Lessons From the Uber Case: “Employees” vs. “Independent Contractors”

The massively popular ride-sharing company Uber agreed to pay up to $100 million to settle a class action case brought by its drivers in California and Massachusetts. The issue in the case was whether Uber misclassified its drivers as independent contractors (Form 1099) when they should have been paid as employees (Form W-2).

The case is interesting for many reasons, including as a case study on how the on-demand economy presents unique challenges to antiquated labor laws. With companies like Uber, you have workers who fall somewhere in this gray area between what clearly looks like an “employee” and what clearly looks like an “independent contractor.”

Employee or Independent Contractor?

Why does all this matter to you? Well, if you’re a business owner who pays workers as 1099-independent contractors, you have cause for concern. Or maybe you’re a worker who should be receiving the protections provided to employees but is treated less favorably as an independent contractor.

Reclassifying “employees” as “independent contractors” is part of a broader trend that has caught the attention of the Obama Administration. The position of the U.S. Department of Labor (DOL) is that a lot of workers are misclassified as independent contractors when they should be considered employees. Companies that misclassify employees run the risk of a lawsuit filed by aggrieved workers (like in the Uber case) or an enforcement action brought by the DOL.

To help you analyze your situation, this blog post will use the Uber case as an illustration. The courts use a multi-factor “economic realities” test to draw the line between an “employee,” who is economically dependent on his or her employer, and an “independent contractor,” who is economically independent and operates a business of their own.

Because the Uber case settled out-of-court, we did not get a clear answer from the court on how it viewed these issues. But some of the preliminary rulings in the case—and the fact that Uber paid out a large settlement—suggest that Uber drivers more closely resemble “employees” than “independent contractors.”

Here’s my scorecard on how I grade Uber drivers, based on each of six factors:

Is the work an integral part of the employer’s business?

Employee – * – * – * – * – * Independent Contractor

A worker is more likely to be an employee if they perform the primary work of the employer. Carpenters perform an integral part of the work of a construction company that frames residential homes. By contrast, a software developer who creates a program for tracking bids for the construction company is not integral to the company’s work.

As one judge reasoned, “Picking the pickles is a necessary and integral part of the pickle business.” And in part for that reason, the court considered the pickle pickers to be employees of the pickle company.

The court in the Uber case found that “Uber’s drivers provide an ‘indispensable service’ to Uber, and the firm ‘could no more survive without them’ than it could without a working smartphone app. Or, put more colloquially, Uber could not be ‘Everyone’s Private Driver’ without the drivers.”

Point, employee.

Does the worker’s managerial skill affect the worker’s opportunity for profit or loss?

Employee – ** – * – * – * Independent Contractor

An independent contractor faces the possibility not only of making a profit, but also of experiencing a loss. A worker who does not experience the risk of the loss of investment looks much more like an employee than an independent contractor.

For independent contractors, financial success or failure depends on managerial skill, including decisions normally associated with the operation of an independent business:

  • hiring others
  • purchasing materials and equipment
  • advertising and recruiting new clients
  • renting space
  • negotiating contracts
  • managing time tables

When considering this factor, it makes no difference whether a worker can earn more money if they work more hours or if more work is made available to them—because that can be the case for both employees and independent contractors alike.

In the Uber case, the ride-sharing company argued that Uber drivers are independent contractors because some use “driving strategies” to maximize profits—i.e., some drivers “target geographic regions that tend to have higher demand, drive during hours when demand is at its peak, or drive when ‘surge pricing’ is available.” The court did not decide the issue, but expressed considerable doubt as to whether these decisions were examples of a driver’s “managerial skills.”

I tend to share the court’s skepticism. My take is that Uber drivers look more like employees on this point because they don’t make the full spectrum of business decisions that true independent contractors make (see list above). But at the same time, Uber drivers do have some managerial control, including the ability to manage their schedule. This one falls somewhere in between, but closer to employee.

How does the worker’s relative investment compare to employer’s investment?

Employee – * – * – * – * – * Independent Contractor

The importance here is the relative investment of the worker. A worker’s investment should be significant in nature and magnitude relative to the employer’s investment in the overall business for the worker to be considered an independent contractor. By contrast, if the worker’s investment is relatively minor, then the worker looks more like an employee who is economically dependent on their employer.

In one case, the court concluded that rig welders were not independent contractors even though they personally invested in fully equipped trucks costing between $35,000 and $40,000. This investment was not viewed as significant when compared with the company’s investment of hundreds of thousands of dollars of equipment at each work site.

Uber and other technology-based companies are unique because they own little in the way of equipment and other capital. The ride-sharing company has become hugely profitable without making substantial capital investments. This lack of overhead expense is one of the reasons why the on-demand economy has been so disruptive—compare the capital investments of Uber with the cab company that owns its fleet of cars, or AirBnB with your typical hotel.

As the court in the Uber case concluded, “All drivers invest considerably more in tools and equipment by obtaining their own vehicle than Uber does by arguably providing certain of its drivers with a smartphone.” (Uber offers some drivers a smartphone to access the Uber app, including through leasing phones.) The relative investment of Uber drivers in their vehicles is larger as compared to the investment in trucks made by the rig welders.

Point, independent contractor.

Does the work performed require special skill and initiative?

Employee – * – * – * – * – * Independent Contractor

An independent contractor typically exercises “business skills, judgment, and initiative.” For independent contractor status, it’s not enough that a worker is highly skilled, or has technical skills useful for performing the work. No doubt that many W-2 employees are highly skilled workers. To be special, the skills must go to the independence of the work.

The result is that the DOL could classify two carpenters, both highly skilled, in different ways: one as an independent contractor, the other as an employee. The highly skilled carpenter who an independent contractor builds made-to-order custom cabinets for a variety of area construction companies. The highly skilled carpenter who is an employee works for a construction company, “is told what work to perform where,” and “does not make any independent judgments at the job site.”

In the Uber case, the court did not decide whether Uber drivers possess special skills. And while I’ve enjoyed the talents of many fine Uber drivers, I cannot conclude that picking up riders at pre-determined locations and times requires “special” skills. This looks more like an employee who is told what work to perform where.

Is the relationship between the worker and the employer permanent or indefinite?

Employee – * – * – * – * – * Independent Contractor

A permanent or indefinite relationship between the worker and employer suggests the worker is an employee. The typical at-will employee continuously works for the same employer.

An independent contractor, by contrast, is economically independent and does not depend on the same permanent (or indefinite) relationship with any one employer.

Even if a working relationship is not permanent or indefinite, it’s still quite possible that a worker should be considered an employee. The key is whether the lack of permanence or indefiniteness is due to the nature of the industry (e.g., seasonal employment = employee) or the business initiative of the worker (= independent contractor).

The DOL provides the illustration of two editors. The employee-editor has worked for a publishing house for several years, and she edits books only from this publishing house. The independent-contractor editor has worked on-and-off with 15 different publishing houses over the last few years “and turns down work for any reason, including because she is too busy with other editing jobs.”

In the Uber case, this factor is a close call. As the court noted, all Uber drivers are hired for “an unspecified and indefinite period.” This looks like at-will employment. But at least some Uber drivers also drive for Lyft and other competitors, including at the same time as using the Uber app.

Drivers also are able to turn down individual ride requests, although doing so too often can lead to a driver being banned from the app. One of the concessions Uber made in settling the class-action lawsuit was allowing drivers to decline more rides without consequence. This had the effect of making Uber drivers look more like independent contractors.

I see strong arguments cutting both ways on this factor. It could be that a driver who works only for Uber is an employee, while a driver who works for Uber, Lyft, and Sidecar looks more like an independent contractor.

Verdict: toss-up.

What is the nature and degree of the employer’s control?

Employee – ** – * – * – * Independent Contractor

Prior to the enactment of the Federal Labor Standards Act (FLSA), the nature and degree of control was the primary test in determining whether a worker was an employee. Now it is just one of multiple factors that are considered.

Companies often exercise control over employees to meet regulatory requirements, to ensure customers are satisfied, and for other reasons relating to “the nature of the business.”

Important factors to consider when measuring the degree of control include whether the worker is required to undergo training, and who determines the worker’s wage rate and schedule. It is not enough that a person can control the hours they work to be considered an independent contractor. A true independent contractor controls “meaningful” aspects of their work in such a way that they can be viewed as conducting their own business.

Uber unilaterally sets the pay received by its drivers. As the court in the Uber case noted, “Bona fide independent contractors typically have the power to set their own compensation or at least negotiate for higher rates.” Uber provides drivers with various training materials and requires “onboarding training,” while also maintaining certain policies. These facts make the relationship look much more like one of employer-employee.

But on the flip side, Uber does not control the drivers’ schedules. All Uber drivers are free “to work as much or as little as they like,” so long as they give at least one ride per month. Uber also does not control where its drivers work or the routes that they take.

This is another factor where strong arguments can be made on both sides. But the inability of Uber drivers to negotiate rates with Uber seems to be a hallmark indicator that they are more like employees than independent contractors.

Final Scorecard and Conclusion

For those keeping score at home, here’s how my scorecard turned out:

Work Integral to Employer’s Business  

Employee – * – * – * – * – * Independent Contractor

Managerial Skill – Profit and Loss

Employee – ** – * – * – * Independent Contractor

Worker’s Relative Investment

Employee – * – * – * – * – * Independent Contractor

Special Skill and Initiative

Employee – * – * – * – * – * Independent Contractor

Permanency of Relationship

Employee – * – * – * – * – * Independent Contractor

Degree of Control

Employee – ** – * – * – * Independent Contractor

In the final analysis, Uber drivers look more like employees than independent contractors. When in doubt, it is advisable to err on the side of caution and treat workers as employees. It may cost your company more in the short-term, but avoiding litigation can save costs in the long run.

Contact an Attorney at Spengler & Agans

If you’re a business owner who is unsure of how to classify workers, or if you’re a worker who believes they have been misclassified as an independent contractor, contact our attorneys below. Spengler & Agans offers a flat-rate legal checkup for startups and business needing a broad, overall legal review of their business and business practices.

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