Uber has not fared well in court battles recently. After losing an unemployment case last month in Florida, it has now just lost an independent contractor misclassification wage case in California. This loss in California comes on the heels of a judicial setback for Uber in March, where a federal court denied its motion for summary judgment and ordered Uber to stand trial before a jury on the issue of whether it misclassified its drivers in that state as independent contractors instead of employees for purposes of the California Labor Code.

The most recent setback for Uber involved an individual claim by a driver who represented herself before the California Labor Commissioner seeking allegedly unpaid wages, including overtime, as well as unreimbursed “employee” expenses under California law. The driver, Barbara Berwick, worked for Uber and its operating company, Rasier-CA LLC, for less than two months in 2014. She entered into a standard driver agreement with Uber’s operating company that, among other things, set forth the relationship of the parties as independent contractors. The Labor Commissioner found that Berwick “was Defendants’ employee.”

Uber and Rasier yesterday filed an appeal of the Labor Commissioner’s decision in the Superior Court of California for the County of San Francisco.  Berwick v. Uber Technologies, Inc., No. CGC-15-546378 (Super. Ct. San Francisco County, June 16, 2015).

The Decision

The Labor Commissioner’s decision first focused on the Uber/Rasier contract signed by Berwick, quoting at length many of the contract clauses. The decision then addressed each of Uber’s arguments as to why Berwick was an independent contractor and, hence, not covered under the California Labor Code.  The Commissioner considered Uber’s arguments under the traditional California test for independent contractor status, setting out 11 different factors.

The Labor Commissioner then made the following findings:

• Uber retained control over the operation as a whole, and was “involved in every aspect of the operation.”
• Uber vets prospective drivers.
• Drivers must pass background checks.
• Uber controls the tools used by the drivers to the extent Uber dictates details about the types of cars that can be used.
• Uber monitors the drivers’ approval rating and terminates their relationship with Uber if the rating falls below a specific level.
• While Uber allows drivers to hire others, only Uber approved drivers can use the Uber software.
• Uber discourages tips by customers.
• Uber exercises its discretion to decide if a cancellation fee will be paid to drivers.

“In light of the above,” the Labor Commissioner held, “[Berwick] was Defendants [Uber and Rasier’s] employee.”

The Labor Commissioner then noted that California Labor Code 2802 requires an employer to indemnify (reimburse) an employee for all expenses that an employee “necessarily expends in the discharge of the employee’s duties.”  The Commissioner then calculated the amount of necessary expenses using the IRS rate for miles driven ($0.56 per mile), plus toll charges, which totaled $3,878.  With interest, the total award amounted to $4,152.

Berwick did not succeed, however, on her unpaid wage claim, but that was because, for unexplained reasons, she failed to provide the Labor Commissioner with her hours worked and payment information.

Analysis and Takeaways

While the decision technically affects a single employee, Berwick, and the award to her was only $4,000, the impact of the decision may be far more profound if upheld on appeal. To begin with, had Berwick worked a year with Uber instead of under two months, the amount of liability for unreimbursed expenses for a single employee for only one year would exceed $25,000. Liability at that rate to Uber would be a multiple of $25,000 per driver per year of service.

Recently, FedEx settled an independent contractor misclassification class action case in California for $228 million, and it is believed that the bulk of the settlement will be for reimbursement of necessary expenses.

The legal test for independent contractor status applied by the Labor Commissioner in California is comparable in many respects to the test used under the federal wage and hour law. Other states have more stringent tests than does California, although there is a case pending before the California Supreme Court that may impose a more worker-friendly standard in California than applied by the Labor Commissioner.

In defending against the claim by Berwick, Uber advanced arguments rather similar to those it asserted unsuccessfully in the recent California federal court case where its motion for summary judgment was denied.

Many commentators are already predicting that this new decision in California is yet another nail in the coffin of the Uber’s business model.  If Uber stands pat, then that may hold true in California and other states for purposes of independent contractor misclassification liability. But companies with on-demand business models need not stand still, they should evolve. While they may wish to be the next Uber in the sharing economy, they surely do not wish to be the next Uber-type defendant in an independent contractor misclassification case.

Based on the facts in this decision by the Labor Commissioner, it appears that Uber has not yet taken steps to enhance its independent contractor compliance sufficient to comply with the laws in California and other states. Nothing prevents Uber from reexamining the way it has structured, documented, and implements its business model, even though it is in the midst of litigation.  Other on-demand companies in the sharing or “gig” economy would be well advised to do so before becoming an Uber-type defendant.

Enhancing independent contractor compliance with California and other state and federal laws is very attainable for many companies. But there is generally no quick fix or universal solution. Rather, businesses are well served if their compliance solution is sustainable, practical, and customized to actually work “in the field” and, at the same time, to serve the company’s business needs.

Some businesses have chosen to utilize IC Diagnostics™ to accomplish this objective. As more fully set forth in the White Paper entitled “Independent Contractor Misclassification: How Companies Can Minimize the Risks,” there are a number of alternative measures to minimize or eliminate misclassification exposure. Those choices include restructuring, re-documenting, and re-implementing the independent contractor relationship (which most companies opt to do); reclassification (by voluntary means or through a government program), or redistribution (by use of a staffing or workforce management firm). Which alternative is best for each company is a decision each business should make if it is currently using an independent contractor model or if it uses independent contractors to supplement its workforce.  Today, the only poor choice is inaction.