Uber Driver Court Case Challenges Independent Contractor Business Model

By Dan Levine | August 10, 2015

The most serious challenge to Uber Technologies Inc.’s “Be your own Boss” business model might also present an early test to the wider sharing economy as well as undermine its own $50 billion valuation.

The immediate battle began last Thursday in San Francisco, where Uber is seen as having a difficult task in persuading U.S. District Judge Edward M. Chen to block a lawsuit seeking to reimburse 160,000 California drivers for mileage and tips from proceeding as a class action.

Chen’s decision hinges on the broader issue of whether Uber drivers are independent contractors, as the company claims, or employees entitled to unemployment and workers’ compensation as well as the right to unionize. The issue is already fodder for the 2016 presidential campaign, with Democrat Hillary Clinton drawing fire from Republican rivals after saying the sharing economy, though promising, raises “hard questions about workplace protections.”

Besides crimping Uber’s “drive whenever you have time” motto, a ruling treating drivers as employees, if upheld on appeal, would dampen profits. It would also raise the same specter for other companies operating in the “sharing,” “gig” or “on-demand” economy, which pair customers with products through apps and typically avoid the costs of traditional employment. The Uber lawsuit before Chen, the most advanced of similar cases, argues the model violates labor laws.

‘Legal Uncertainty’

The case is significant for firms that farm out work to others in exchange for a share of the revenue they generate, said Christopher Sagers, a Cleveland State University law professor. “I think that a plaintiff win would put them in some legal uncertainty,” he said.

Two Uber investors who asked not to be identified said the company could survive any decision requiring it to treat drivers as employees.

Uber’s value might drop because it’s based partly on the arrangements with drivers. Treating them as employees would add to costs and probably shrink profit.

Classifying drivers as employees would result in higher prices, and fewer Uber drivers overall who must work longer hours, said Arun Sundararajan, a professor at New York University’s Stern School of Business. The higher costs would be passed on to consumers, with reductions in drivers’ income and Uber’s cut of their fares, he said.

The effect on Uber’s global revenue would likely be small, Sundararajan said. “I think the real risk is that if they lose in California, other states will follow,” he said.

Lyft, Homejoy

Chen has already ruled that a jury will decide the case if it goes to trial. Other sharing-economy companies are paying attention to Uber’s fight.

Shannon Liss-Riordan, the lawyer representing the drivers, has filed similar cases against companies including Uber competitor Lyft Inc., as well as sharing-economy ventures Caviar Inc., Postmates Inc. and Homejoy Inc., an on-demand house cleaning company that ended operations on Friday.

Homejoy Chief Executive Officer Adora Cheung said her company buckled under the weight of the litigation threat.

Uber’s spread in the U.S. and around the world has been pockmarked with lawsuits and prosecutions over accidents and alleged crimes by drivers including rape. The company is also subject to government probes of whether it violates labor laws and local regulations designed largely for taxi service.

The drivers’ case may succeed — or not — based on whether it proceeds as group suit. Stanford Law School Professor William Gould called it a “good candidate” for a class action, which increases defendants’ potential costs and gives plaintiffs leverage to negotiate a deal.

Independence, Flexibility

Uber stresses the independence and flexibility drivers enjoy — they can work whenever and as often as they like. It claims to rely on as many as 17 different licensing agreements for drivers.

Some of the licensing agreements describe a “mutual right to terminate,” which Uber argues is typical of independent contractor relationships. Others give Uber the right to terminate for specific misconduct and require a minimum amount of notice, according to the company.

Chen would be required to make too many “individualized inquiries” assessing each driver’s understanding of Uber’s policies to make a group lawsuit viable, the company argued.

‘Singular’ Point

Uber’s ability to terminate drivers at will, or for any reason and without warning, is of “singular importance,” the plaintiffs argue in a court filing. That policy proves Uber’s control, which means the drivers qualify as employees, according to the filing.

For Uber, the road ahead isn’t likely to get easier, according to Sagers and Gould.

FedEx Corp. lost an appeal in a case brought by its drivers and agreed to a $228 million settlement. That deal is scheduled to be considered by Chen Thursday, just before Uber’s hearing.

The FedEx case works in Uber’s favor, said Theodore Boutrous, one of the ride-share company’s lawyers.

“FedEx delivery drivers do not have anywhere near the flexibility or autonomy that drivers who use the Uber app have,” Boutrous said in an e-mail. “Uber has none of these types of rigid controls over drivers; indeed, most drivers value Uber precisely because they are not subject to this type of inflexible arrangement.”

The case is O’Connor v. Uber Technologies.

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