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By Lisa Nagele-Piazza
April 8 — Businesses in the “sharing economy” that use smart phone technology and independent contractors to deliver on-demand services to consumers could be significantly affected by two cases pending in a federal district court, wage and hour attorneys told Bloomberg BNA.
Drivers for California-based on-demand ride services Uber Technologies Inc. and Lyft Inc. filed separate lawsuits in 2013 asserting that the companies misclassified them as independent contractors (O'Connor v. Uber Techs. Inc., N.D. Cal., No. 3:13-cv-03826; Cotter v. Lyft, Inc., N.D. Cal., No. 3:13-cv-04065). The drivers contend they are actually employees and are due benefits under California law, such as minimum wage, overtime compensation and expense reimbursement.
The U.S. District Court for the Northern District of California March 11 declined to decide as a matter of law whether the drivers are independent contractors or employees, holding that the issue is for a jury to decide.
Ever since U.S. labor laws were established in the 20th century, employers have attempted to shift the cost of labor to workers, plaintiffs' attorneys and employee advocates said. However, a determination that the drivers are employees in these cases will translate into higher costs for the companies, which may ultimately increase fares for consumers, attorneys said.
Practitioners interviewed by Bloomberg BNA said the issue is nothing new. Ever since U.S. labor laws were established in the 20th century, employers have attempted to shift the cost of labor to workers, plaintiffs' attorneys and employee advocates said. However, a determination that the drivers are employees in these cases will translate into higher costs for the companies, which may ultimately increase fares for consumers, attorneys said.
Tad Devlin, an attorney with Kaufman Dolowich & Voluck in San Francisco who focuses his practice on the sharing economy, said people are looking to San Francisco because companies like Uber, Lyft, Airbnb, and Yelp are headquartered there.
“Here you have class actions against two of the hottest companies on the face of the earth right now,” Devlin said. “Other businesses will be watching what happens in these cases.”
Jury verdicts in these cases could have a considerable effect on the companies' business models, attorneys said. “A verdict against the Company will likely cause the business model to have to be overhauled and ultimately, we could expect to see increased costs that would be passed on to the consumer,” Tamara Devitt of Haynes and Boone LLP in Costa Mesa, Calif., told Bloomberg BNA March 30. “A verdict for the Company would likely drive further developments in such services.”
Rebecca Smith, deputy director at the National Employment Law Project, told Bloomberg BNA April 6 that “a jury verdict in the workers’ favor will bring these companies into compliance with core labor standards and give their workers the rights that they are currently being denied.”
Whether drivers are “employees” or “independent contractors” under California law is of “great consequence” for the drivers, because “the California Legislature has conferred many protections on employees, while independent contractors receive virtually none,” Judge Vince Chhabria wrote in the Lyft ruling. “The answer is also of great import to Lyft, because its business model assumes the drivers are independent contractors.”
An “employee” is generally someone who “works under the direction of a supervisor, for an extended or indefinite period of time, with fairly regular hours, receiving most or all his income from that one employer,” Chhabria wrote.
An “independent contractor,” by contrast, is generally “someone with a special skill (and with the bargaining power to negotiate a rate for the use of that skill), who serves multiple clients, performing discrete tasks for limited periods, while exercising great discretion over the way the work is actually done,” Chhabria wrote. Thus, independent contractors don't receive the same legal protections as employees because they are generally in a far more advantageous position, he added.
But workers in the on-demand economy don’t fit neatly into the legal categories of employee or independent contractor, Lewis Maltby of the National Workrights Institute told Bloomberg BNA March 31. “Uber drivers look like independent contractors,” Maltby said. “They furnish their own cars, are free to work for anyone, and are not under Uber’s direct control,” he said. “But they do not have their own business, earn very little, and are completely dependent on Uber for business.”
As independent contractors, the drivers are required to pay for their own gas, vehicle maintenance and other expenses, Shannon Liss-Riordan of Lichten & Liss-Riordan P.C., an attorney for the drivers in both lawsuits, told Bloomberg BNA April 7.
“Uber drivers look like independent contractors,” Maltby said. “They furnish their own cars, are free to work for anyone, and are not under Uber’s direct control. But they do not have their own business, earn very little, and are completely dependent on Uber for business.”
Whereas, if the drivers are classified as employees, the California Labor Code Section 2802 requires employers to carry the cost of doing business and to reimburse employees for all reasonable and necessary expenses.
Thus, one of the most significant damage items for the drivers is expense reimbursement, Liss-Riordan said.
Under California law, whether workers are properly classified as employees or independent contractors is determined in a two-stage analysis. First, the workers must produce evidence that they provided services for an employer. In the Uber ruling, Judge Edward M. Chen found that the drivers are “presumptive employees” because they perform services for the benefit of Uber.
Once workers establish a prima facie case of an employer-employee relationship, the burden shifts to the putative employer to show the workers were actually independent contractors.
The California Supreme Court adopted a “multi-factor” or “economic realities” test for determining workers' employment status in S. G. Borello & Sons, Inc. v Dept. of Industrial Relations, 48 Cal. 3d 341 (Cal. 1989). The most important factor in the Borello test is who has the right to control the work. But the Borello court also identified additional factors to consider, including:
• whether the person performing services is engaged in an occupation or business distinct from that of the principal;
• whether the work is a part of the regular business of the principal;
• whether the principal or the worker supplies the instrumentalities, tools and the place for the person doing the work;
• the worker's investment in the equipment or materials required by his or her task or his or her employment of helpers;
• whether the service rendered requires a special skill;
• the kind of occupation, with reference to whether, in the locality, the work is usually done under the direction of the principal or by a specialist without supervision;
• the worker’s opportunity for profit or loss depending on his or her managerial skill;
• the length of time for which the services are to be performed;
• the degree of permanence of the working relationship;
• the method of payment, whether by time or by the job; and
• whether the parties believe they are creating an employer-employee relationship may have some bearing on the question but is not determinative because this is a question of law based on objective tests.
“It boils down to a question of control,” Professor Michael Duff of the University of Wyoming College of Law told Bloomberg BNA April 9.
In Ayala v. Antelope Valley Newspapers Inc., 59 Cal. 4th 522, 23 WH Cases2d 984 (Cal. 2014), the California high court held that the proper inquiry isn't how much control the company actually exercises over the workers' duties but whether the company retains a legal right to control the work.
According to Chhabria, the test developed in California courts in the 20th century for classifying workers isn't very helpful in resolving the 21st century on-demand driver dispute. The jury “will be handed a square peg and asked to choose between two round holes,” he wrote.
Some practitioners interviewed by Bloomberg BNA agree with Chhabria that worker-classification tests are difficult to apply to the drivers' unique circumstances. “The on-demand economy pushes the limits of those tests because some factors favor employee status and other factors favor independent contractor status,” Devitt said.
Shelby Clark, executive director of Peers Benefit Corp., told Bloomberg BNA April 21 that it’s important for workers to have protections, but the old model doesn’t fit the new economy. Peers is an organization for sharing-economy workers with the mission of “making the sharing economy work for the people who power it,” according to its website.
“We talk to our community regularly,” Clark said, “and people talk about how much they love the flexibility to work as little or as much as they want. Many people find that empowering.” He said the organization wants workers to have access to legal protections, although if those protections were invented today instead of several decades ago, they might look different.
Other practitioners said multi-factor tests are still applicable to the on-demand workforce.
“This is one aspect where I respectfully disagreed with Judge Chhabria's comments,” Liss-Riordan said. “There is nothing new about employers trying to shift labor costs to workers.”
“Employers try to avoid paying benefits, taxes, workers' compensation and work-related expenses by classifying workers as independent contractors,” she said. “Providing services through technology doesn’t change anything.”
Companies in many industries over the last century have attempted to divest themselves of the employment relationship and their obligations under it, Rebecca Smith of NELP said. “They do this by either calling workers ‘independent contractors,' or by passing obligations off to another business via franchising, subcontracting or use of temporary or staffing agencies,” she said. “The companies at the top still retain a huge degree of control over the workers at the bottom, but they save up to 30% in payroll costs if they can get away with it.”
The state supreme court in Ayala found that the most convincing evidence of an employer's right to control is the power to terminate workers without cause. “Uber can terminate drivers for any reason at all,” Liss-Riordan said, “and especially in California, that points to an employer relationship.”
The employee/independent contractor classification test “has always been a muddy one,” Devitt said. “Because the applicable tests are multi-factored, the issue breeds inconsistent rulings and a resulting lack of clarity for businesses.”
“Part of the point of having a multi-factor test is to give judges enough flexibility and discretion to account for the wide array of work arrangements in the economy, including relatively new ones, when figuring out how much right of control one party has over the other,” Professor Sachin Pandya of the University of Connecticut School of Law told Bloomberg BNA April 17. “The price for that flexibility is that past rulings don’t help as much as you might like in predicting how judges will ultimately rule in some of these cases.”
Practitioners said it is important to remember the purpose of the law. “When the words of a statute do not neatly fit a situation, judges are supposed to follow the law’s purpose,” Maltby said. “Uber drivers are low wage workers who need protection under existing laws and should receive it.”
Duff said whether it is a six-factor, 20-factor or 30-factor test, there are always going to be cases that fall through the cracks. “When enough fall through the cracks, it may be time to revise those tests,” he said. “But if we get bogged down in the specific prongs of a test, we may lose sight of its purpose.”
Devlin said these issues may wind up before the California Supreme Court, which could create a new legal framework that takes into account the on-demand economy. “There could be a new test that arises from these cases, but we may see a further explanation of existing factors,” Devlin said. If it goes to a judicial process, we may see a modified or expanded Borello test, he added.
It is important to keep in mind that any test arising out of the pending Uber and Lyft cases would be limited to the California wage and hour context and would not address conflicting tests in other contexts, Devitt said.
“In the long run, Congress needs to recognize that the workplace has changed and revise employment law to fit the new reality,” Maltby said.
It is difficult to know how a jury determination that the drivers are employees would impact on-demand services, practitioners said.
“In theory, a verdict for the drivers could affect the price of such services,” Pandya said. “For example, Uber may try to pass on their additional labor cost to customers in the form of higher prices, but if Uber riders are sensitive to price, it might lose customers to their less-expensive rivals.”
But Uber also may attempt to retain a larger percentage of the total fare it takes from drivers, attorneys said.
“Right now, Uber apparently takes about 20 percent,” Pandya said. “Uber may decide to take 30 percent, but that will also depend on how sensitive drivers are to these conditions,” he said.
“Maybe most drivers aren’t going to work for 70 percent of the fares they receive, or maybe they are willing to take a smaller share in exchange for the added legal protection that comes from being recognized as ‘employees' under California law,” Pandya said.
But the companies may be nervous about having a jury make the decision regarding the drivers’ status as employees or independent contractors, Duff said. A juror may not care about a multi-factor test, he said.
The companies may want to avoid the unpredictability of a jury verdict, Devlin said. “Maybe the companies take the issue to Sacramento and we see some kind of adjusted employer-employee relationship emerge,” he said.
Although the issues in these cases are limited to California law, there could be similar industry challenges in other states if there is a determination in California that the drivers are employees, attorneys said.
“While there are some differences between the federal and state tests, the general premise is the same—whether the putative employer has the right to control the worker,” Devitt said.
Liss-Riordan commented that both the Lyft and Uber claims were initially filed as nationwide class actions.
In the Uber case, the drivers argued that California law applied nationwide because the choice of law provision in the licensing agreement overcame any presumption against extraterritorial application of those laws.
“We think Judge Chen got it right the first time,” Liss-Riordan said, “and we plan to appeal.”
There has been a lot of attention on these two cases, Liss-Riordan said, and they could have a significant impact on how other companies are structuring their workforce.
To contact the reporter on this story: Lisa Nagele-Piazza in Washington at email@example.com
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