Observers call the ruling a possible game-changer for Uber, Lyft and other on-demand companies, which all rely on vast workforces of independent contractors.
(TNS) — An Uber driver is an employee, not an independent contractor, the California Labor Commission ruled this month, in a decision that foreshadows a big challenge to Uber’s business model and potential seismic changes to the nation’s classifications of workers.
The case involves a San Francisco driver who was awarded a $4,152.20 reimbursement for expenses — chump change for Uber, which has an immense war chest and a valuation of $50 billion.
But observers seized on the ruling as a possible game-changer for Uber, Lyft and other on-demand companies like Postmates and Handy, which all rely on vast workforces of independent contractors. If those workers were reclassified as employees, the companies would be on the hook for pricey benefits such as workers’ compensation, insurance, and expenses like gasoline.
“This ruling will have a chilling effect on the entire sharing economy,” said Berin Szoka, president of TechFreedom, a think tank, using the term for companies that harness underutilized assets.
Legal experts cautioned that labor commission rulings don’t set precedents, a point that Uber also made.
Still, the ruling drew widespread attention, pouring fuel on an ongoing national controversy about new employment models at a time when the freelance workforce is growing rapidly.
A raft of lawsuits now winding their way through the courts seek to have drivers and other on-demand workers reclassified as employees, but are years away from final decisions. This year, two San Francisco federal judges denied requests by Uber and Lyft to have various such cases tossed out.
Uber, the largest and most successful of the on-demand companies, has more than 200,000 U.S. drivers. Like other on-demand firms, it relies on the independent-contractor model as a way to quickly scale up its workforce while ducking the expense and paperwork of employment status.
It has filed to appeal the Labor Commission decision, which would trigger a new trial in San Francisco Superior Court starting from scratch.
Reclassifying drivers as employees could force Uber and other companies to rely on fewer workers who would work longer and more structured hours, eliminating the flexibility that makes them appealing, said Arun Sundararajan, an New York University business professor who studies the on-demand economy. While big companies like Uber and Lyft could handle the financial hit, smaller ones may determine that their business models are no longer viable, he said.
Such a move could stifle innovation, he said. “Many new platforms and other businesses that might have used on-demand labor may not emerge because of the risk that they will be considered employers,” he said.
Uber has long argued that it is a technology company, not a transportation provider.
But the Labor Commission disagreed. Uber is “in the business to provide transportation service to passengers,” it wrote. Moreover, Uber “is involved in every aspect of the operation,” the ruling said, including setting rates for rides, vetting drivers and more.
Labor Commission rulings “do not have any meaningful legal significance” such as being cited as precedent, said Steve Hirschfeld, an employment lawyer in San Francisco. “The hearings are very slapdash; short, quick, low-key,” he said. “Rules of evidence aren’t followed.”
Uber said as much in a statement. “The California Labor Commission’s ruling is non-binding and applies to a single driver,” it said. “Indeed it is contrary to a previous ruling by the same commission, which concluded in 2012 that the driver ‘performed services as an independent contractor, and not as a bonafide employee.’”
Barbara Berwick, the driver who brought the case after working for Uber for less than two months in 2014, said she went to court — where she represented herself — as a matter of principle.
“I didn’t like being ripped off,” Berwick said. “It would be the greater social good that people who drive for Uber and Lyft would get at least minimum wages and get their expenses paid and were paid for overtime.”
Berwick said she was disappointed not to have been awarded overtime pay after clocking many long days behind the wheel. Berwick said she drove for Uber to be around people. Financially, she is “set for life,” she said, with residuals from her former work running an adult-entertainment telephone enterprise.
About a third of U.S. workers are freelancers, a number projected to hit 40 percent by 2020. The ongoing debate over their status could spur creation of a new employment model rather than the current black-and-white choices of W-2 full-time employment or 1099 independent contract work.
SherpaShare, which provides software for drivers to analyze their earnings, on Wednesday polled 125 Uber and Lyft drivers about the ruling, finding that 53 percent of them agreed that Uber drivers should be considered employees.
In the bigger picture, the Labor Commission ruling “demonstrates why federal policymakers need to re-examine the 20th century definitions and employment classifications we’re attempting to apply to a 21st century workforce,” Sen. Mark Warner, D-Va., said in a statement Wednesday.
Sundararajan had a similar view, saying the case underscores the need “to create a new social safety net as employment is unbundled and our workforce becomes largely freelance.”
Tad Devlin, a San Francisco lawyer, said Uber’s name may even grace a new hybrid employment status.
Someday “ubers” may be a new form of employment, he said, “not a full-fledged traditional employee, not a 1099, but an ‘uber,’ somewhere in between.”
©2015 the San Francisco Chronicle, Distributed by Tribune Content Agency, LLC.