Uber, Lyft and others - worker classification in the 21st Century

I was surprised by the broad press coverage that a California Labor Commission ruling involving one ex-Uber driver (Berwick) received this past week (USA Today, 6/19/15; Los Angeles Times, 6/17/15;.New York Times, 6/17/15).  This ruling (6/2/15) found that someone who drove using the Uber app for less than two months was an employee rather than a contractor. As such, under California Labor Code Section 2802, the employer must cover "all necessary expenditures" of the employee in carrying out their duties or obeying the directions of the employer. So, key to this expense reimbursement rule is that the worker must be an employee.

In the California Labor Commission ruling, the driver says she drove 6468 miles in the 49 days she worked and incurred tolls of $256 and a traffic fine of $160.  Finding that she was an employee, the Commission awarded her:

• $3,622.08 mileage (@56 cents per mile)
•    $256.00 tolls
•    $274.12 interest for getting this reimbursement late

She was not awarded reimbursement for the traffic fine as it was not incurred "at the behest of" Uber. The driver also requested compensation for 470.7 hours of work. But she did not present sufficient evidence and there was evidence that she had been paid. Interesting as well, the driver had a corporation and the payments were made to it. She argued that she did not have the information about this although she is an agent of this corporation.  I note this as interesting because some people argue that if the worker has a corporation and payments are made to it, there can be no worker classification issue as the "employer" hired the corporation.  In this case, I assume Uber "hired" the individual because, as described in this ruling, Uber does a DMV and background check on the drivers.  Presumably, this was all done for the driver even though Uber apparently made payments to the driver's corporation. (A different review seems necessary by Uber if it had hired the corporation. For example, would Uber want the corporation to certify that all of its drivers and vehicles were licensed and insured?)

Well, this topic could easily be a book, but let me get back to why I was surprised by the degree of press coverage and a few other general comments.

This ruling involved one driver and a labor commission in one state. In contrast, there seemed to be little press coverage about two decisions from the federal District Court for the Northern District of California in March 2015. These cases were brought by groups of former drivers - one case involved Uber and the other Lyft. The judge denied summary judgment for both the companies and the drivers saying the determination was not clear and needed to go to a jury (so the litigation continues).  In the Lyft case, the judge noted:

"the jury in this case will be handed a square peg and asked to choose between two round holes. The test the California courts have developed over the 20th Century for classifying workers isn't very helpful in addressing this 21st Century problem. Some factors point in one direction, some point in the other, and some are ambiguous. Perhaps Lyft drivers who work more than a certain number of hours should be employees while the others should be independent contractors. Or perhaps Lyft drivers should be considered a new category of worker altogether, requiring a different set of protections. But absent legislative intervention, California's outmoded test for classifying workers will apply in cases like this. And because the test provides nothing remotely close to a clear answer, it will often be for juries to decide."

I think that is a good summary of the problem.  The drivers set their own hours and how many hours they want to work.  That is not typical of most employer-employee relationships. Also, if the companies are really only matchmakers and payment processors, the drivers are performing services for the passengers, not the companies. This point remains in dispute though. In the Lyft case, the judge notes that given statements from Lyft and requirements it places on the driver's including about cleanliness of the cars and no smoking, it is more than an entity that connects service providers and service recipients. Similar statements are made in the Uber case. It seems that both companies have changed their approach from that of the start though when they were describing themselves as providers of rides (see the cases).  I see that on the website to sign up to drive for Uber, you agree to a statement that includes the following: "I understand that Uber is a request tool, not a transportation carrier." [For more on the process and benefits, click here.]

Also, cases have varied over many years regarding taxi cab drivers as to whether they are employees or contractors. In fact, in a press release (6/17/15) in response to the CA Labor Commission ruling, Uber notes that the Commission ruled in the opposite way in 2012. A ruling in April 2015 in Massachusetts found that taxi drivers who leased their cars from cab companies were contractors, not employees (Bernard Sebago & others v Boston Cab Dispatch, Inc. & others; SJC-11757). One advantage the cab companies had in this case (beyond the fact that they leased cars only) was that the rules in Boston regulating drivers and cab companies specified most of the things Uber and Lyft want their drivers to do. For example, Boston law required drivers to be trained by the city, follow rules on personal appearance, how to line up for fares, etc.  I think that if the California Public Utilities Commission or similar agency in other states had these rules for licensed carriers, Uber and Lyft would not need any and it would be easier for them to truly be a matchmaker (I'm not saying they aren't a matchmaker today, I want more facts).

A few more observations:

• These cases involved labor laws, not federal tax laws. The labor laws focus primarily on wage and hour standards and at least in California, also whether the worker is entitled to expense reimbursement.
• The worker classification standards are not identical among all laws even within the same state or within the federal government. Thus, it is possible that a worker is an employee for one law but not another. Generally, the goal is to determine if the employer has the right to control the manner and means of how the worker performs but the relevant factors vary among jurisdictions and laws.
• These laws have not kept pace with workforce and economic realities. As the judge noted in the Lyft case, perhaps a new system is needed. We likely will see more individuals work via a variety of freelancing activities where various companies, such as Uber or TaskRabbit or many others, connect and process payments for workers and those seeking services. (See Wall Street Journal, "One in Three U.S. Workers Is a Freelancer," 9/4/14, and Hall and Krueger, "An Analysis of the Labor Market for  Uber's Driver - Partners in the United States," which states that in its first 18 months, Uber had over 160,000 active drivers in the U.S.)  If we want to be sure these workers have certain safety net provisions, why not modify laws to be sure service recipients pay a fee that is at least some multiple of minimum wage (these workers do need to cover more payroll tax and expenses).  Why not have a new type of unemployment fund that all workers pay into and can benefit from within certain parameters? Why not divorce health insurance and retirement plans from employment? Why not have a worker classification scheme that can easily be figured out and relied upon?
• What if instead of the app provider or matchmaker company, the Bitcoin model were used with a decentralized system using the Blockchain and software to connect worker and service recipient and arrange payment and log the transactions?  There would be no employer other than possibly the service recipients.  I think the reality that this scheme is possible, calls for a new model (see prior bullet).
• Laws likely require updating in various areas. In January 2015, the California DMV said it was studying the issue of whether "ride share operators" needed a commercial license. And, these rules may vary from state to state. The California Public Utilities Commission is also studying how the laws apply to the drivers and the Transportation Network Companies. Take a look at this CPUC website on TNCs. There is a lot of complication here - worker classification under numerous local, state and federal laws is not the only complicating factors in applying old economy laws to new economy ways of doing business.
• Some commentators have said the recent California Labor Commission ruling could have a detrimental effect on Uber (and Lyft and others). IF this conclusion is ever held to be more broadly applicable, it would be costly to these companies for past transgressions. But, going forward, they would certainly reduce the fees the drivers receive if the companies are covering their expenses!

Well, that was a lot, yet there is a much more to discuss. I'll save for another post the classification criteria used in the cases noted above and how they compare to that used by the IRS and federal courts for U.S. tax cases.  And more later on better approaches and how to bring these laws into the 21st century.

What do you think?