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California’s Uber Decision Deepens the Employee vs. Independent Contractor Debate in Emerging Industries

Published by on June 18, 2015

On June 3, 2015, the California Labor Commission found that a driver for the wildly popular ride-hailing service Uber was in fact operating as an employee, and not as an independent contractor, making her eligible for reimbursement of work expenses and other costs required of employers. The driver filed an initial complaint with the California […]

On June 3, 2015, the California Labor Commission found that a driver for the wildly popular ride-hailing service Uber was in fact operating as an employee, and not as an independent contractor, making her eligible for reimbursement of work expenses and other costs required of employers. The driver filed an initial complaint with the California Labor Commission in September 2014. The ruling became public when Uber filed its appeal on June 16 of this year.

In its legal analysis, the California Labor Commission referenced two California Supreme Court decisions — S.G. Borello & Sons, Inc. v. Dept. of Industrial Relations, 48 Cal. 3d 341 (1989) and Yellow Cab Cooperative vs. Workers Compensation Appeals Board, – 226 Cal.App. 3d 1288 (1991) — as the basis for its reasoning.

The Commission concluded that while “defendants hold themselves out as nothing more than a neutral technological platform, designed simply to enable drivers and passengers to transact the business of transportation”, in reality Uber “is involved in every aspect of the operation”, including evaluating and selecting prospective drivers, controlling the tools drivers use, specifying requirements for the vehicles drivers operate and accepting and terminating drivers based upon various ratings.

The Commission also pointed out that Uber also influences drivers in areas that further inhibit their ability to operate as independent business owners. For example, Uber controls whether or not a driver receives remuneration for a trip that a customer cancels, and the company also controls negotiation over fees with passengers. In fact, Uber even discourages drivers from requesting or accepting tips “because it would be counterproductive to…[their] advertising and marketing strategy”.

In summary, the Commission found that Uber so fully restricted and limited a driver’s ability to operate an independent business that it was simply not reasonable for Uber to suggest that drivers are, in fact, independent business owners in the first place.

Uber has appealed the decision, and for now the ruling only applies to the driver who brought the initial complaint, and only in California. Five other states have recognized Uber drivers as independent contractors, and it is yet to be seen how the California Labor Commission’s analysis will be interpreted by the courts.

From a business perspective, however, this demonstrates that companies often enter an industry assuming that they can essentially serve as a neutral ‘market-maker’ between customers and operators, but in fact the necessities associated with regulatory compliance, customer protection, quality control and safety/security ultimately lead the self-envisioned ‘market-maker’ to become, for all intents and purposes, a full-fledged operator itself.

The California Labor Commission noted this shift and has now insisted that Uber recognize its own evolution by reconfiguring its current legal relationship with its drivers to ‘catch up’ with its evolving business relationship with them.

Laconic Lookout:

Technology-driven companies and those involved in creating or making markets to deliver retail, hospitality, transportation, delivery or other consumer-facing services should be keenly aware that as their business models evolve, their legal circumstances may have to evolve as well.

The greater the controls your company places upon its independent contractors in the interests of safety, security, quality, uniformity and market positioning, the less likely it will be that the business will be able to maintain the view that such personnel are not employees.

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