Uber, Lyft, and the Employment Battle

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Class-action lawsuits filed against ridesharing companies over alleged misclassification of worker’s employment status.

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For ridesharing companies like Uber and Lyft, navigating the complex world of regulation is not as simple as loading up an app on a smartphone. While consumers are pleased with the ease of arranging transportation using modern technology, rideshare companies are now, more than ever, under pressure from state regulators as well as their own drivers when it comes to labeling the driver’s employment status.

From the consumer’s standpoint, Uber operates in a seamless fashion, from dispatch to payment. Passengers request a vehicle using a smartphone application, plug in a location, and dispatch software sends the nearest driver to the location within minutes. As a testament to its commitment to consumer satisfaction, Uber allows users to “rate” drivers on 5-star scale and requires drivers with ratings below 4.6 stars to take a training course. The average wait time for a vehicle in most Uber-friendly cities in the U.S. is under five minutes; the median wait time in Manhattan is just two minutes, twenty-five seconds.

So where is the pressure coming from? Most of the legal friction comes from the Uber drivers about the alleged misclassification of their employment status.

In the summer of 2013, Uber and Lyft drivers filed two separate class action lawsuits in federal court. The drivers claim that Uber’s and Lyft’s classification of drivers as self-employed independent contractors, as opposed to company employees, violates California’s employment and unfair competition laws. The lawsuits are currently pending before the U.S. District Court for the Northern District of California, and will proceed to trial.

Independent contractors lack many of the protections that labor and employment laws have to offer, such as health insurance, unemployment benefits, overtime benefits, and minimum wages. Under California employment law, companies are also required to provide reimbursement for on-the-job expenses incurred by employees. The drivers argue that the alleged misclassification forces them to pay for gas, insurance, and car maintenance expenses that would otherwise be covered by the company if the drivers were considered employees. A trial victory for the drivers could mean reimbursement for these business expenses, and the possible extension of other state employment protections.

Traditional taxicabs and car service companies hire drivers as independent contractors based on a commercial license or “medallion” system and lease cars provided by the company. Rideshare companies like Uber and Lyft, on the other hand, contract with drivers privately, thereby blurring the traditional lines between the “employee” and “independent contractor” classifications. Uber and Lyft drivers use their own cars, pick up their own passengers, and work on their own time – the cornerstones of independent contracting. Still, the drivers must comply with the companies’ performance standards. Drivers log their hours and are subject to at-will termination or investigation. The drivers bringing the lawsuit argue that this level of control over their work is more in line with an employer-employee relationship.

The employment status classification controversy is now a relatively common problem in the sharing economy. States like California and New York, where Uber and Lyft are most frequently used, are struggling to adapt to these kinds of changes in employer-employee relations.

The Fair Labor Standards Act (FLSA) broadly defines “employ” as “to suffer or permit to work.” The U.S. Department of Labor (DOL) issued guidance this summer in an effort to clarify these terms for employers. The guidelines conclude that the FLSA intentionally calls for a broad interpretation of the employment relationship such that most workers are employees under the Act. The DOL provides a number of “economic realities” factors to consider, such as whether the work is an integral part of the employer’s business, the nature and degree of the employer’s control, and whether the relationship between the worker and the employer is permanent or indefinite. The guidance stresses that these factors “should not be applied in a mechanical fashion,” and that the evaluation should ultimately turn on economic dependence–that is, whether the worker is “really in business for him or herself.”

Some critics of the DOL’s approach have argued that the focus on “economic dependence” fails to take into account other important aspects of employee independence and employer control. Legal scholars Benjamin Means and Joseph A. Seiner of the University of South Carolina School of Law argue that the DOL guidance downplays the importance of workers’ schedule flexibility. Worker flexibility, they argue, should be a key determinant in defining an employment relationship because workers who have little flexibility in their schedules need the legal protections that come with employee status.

Means and Seiner also criticize the DOL’s “economic realities” approach as being unpredictable, and argue that more clarity is needed so that “businesses are able to innovate without fear of unknown liabilities.” The guidance document urges that companies resolve any status ambiguities in favor of employment status. Means and Seiner argue this “broad coverage” creates a presumption of employment status that, if adopted, would make it nearly impossible for businesses that actually hire independent contractors to argue that their workers are not full-time employees.

The California courts, however, have pushed for legislative action as the solution to the employment controversy. In denying Uber and Lyft’s respective summary judgment claims, which asked for the case to be dismissed because the drivers are not entitled to the requested monetary relief as independent contractors, the judges have allowed the case to proceed to a jury trial. Still, the courts are in agreement that, short of the legislature enacting rules specific to the sharing economy, neither courts nor juries will have any way of classifying workers in these non-traditional cases; the jury will be “handed a square peg and asked to choose between two round holes.” The court decisions urge the legislature to act to remedy this discrepancy.

Regardless of how the change occurs, the DOL guidelines and the recent lawsuits suggest that embracing rideshare technology in our economy requires more than what the current employment status has to offer.