[author: Jonathan Turner- Partner, Mitchell Silberberg & Knupp LLP]
On June 3, 2015, the California Labor Commissioner’s Office, following an evidentiary hearing, issued a decision finding that under the state’s wage and hour laws, Uber was an “employer” of drivers using its online platform to respond to customer requests for driver services. The case, Berwick v. Uber Technologies, Inc., was appealed by Uber to the California Superior Court, which will conduct a de novo review as provided under the Labor Code.1 Whether the superior court reaches the same conclusion as the Labor Commissioner remains to be seen, but there is growing momentum in the judicial system to confront the issue of employment relationships in the “service on demand” businesses that are flourishing with advances in online technology. In confronting this issue, courts must face the challenging task of applying antiquated legal principles to the business realities associated with that technology, particularly as that technology redefines the ways in which people go to work.
Uber, whose financial assets have grown exponentially over time,2 seems determined to defend its position that the drivers using its technology are independent contractors and not employees; hence, Uber may well be the flagship defendant in pending and future cases in which this issue is firmly decided one way or the other, even though other startup companies utilizing similar technology to provide consumers with “service on demand” are facing legal challenges from plaintiffs claiming they have been misclassified as independent contractors. By way of example, Homejoy, an on-demand home cleaning service company, recently shut down citing lawsuits from cleaners who claimed they were misclassified as independent contractors as a factor in its decision to close its doors. Similarly, on-demand companies such as Lyft (on-demand ride service similar to Uber), Postmates (on-demand product delivery), and Caviar (on-demand food delivery), to name a few, have faced or are facing similar misclassification lawsuits.
The Labor Commissioner’s Berwick decision has drawn the attention of employment law practitioners on both sides of this issue because it provides some insight into the legal principles that govern this issue, at least under California wage and hour laws.
During the hearing before the Labor Commissioner, Uber’s product manager testified that Uber is a “technological platform, a smart phone application that private vehicle drivers (Transportation Providers) and passengers use to facilitate private transactions;” that Uber provides “administrative support” to the driver and the party requesting driver services; that the driver takes no instruction, supervision or direction from Uber, but merely uses Uber’s mobile application whenever the driver wishes to notify prospective customers that the driver is available to transport them; and that Uber neither exerts control over the hours drivers work, nor sets any minimum requirements regarding the number of customer pickups.
From these facts, Uber argued that no employment relationship existed as between Uber and the driver; rather, Uber is a “neutral technological platform, designed simply to enable drivers and passengers to transact the business of transportation.”3 The Labor Commissioner was not persuaded. According to the Labor Commissioner, “the reality …is that [Uber] [is] involved in every aspect of the operation. [Uber] vet[s] prospective drivers, who must provide to [Uber] their personal banking and residence information, as well as their social security number. Drivers cannot use [Uber]’s application unless they pass [Uber]’s background and DMV checks.”4
Perhaps the most significant finding upon which the Labor Commissioner relied when determining that Uber is an employer is that the service provided by the driver is “integral” to the very business purpose for why Uber exists—to provide transportation services for customers who see this business model as an alternative to taxicab services. Quoting from the California Supreme Court’s decision in S.G. Borello & Sons, Inc. v. Department of Industrial Relations (1989) 48 Cal.3d 341, the Labor Commissioner stated:
The modern tendency is to find employment when the work being done is an integral part of the regular business of the employer, and when the worker, relative to the employer, does not furnish an independent business or professional service.” (Borello, supra, at p. 357.) Plaintiff’s work was integral to [Uber]’s business. [Uber] [is] in business to provide transportation services to passengers. Without drivers such as Plaintiff, [Uber]’s business would not exist.
In one sense, the Labor Commissioner’s ruling in the Berwick case reflects a trend that has been prevalent in California over the two and a half decades since Borello was decided—for courts and other adjudicatory authorities to go beyond the common law test for determining when the relationship between parties to a service transaction is that of employment or independent contractor. At common law, this question was answered by examining who had the “right to control” the work being performed-if the hiring party retained control over only the results of the work, but not the manner and means by which that work was performed, then the relationship between the parties would be considered one of an independent contractor. On the other hand, if the hiring party also maintained day-to-day control over the manner and means by which the work was performed, which generally meant administering day-to-day supervision, instruction and direction regarding performance of the work, an employment relationship existed. When deciding whether the plaintiffs in Borello were employees or independent contractors, the California Supreme Court broke new ground by applying the common law test of employment “in light of the remedial purposes of the workers compensation laws,” and concluded that the plaintiffs were “without doubt…a class of workers to whom the protection of the [workers compensation law] is intended to protect.” Borello, at p. 358.
The wage and hour statutes, like the workers compensation statute, are, of course, “protective statutes.” Consistent with its ruling in Borello, the California Supreme Court more recently reaffirmed that the wage and hour laws are not to be confined by the common law test for employment but are to be “liberally construed with any eye to promoting such protection.” See Martinez v. Combs (2010) 49 Cal.4th 35, 61. It follows that when deciding Uber’s case on appeal in Berwick, the trial court and any reviewing court of appeals will have to take their cues from Borello and Martinez, and will not limit their analysis to whether the common law definition of employee has been satisfied but will examine the “remedial purposes” of the governing Labor Code sections.
This approach may be well intended, and it undoubtedly will be seen by many as furthering legislative goals to prevent abuses in compensation practices as between hiring parties and those being hired. Even so, the compensation abuses that led to the passage of the wage and hour laws in the early part of the last century are not what are at issue in Berwick or, for that matter, in the several other driver cases that are pending against Uber. True enough, Uber’s business model carries some attributes of employment. It provides the means for which persons can earn money in return for their labor, and the type of labor involved; i.e., driving, goes to the very core of Uber’s operation and reason for existing. But there is a reason why the number of Uber drivers is growing and why Uber’s business model is succeeding. Uber’s business model affords complete flexibility to the driver, who decides what days to work, what hours during the day to work, or whether to work at all. There is no field supervisor who monitors driver performance, nor an on-site manager to whom drivers must report their work activities. There is no passenger pick up quota. There is no disciplinary procedure established or administered by Uber for a driver’s failure to work, or for working poorly. All of these matters are left to the free and open market in that the driver’s compensation or lack thereof will depend on the driver’s availability to work, and the quality of the service provided by the driver, as perceived by the customer, not by Uber management.
Redefining the relationship between Uber and the drivers as one of employment invites a host of practical problems for which “workarounds” could not be developed or applied without changing the very core of the business model adopted by Uber. Because driving is not considered an exempt task under the wage and hour laws, Uber, among other things, would have to monitor hours worked by the drivers; determine when the driver’s workday begins and ends; pay overtime premiums when drivers work beyond the number of straight time hours permitted; ensure that drivers are afforded meal breaks and rest periods; adopt a payroll system and pay cycle that complies with the Labor Code; and obtain workers compensation insurance. In today’s business environment, we are witnessing how innovative advances in online technology intersect with the desire of persons to maintain more flexibility over their work and control over their time. The wage and hour laws should be construed and applied in a manner that adapts to, and not hinders, this new environment.
. Cal. Lab. Code § 98.2.
2. Henry Blodget, “I Just Heard Some Startling Things About Uber…,” at http://www.businessinsider.com/uber-revenue-2014-6. Mr. Blodget is CEO and Editor-in-Chief of Business Insider.
3. This was the Labor Commissioner’s characterization of the position Uber took in the case. The author has not reviewed the arguments made at the hearing, nor the post-hearing briefs, if any, submitted in the case.
4. See Labor Commissioner’s decision in Berwick v. Uber Technologies, Inc., at p.6.