The biggest challenge facing Uber got a lot bigger Thursday when a California judge expanded a lawsuit against the ridesharing company dramatically, reversing his own previous decision limiting Uber’s liability in the case.
After first deciding that only a fraction of the 160,000 California-based Uber drivers attempting to sue the company over wages and expenses could actually do so, Judge Edward Chen found Thursday that a far larger group can participate in the class action case. Arbitration clauses in Uber’s contracts that had previously restricted the case’s scope are no longer enforceable, Chen ruled, due to changes in case law governing arbitration questions in California specifically.
Thursday’s decision expanding the size of the class has nothing to do with the drivers’ core claims about Uber’s business practices. Those claims are straightforward: Uber is cheating the law by designating drivers as contractors while treating them like employees, the drivers say.
The firm has been sued elsewhere for alleged “misclassification” of drivers too, and similar arguments are at the heart of ongoing litigation against Uber competitor Lyft and a recent high-profile case against FedEx. Misclassification saves firms thousands of dollars per person per year in labor cost alone. It’s a widespread problem across economic sectors, but is especially acute in transportation jobs. As misclassification questions have begun to dog tech firms, pressure has started building for the government to create a third class of workers that would split the difference between W-2 employment and 1099 contracting.
But if misclassification issues are becoming familiar, disputes over contract language that strips individuals of their standard legal rights of action in court are just beginning to face scrutiny. Arbitration clauses in contracts require that all conflicts between the signatories will get resolved in private, individual arbitration rather than in standard courts or in class-action suits. The increasing use of the clauses over the years has “essentially disabled consumer challenges to practices like predatory lending, wage theft and discrimination,” the New York Times reported in a November series on the provisions.
Arbitration clauses have generally been successful at protecting companies. Negating the risk of class-action suits dramatically reduces the potential monetary consequences of any given dispute with a worker or customer. Moving the disputes themselves out of common court and into arbitration rooms where the rules are different and the process moves at break-neck speed also increases the odds that companies will out-lawyer an overwhelmed opponent. The clauses are so valuable to corporate America that recent Consumer Financial Protection Bureau efforts to restrict their use have drawn exotic attack ads on television.
Thursday’s ruling, then, is a rare case of an arbitration shield breaking down just when a large company needs it most. If a class-action suit by about 15,000 drivers was going to be a headache for Uber, the newly expanded class of drivers is more like a persistent migraine. Uber could still come out of all this unscathed, since Thursday’s ruling has no bearing on the core disputes of the case. But the stakes are now much higher.
If courts ultimately agree with the Uber drivers’ argument, it wouldn’t uproot the tech company’s broader ambitions. But it could be the end of Uber as everyday riders know it in 2015. It’s not that the ride service would vanish from the planet. Instead, the current image of Uber — an innovative firm that’s so successful at disrupting traditional taxi service business models that investors think the company is worth over $50 billion — would likely dissolve.
All that disruption talk that’s made Uber so valuable stems in part from keeping the costs of maintaining a huge car fleet and driver stable far below what traditional employment law has required taxi companies to spend on overhead. Independent contractors don’t have to be reimbursed for the expenses of keeping their vehicles fueled and in good repair. They don’t incur payroll tax expenses for Uber, and they aren’t covered by minimum wage and overtime laws.
If Uber is compelled to re-classify large numbers of its drivers as employees rather than contractors, it would start to look very much like a traditional taxi service. It would shoulder the expense of vehicle upkeep and face increased costs for labor. The gap between how taxi services split up every dollar they get from riders and how Uber allocates that income would narrow almost to zero. The startup would probably still have the edge on user interface — traditional cab services have started to roll out their own app-based hailing systems, but Uber is likely to maintain an edge there both on quality and on the number of potential riders already using their system — but that’s where the differences would stop. Such a reversal would mean the company has even more riding on its promises to take over the logistics sector in coming years, which are already the primary driver of the company’s massive valuation — and which some analysts are already naysaying.