certain conduct, but these suggestions are written as commands or prohibitions.

The company also denied that it can discharge drivers at will, one of the most important indicators of the right to control, but the courts noted that the contracts and “rules of the road,” as one company termed it, appeared to allow discharge for failure to adhere to these standards or for any reason at all.

A 20th Century Test For A 21st Century Problem?

Both courts commented that the problem is that the drivers don’t seem to fit neatly into one category or the other. Both questioned whether the traditional test of employment may be outmoded. The Uber court observed that this test “evolved under an economic model very different from the new ‘sharing economy.’” The Lyft court noted that the jury in this case “will be handed a square peg and asked to choose between two round holes,” and that the test developed over the 20th century “isn’t very helpful” in addressing this 21st century problem.

Absent legislative intervention, however, courts and juries must continue to apply the multi-factor “economic reality” test that prevails, with some modifications, in most jurisdictions.

Intolerable Business Uncertainty Or Fairness And An Even Playing Field?

As companies and worker advocates across the country will tell you, the ability to predict whether a company-designated independent contractor relationship will pass muster under this test is already relatively low. It is entirely possible that little clarity regarding the application of the traditional test for employee status to newer, technology-driven industries will issue from these trials, since there will be a simple jury verdict with no opinion to provide guidelines in future cases. Confusion may be further heightened if the juries reach opposite conclusions.

Worker advocates, not surprisingly, do not view the attack on the independent contractor model in general, or the “predictability dilemma” as a problem. Shannon Liss-Riordan, the drivers’ co-counsel in both cases, has stated that misclassifying workers as independent contractors allows companies to improperly save massive amounts of money they are not paying for benefits and workers’ compensation and payroll taxes. These companies, she declares “could and should flourish playing by the same rules everyone else has to play by, and shouldn’t shift the costs of doing business on to their workers.” Moreover, she plans to pursue lawsuits against other tech companies that use the independent contractor approach.

Advocates on both sides of the issue will definitely be watching for the jury verdicts in these trials.

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