Economy

California Labor Ruling Deals A Blow To Uber’s Strategy For Denying Drivers Benefits

CREDIT: AP

Uber must pay its drivers benefits, overtime, working expenses, and other standard compensation that the company has thus far avoided providing, the California Labor Commission has ruled.

The decision is not self-executing across the state and can only be directly applied in one specific driver’s case. But it signals to the company’s other employees that the body charged with adjudicating California labor law views Uber to be an employer with all the obligations that come with the label. Uber notes in a statement that the same commission had ruled the opposite way in a 2012 case, and that neither of those rulings would be binding in any other individual lawsuit over similar complaints by other drivers.

The ridesharing start-up, whose market value recently hit $50 billion, has relied upon paying drivers as though they were independent contractors rather than employees. Classifying a worker as a contractor negates most provisions of federal labor law, saving an employer thousands of dollars per year for each person they treat as a contractor.

If a company treats a contractor like an employee by exerting substantial control over day-to-day job activities, though, it risks being found guilty of misclassifying workers. Misclassification is a widespread problem, with complaints popping up everywhere from trucking to strip clubs to beauty parlors.

In California, Uber argued that its relationship with drivers is not controlling enough to constitute an employer-employee relationship, pointing out that they don’t set drivers’ hours or require a minimum number of trips in a shift. But California’s definition of the line between employment and contract work is primarily based on whether the worker is providing a service that’s integral to the main line of business of the company paying her. Labor commission lawyers examined Uber’s policies for drivers and overall business model and found the company’s argument weak.

“Defendants hold themselves out as nothing more than a neutral technological platform, designed simply to enable drivers and passengers to transact the business of transportation. The reality, however, is that defendants are involved in every aspect of the operation,” the commission ruled. By vetting would-be drivers, requiring them to register their vehicles with Uber, and terminating them if their approval ratings dip too low, the state found, Uber positioned itself as an employer rather than a non-controlling party to a contract.

The case that generated the ruling will only cost Uber about $4,000 in reimbursement payments to a driver named Barbara Ann Berwick. But its consequences could be much grander. If it cannot successfully appeal the finding, it will have to choose between fielding further individual lawsuits or reclassifying all its California drivers as regular employees to pre-empt the suits. That means paying unemployment insurance and other payroll taxes that aren’t triggered for contractors, as well as potentially being subject to overtime rules and made to reimburse drivers for work expenses like gas, tolls, and some traffic tickets.

Any multi-billion-dollar corporation should theoretically be able to absorb such costs. But they threaten to turn Uber into a much smaller-margin enterprise, one more akin to the traditional taxi company business model that the firm has made so much money disrupting. And because Uber’s market value is a fluid, on-paper number that depends on investor confidence and market analyst’s reading of the economic tea leaves, the California ruling could lead to some shrinkage in the car service’s worth and ability to raise private funds.

The ruling isn’t the end of the story, either. There are other civil cases outstanding in California and elsewhere that touch on similar issues and could be decided differently. And the sheer variety of different driver experiences, from people who drive a few hours a week for supplementary income to those who log long hours in vehicles leased from the company itself, suggests that it’s hard to pin down the entire category of workers with either the “employee” or “contractor” label that the law provides.

UPDATE JUN 17, 2015 3:47 PM

This story has been updated to include information from Uber.

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