In May 2018, the California Supreme Court dealt a blow to Uber, Lyft and all gig economy companies that utilize independent contractors to make up the backbone of their labor force.
In a landmark ruling in the case of Dynamex v. Superior Court of Los Angeles, the California Supreme Court fired the first legal shot that could ultimately make it illegal for these companies to use contract labor to provide the workforce that performs the work that is central to their primary business.
Two months later in New York, that state’s Unemployment Insurance Appeal Board ruled that Uber is liable for unemployment benefits for three drivers, along with others who are “similarly situated.” With this ruling, they in essence, declared Uber drivers employees.
And in November 2017, the British Employment Appeal Tribunal in London rejected Uber’s argument that its drivers are self-employed. They were then ordered by the TfL (Transport for London) to treat their drivers as workers with full employment rights. This entitled Uber drivers to minimum wage, sick time and paid vacation.
But what do rulings like this mean for drivers?
A Tidal Wave of Legal Rulings Could be Rolling Towards Uber and Lyft Soon
More and more, cities, states and entire countries are beginning to oil their creaky legal wheels to bring these wild startups into line with traditional cultural norms and legal principles.
One of the drivers who brought the case against Uber in London, Yaseen Aslam, said…
They’ve got thousands of drivers on the streets with as little liability to them as possible and that can’t be right. You can’t have a company making millions and workers working below minimum wage. Uber wants to stay in the internet cloud and divorce itself from the reality on the ground. It’s time to come back down to the ground, face its responsibilities and run this business in a responsible way.
That pretty neatly sums up our Western values on employment.
Led by Uber, these new so-called gig-economy companies have taken advantage of our less-than-precise legal definitions to build huge work forces numbering in the millions without incurring a single cent of the costs normally associated with large work forces.
When a company is making billions of dollars from the labor provided by its work force, they have certain responsibilities to that work force. They owe their work force at least a minimum set of protections. Our laws are just starting to catch up with our values.
Uber is still fighting tooth and nail against the London ruling, however. Nearly a year later, in October 2018, Uber is filing an appeal with England’s Court of Appeal.
In that appeal, filed in London, Uber claims, in a message to Techcrunch that the Employment Appeal Tribunal…
last year fundamentally misunderstood how we operate. For example, they relied on the assertion that drivers are required to take 80% of trips sent to them when logged into the app, which has never been the case in the UK. Over the last two years we’ve made many changes to give drivers even more control over how they use the app, alongside more security through sickness, maternity and paternity protections. We’ll keep listening to drivers and introduce further improvements.
It sounds like they’re up to their old trick of saying the right things while doing something completely different behind everyone’s backs. It’s doubtful the UK courts will fall for it.
Uber also touts the fact that its British drivers are making just slightly more than the UK’s minimum wage. Keep that in mind… they’re bragging that their drivers make a tiny bit more than minimum wage (about £1 or $1.28 more per hour).
With that they are admitting that driving is basically a minimum wage job. However, what they don’t mention is that its British drivers are in the bottom 10th percentile of all British income earners (which means 90% of workers earn more than they do).
What Uber Says Would Happen
Uber is making the usual threats whenever any part of their business model is under regulatory attack. The claim is always basically the same. They protest and insinuate that they’ll go out of business if any law is passed regarding their business.
In August, the New York City Council was considering a law that would put a moratorium on any new drivers coming onto the system for a year. Uber ran ads suggesting that if this law was passed, low-income people and minorities would no longer have any way to get around in New York! They showed videos of poor people and minorities trying unsuccessfully to get rides. It was a bleak picture. They insinuated that Uber itself would no longer exist.
Don’t believe us? Watch the ad for yourself:
However, that law took effect in August and so far, Uber is still in business, and minorities and low-income people are still getting around just fine, thank you. Oh and as for Uber’s faint hint that there would no longer be any Uber drivers, there are still more than 60,000 Uber drivers on New York City’s streets.
That’s typical of their response to these situations. They basically they threaten Armageddon! And they’re taking the same tactic with London.
If London does rule against Uber again forcing them to convert all their drivers into employees, it is likely that it won’t be the end of the world and it won’t be the end of Uber.
What’s Behind the Intense Insistence on Independent Contractors?
As it turns out, the venture capitalists who fund most of these startups absolutely demand that companies use independent contractors. They are convinced the companies won’t succeed if all their workers are employees. But, is that really true?
Business Insider ran a story about Josh Bruno in 2016. Josh was the CEO of a new startup called Hometeam Care. Hometeam Care is a company that sends caregivers to the homes of the elderly or infirmed where they provide care for them. Josh was adamant that his 1,000-plus caregivers needed to be W2 employees.
That’s because they would need a lot of training and Josh wanted to “give them a sense that Hometeam was investing in them for the long haul. But unfortunately, when Bruno was trying to raise money, that wasn’t what Silicon Valley VCs (venture capitalists) wanted to hear.” Josh says he, “was kicked out of every office on Sand Hill Road,” referring to the street that is home to the most famous Silicon Valley VCs. “Bruno said he even had a verbal agreement with a flashy name VC, who then wouldn’t go through with the investment unless Bruno put his workers on 1099s.”
Why? Josh says it was because big names like Uber and Lyft were doing it. So, the VCs thought that was the only way to go. They believed it was the only way to scale up operations to the massive size they need to insure they’ll get a huge return on their investment.
When a company hires 1099 workers, otherwise known as independent contractors, it doesn’t really cost them much more to bring on 10,000 independent contractors than it does to bring on 100. But if these same workers are W2 workers (or employees), the cost to bring thousands on board is massive. And that means VCs would ultimately see a smaller return on their investments.
It is because of the extreme reluctance VCs have to funding companies that use W2 workers that we’re seeing so many companies going the way of Uber and Lyft.
What Has Happened with Other Companies?
In Josh’s case, he was able to start his company with W2 employees and he has done really well. He now has over 1,000 caregivers. If he had used 1099 workers he would not have been able to train them as well as they need to be trained to do a great job for the company’s clients. And one of the litmus tests to determine whether or not someone is an employee or an independent contractor is how much control the company exercises over their work. In Josh’s case, he needed to exercise a great deal of control in order to insure consistency and quality of the work.
Other companies have gone the W2 route as well. Many have done so to avoid the legal consequences of misclassifying their workers. They’ve seen the massive lawsuits lodged against Uber and Lyft and it has frightened them from going the 1099 route.
The 1099 route may be the best way to get a quick start and grow to a massive size in a brief period of time. But there are other companies that have been put out of business because they misclassified their workers. On-demand cleaning service Homejoy went out of business in 2015 and they blamed the lawsuits the company faced for classifying its workers as independent contractors as the deciding factor in closing down.
But other companies say the real reason they’re switching to a W2 employee model is because it makes a better business. They can fully train their employees and require them to perform their jobs in specific company-approved ways. Did you ever wonder why Uber gives drivers no training at all, except on how to use the app? It’s because they can’t give any training or the courts would have more reasons to classify the drivers as employees.
The Example of the Cannabis Dispensaries
In 2016 California voted to legalize marijuana and this has given us a real-world experiment, according to The Atlantic, to see what would happen if companies switched a large portion of their workers from independent contractors to employees.
Starting on January 1, 2018, California mandated that cannabis delivery workers be classified as employees. They had to be so that law enforcement could ensure the dispensaries were taking full responsibility for their product and that everything was being handled by well-trained employees. So, dispensaries started the process of converting their delivery drivers to full employees.
California government officials didn’t think it was a good idea for independent contractors to carry marijuana around since they could be driving for other gig-economy companies at the same time. Law enforcement officials needed to know who was responsible for the cannabis in a driver’s car if they were stopped for some reason.
The cannabis dispensaries saw the wisdom in this and finally got onboard and supported the move.
Cannabis Delivery Drivers Split on the Change to Employees
However, workers were split on how they felt about the changes. The Atlantic article related the experience of Sky Siegel, who is the general manager for Perennial Holistic Center in Los Angeles. Siegel said that about half his drivers preferred being independent contracts so they quit to find other jobs as independent contractors with other gig companies.
Others left because Siegel could not yet afford to offer them benefits so he limits his employees to just 30 hours of work per week. The workers were appreciated a steady consistent minimum wage, but many decided 30 hours a week just wasn’t enough.
But that’s just one side of the story. On the other side are the workers who stayed. Many of them say they like the change because they get to use company-provided vehicles rather than their own cars. If they worked for Uber they would earn a little more than minimum wage but then they’d have to subtract all their car expenses from the total.
They also liked that the company withholds taxes from their paychecks, helping them to avoid the April Panic that other gig economy workers face. Many gig-economy workers know that they’re supposed to withhold taxes themselves and make quarterly tax payments to the IRS but a huge portion of them don’t. They also have to accurately record all their business expenses – which most don’t do consistently because it becomes such a huge chore. And as independent contractors they would have to pay twice as much in Social Security and Medicare taxes as employees do.
Another employee who had worked for companies like DoorDash and Grubhub said he liked “the predictability, job security and guaranteed hours of being an employee.”
Customers of the W2 employers tell the companies they like their workers better because they represent their brand well. That’s kind of work quality that’s hard to get from an independent contractor. Companies aren’t allowed to train or give too much oversight on how an independent contractor performs his work. So they necessarily can’t represent a company well, especially when that company is doing something a little more complicated than driving people and food around.
Smart company leaders also know that employees take more pride in their work and are more invested in doing a good job.
Munchery Converts its Delivery Drivers to W2 Employees
Munchery, a food preparation and delivery company decided to convert all of its independent contractor delivery drivers to employees in 2014.
Now, they offer some benefits which all Uber and Lyft drivers would be envious of.
In a job post Munchery is offering its delivery drivers the following:
- An hourly wage
- Mileage reimbursement of $0.54 per mile
- Data reimbursement for their phones
This could add up to a consistent $20-$25 an hour. That’s an enviable wage for an Uber or Lyft driver. The only problem is, you can only work four and a half hours a day.
“eaze” is another cannabis delivery service. They connect drivers to legal marijuana dispensaries in California. They work as employees and here’s a look at their benefits package for drivers:
- A guaranteed wage of $15 per hour
- Mileage reimbursement of $0.54 per mile
With that package, drivers should earn anywhere from $25-$30 per hour before tips.
And keep in mind both of these companies pay the mileage rates for every mile driven. Not just miles when the product is in the car and they’re on the way to a customer’s location. But, all miles. Even the miles they drive after making the delivery when they’re headed back to pick up their next order.
And they’re paid for every minute they’re working – not just the time they’re on actual delivery runs. But they’re paid for all the time in between deliveries as well.
So, apparently it is possible for companies to flourish while taking on workers as employees and paying them a living wage.
While Uber and Lyft and the other gig companies are still fighting tooth and nail to hang on to their independent contractor status, the law seems to be slowly catching up with them. It’s like a title wave in slow motion. You see it coming but you’re still hoping you’ll be able to get out of the way. But in the end the wave is so big, it will swallow you up. And that’s what it looks like is going to happen to Uber, Lyft and all the others.
They will fight it as long as they can, but we’re already seeing cities, states and nations starting
There is a Lot of Confusion in Current Law on Independent Contractors
Our ancient laws regarding independent contractors are vague, to say the least. They say, in essence, that if a company doesn’t exercise an inordinate amount of control over workers, that is, if workers could do their work in any way they pleased and the company only had a say over the final result of their work, they could be considered independent contractors.
And as independent contractors, companies wouldn’t have to pay a whole slew of costs and expenses associated with real employees. The independent contractors themselves actually take on all of the costs normally paid by employers, like having to pay more than twice as much in Social Security and Medicare taxes than employees pay.
To save billions of dollars in employee-associated costs, Uber claimed that drivers were not their employees because Uber did not exercise an inordinate amount of control over their work. They were supposedly only concerned with the results, not how the actual work was performed. However, in law suit after law suit, it was shown that Uber did in fact not only concern themselves with the results of drivers’ work, but they did in fact exercise a great deal control over just how drivers performed the work.
But in legal circles it’s hard to define exactly where the line is drawn between too much control or just the right amount. So the lawyers and courts resort to looking at precedents set by past cases. They used certain tests such as figuring out if the workers were free from the control and direction of the company and whether or not they were able to work for others and if they could determine when, where and how their work is performed.
There is enough ambiguity in the law, however, that both sides can make a good argument.
Uber Passes Some of the Tests Under Current Law
An argument could be made that Uber passes some of the traditional tests involving independent contractors, but not others. Its workers can indeed work for other companies and they can certainly decide when and where they perform the work of driving passengers around. However, there were other things they weren’t free to do. For instance, they aren’t free to decline more than a certain number of passenger requests. And they aren’t free to cancel too many trips. They can do these things, but ultimately Uber will penalize them or even deactivate them (Uber’s euphemism for “firing” them). That showed that Uber does actually exercise a good degree of control over how drivers perform their work.
In the end, Uber sits right in the middle. They passed some of the tests but not others. Because of that, the courts were confused on how to rule. Were Uber’s drivers in reality employees, or were they indeed independent contractors? Most courts agreed that drivers were indeed independent contractors. But not all courts.
In the Dynamex case, Dynamex presented a set of facts that was very similar to Uber’s. They hired delivery drivers but had a great degree of control over how the drivers performed their work. And with their ruling, the California Supreme Court came up with a novel approach to determine whether employees are independent contractors. Their approach eliminated almost all of the ambiguity of past legal precedents and it was so lucid and logical that it is bound to have a powerful influence over other courts and even legislators.
California did two things that could eventually make it very difficult for Uber to maintain its current status. They first shifted the burden of proof to any company that claims its workers are independent contractors. According to Forbes, “The Court adopted a standard that presumes that all workers are employees instead of contractors. The burden is now on any entity classifying an individual as an independent contractor.”
California’s Supreme Court Creates a New Test that Uber Can’t Pass
That means if a case comes against Uber on this issue, Uber will now have to prove that its drivers meet the legal requirements for independent contractor status. And to help in doing that, the Court came up with a three-point test that companies must meet in order to declare its workers independent contractors. Most legal analysts agree that Uber does not meet all of the requirements of these tests.
Keep in mind that a company must establish that all of the following are true of the workers it declares to be independent contractors:
- The worker is free from the control and direction of the hirer in connection with the performance of the work. (This is one of the traditional tests and it is questionable that Uber meets this requirement);
- The worker is customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed for the hiring entity. (This is also one of the traditional elements and this is the one where Uber has the strongest case); and
- The worker performs work that is outside the usual course of the hiring entity’s business.
Uber is shaky on the first point, they can make a case on the second point, but they completely fail on the last point. And keep in mind, the California Court did not say ‘two out of three ain’t bad’! They said a company must pass on all three points. It’s not good enough to pass two of them and fail the third. If a company fails any one of the three tests, then they fail and their workers won’t be considered independent contractors.
And Uber is on even shakier ground on point number 2, that says in order to qualify as an independent contractor workers have to be “customarily engaged in an independently established trade, occupation, or business”. The Court also stated in their ruling that the simple fact that a company does not prohibit or prevent a worker from engaging in such an independent business with other companies is insufficient to establish that a worker has independently made the decision to go into business for themselves.
In other words, the court is striking at the root of Uber’s claims by noting that most of its drivers were not drivers with other companies before Uber came along. They became drivers for the sole purpose of working with Uber. The fact that Uber doesn’t prohibit them from working with other companies is not enough to establish that they “customarily” do or did work for other companies as drivers.
The work Uber drivers perform is certainly not outside the usual course of Uber’s business. It is absolutely central to Uber’s business. It is Uber’s business. Therefore, Uber fails this test and consequently fails the California Supreme Court’s new litmus test.
Uber drivers cannot be considered independent contractors if this new California precedent is accepted by higher Federal courts where Uber will no doubt try to appeal it. The power of this opinion of the Court is that it is so flawlessly logical. It’s shear logic could persuade legislators and other courts to adopt it. It’s hard to imagine that any other court could reject it, although it could take several years of appeals before we see any visible impact.
State legislatures could also get into the act and pass California court’s ruling as law. Then it would be highly unlikely that any court would overturn it.