Uber Scores Big Win in Independent Contractor Misclassification Case

Locke Lord LLP

Yesterday, Uber Technologies, Inc. won a watershed case under federal and state wage laws on the issue of whether Uber drivers are independent contractors, as the company has steadfastly maintained. A federal district court in Pennsylvania granted summary judgment in favor of Uber concluding that UberBLACK limousine drivers, as a matter of law, are not employees covered by the federal minimum wage and overtime laws or by Pennsylvania’s minimum wage and wage payment laws.

This decision, if upheld on appeal, may become a seminal case allowing Uber and other ride-sharing companies to finally breathe easy that their independent contractor business model passes muster under the federal Fair Labor Standards Act and any state wage laws that, like Pennsylvania’s, uses a test for independent contractor status similar to the test under the FLSA.

The overwhelming number of courts that have ruled in the past decade on the issue of whether workers were being misclassified as independent contractors have concluded that the workers were employees, but there have been a number of notable decisions to the contrary, most recently the decision involving GrubHub delivery couriers. All but a handful of the cases finding in favor of a company’s classification of workers as independent contractors have found that the case was a “close” one and a few different facts may well have changed the court’s decision. This case involving Uber, however, was not even close, according to the court’s decision.

Judge Michael Baylson examined six factors that he said “drive this Court’s analysis.”  As more fully discussed below, he found that four of those factors weighed heavily in favor of independent contractor status, whereas only two factors favored employee status and one of those two did not carry much weight while the other factor only slightly favored employee status.

Many businesses, besides those in the ride-sharing industry, that are based in whole or in part on an independent contractor model will likely draw encouragement from Judge Baylson’s decision.  Some may view the ruling, though, as being confined to a particular type of business model where workers operate through their own business entities (as did the plaintiff limousine drivers in this case), have a considerable investment in expensive equipment (their vehicles), and provide services to a competitor or their own private customers (which these limo drivers did).

The decision is also limited to cases where the legal test for independent contractor status is comparable to the test under the federal FLSA.  Not infrequently, some state laws have tests for independent contractor status that are quite different from the test applied in this Uber case.

Nonetheless, there is no question that this decision is an important recognition by the courts that some business models that rely on the use of independent contractors do comply with the federal wage and hour law.

The Decision by Judge Baylson

The case decided yesterday by Judge Baylson is Razak v. Uber Technologies, Inc., No. 16-cv-573 (E.D. Pa. Apr. 11, 2018).  In his decision, the judge first reviewed a number of cases decided by other courts throughout the United States on the issue of independent contractor misclassification.  He then decided the case under six factors identified in the leading case applying the FLSA in the federal circuit covering Pennsylvania: Donovan v. DialAmerica Marketing, Inc.

Right to Control.  The first factor involves “the degree of the alleged employer’s right to control the manner in which the work is performed.”  This is typically the most important factor considered by the courts. The plaintiff asserted that Uber controls drivers by, among other things, being able to terminate a driver’s access to the Uber app, de-activate a driver for canceling trips, block drivers from manipulating lines at major transportation hubs, and limit the number of consecutive hours that a driver may work. The court found that such efforts by Uber were “generally geared towards ensuring safety and quality control.”

The court noted that while Uber “does exercise some control when UberBLACK drivers are Online,” such limited control “does not convert UberBLACK drivers into employees.” The court equated Uber with a homeowner who imposes limited requirements on a plumber or carpenter while in the home, such as not permitting fumes, using certain footwear to protect floors, or not playing loud music while performing services – that type of control, according to the court, does not “suffice to conclude that the carpenter/plumber is an employee.”

In contrast, the court noted that there are significant indications that Uber does not exercise substantial control over the drivers, including the right of drivers to hire subcontractors or helpers, to work for competing companies, to determine their own hours, to accept or reject rides offered to them, to wear anything they want, and to work anywhere they choose.

The court concluded that this factor “weighs heavily in favor of ‘independent contractor’ status.”

Opportunity for profit or loss.  Judge Baylson next examined “the alleged employee’s opportunity for profit or loss depending on his managerial skill.” The court concluded that this factor also “strongly favors a conclusion that UberBLACK drivers are not employees.”

In reaching his conclusion, the judge not only noted that “Plaintiffs themselves have taken advantage of such opportunities through their own respective [limousine] companies,” but that they also had the right not to accept trip requests and, therefore, were “free to make money elsewhere (even while actively remaining Online [with] the Uber app to assess whether, for example, there was any ‘surge’ pricing).”  According to the court, “[t]hese facts strongly indicate that Plaintiffs are independent contractors pursuing their own entrepreneurial opportunities in search for profit.”

In response to the drivers’ argument that Uber’s app determines whether a driver receives a trip request and sets the price for the trip, the court noted that “the ‘profit and loss’ factor does not require that Plaintiffs be ‘solely in control of their profits or losses.’”

Investment.  The third factor is “the alleged employee’s investment in equipment or materials required for his task, or his employment of helpers.”  The Plaintiffs conceded that the drivers’ purchase or lease of their own expensive vehicles is “strong evidence that they are not employees,” but argued that Uber deducts money from the drivers for “vehicle finance payments.”

The court noted, though, that merely because a driver chooses to lease a vehicle from Uber “does not convert Uber into an employer under the FLSA.”  This factor, according to the court, “strongly favors independent contractor status.”

Special skills.  The fourth factor is “whether the service rendered requires a special skill.” The court concluded that driving is not a special skill.  Nonetheless, the court held that “while this factor weighs in favor of finding the Plaintiffs are ‘employees,’ it does not carry much weight.”

Relationship permanence.  The next factor is “the degree of permanence of the working relationship.”  The court concluded that UberBLACK drivers “have basically complete freedom regarding how long they wish to serve in this capacity and the hours in which they serve.”  As a result, the court found that  “there is no permanence of the working relationship whatsoever, unless a driver wants it.”  Thus, the court held, this factor also “weighs heavily in favor of independent contractor status.”

Integration of service.  The last factor is “whether the service rendered is an integral part of the alleged employer’s business.”  The court found that while Uber could not conduct this part of its business without the drivers, “UberBLACK is only one of the many services that Uber provides through its Uber app.”  The court found that this factor favored employee status, “but only to a slight degree.”

Based on the above analysis, Judge Baylson concluded that the drivers had not met their burden to show that they are employees and that Uber is their employer.

Analysis and Takeaway

This case involved three drivers who had “opted out” of the arbitration provisions in Uber’s independent contractor agreement.  They brought this case on behalf of themselves and as the representatives of other Uber drivers who opted out.

Lawyers representing workers in independent contractor misclassification cases in the ride-sharing industry may now be more likely to sue under state laws where the test for independent contractor status differs from the test under the FLSA.

This decision in favor of Uber is, of course, subject to appeal.  If upheld on appeal, it will likely be cited as legal authority by businesses that rely on workers treated as independent contractors.

But even if affirmed on appeal, plaintiffs’ class action lawyers are likely to try to distinguish the facts in their cases from those in this UberBLACK decision.  While that may take some fancy legal work in cases arising in the ride-sharing industry, it may not require nearly as much effort in other industries where the business models differ considerably from Uber’s.

Decisions like this one are also not binding on state regulatory agencies including those enforcing state laws covering unemployment, workers’ compensation, minimum wage, and wage payments.

What can businesses learn from this decision? Uber has been the subject of multiple lawsuits over the recent past alleging independent contractor misclassification. During the same time, it has enhanced its independent contractor agreements and tweaked the structure of its business model. In other words, it has been proactive in seeking to minimize its exposure to independent contractor misclassification claims.

One way in which companies that use 1099ers have sought to minimize this type of  legal exposure is through a process such as IC Diagnostics™, which seeks to restructure, re-document, and re-implement independent contractor relationships in a manner than enhances compliance with independent contractor laws.

For those businesses that have yet to upgrade their independent contractor compliance, this win by Uber should be a positive signal that they, too, can structure, document, and implement their independent contractor relationships in a lawful manner.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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