Whether workers are properly classified as employees or independent contractors has been an increasingly hot topic in discussions about the American labor market. Independent contractors are deemed to own their own business, making them responsible for covering most of their own business expenses, taxes, and costs. Worker classification is governed by federal and state law. The U.S. Department of Labor (DOL) issued guidance in July 2015 aimed at reducing employee misclassification. 
The recent expansion of the so-called sharing economy concept (a hybrid market model in which people share access to goods and services) has led to emerging new business models. On-demand ridesharing network companies like Uber Technologies, Inc., and Lyft, Inc., are beginning to displace traditional transportation like taxis and mass transit. These companies connect independent drivers with people who need a ride. Now, however, Uber and Lyft’s characterization of their drivers as independent contractors is being called into question.
The companies’ classification of drivers has been the subject of lawsuits, agency actions, and arbitration. The outcome of those actions will likely have a significant impact on the business models of Uber and Lyft. Moreover, the ripple effects are likely to be felt throughout the modern sharing economy market with regard to the issue of employee classification. The following article discusses recent developments in the classification of Uber and Lyft drivers.
Hold up your virtual thumb
In a basic sense, Uber and Lyft are companies that facilitate fee-for-service ridesharing. (Uber provides a few other services that are not described here, such as UberBLACK.) They provide smartphone application-based services that connect individuals needing a ride with drivers willing to shuttle them.
When a person seeking transportation summons a ride through the smartphone application, Uber and Lyft dispatch a driver who has agreed to provide the shuttle service to pick up the would-be passenger. The rider’s credit card is charged for the service. Drivers generally use their own cars, and Uber and Lyft are paid a percentage of the fare for the trip.
Uber has held itself out as a technology company rather than a transportation company. The use of ridesharing services has proliferated quickly in just a few years, and the new business has become a worldwide multibillion-dollar industry. However, the very heart of the business is being attacked by drivers who have initiated lawsuits, arbitration, and agency actions in which they claim to be employees rather than independent contractors.
Are drivers employees?
Uber and Lyft consider their drivers to be independent contractors, not employees. They view their role as connecting willing riders with willing independent drivers. The arrangement helps them avoid many significant expenses to which taxi and other transportation companies are subject. Classifying drivers as independent contractors means that the driver—not Uber or Lyft—is responsible for numerous costs related to the business, including payroll taxes, health insurance, car maintenance, fuel, and Social Security obligations.
Many Uber drivers see their independent contractor status as beneficial. Some of them have other jobs, and they feel they have a significant amount of flexibility in determining when, where, and how frequently they drive. The drivers feel empowered and in control of their employment and how much they earn. That freedom makes the role of Uber driver enticing.
However, other drivers are not entirely happy with being classified as independent contractors. They want the greater protection and benefits they would have if they were classified as actual employees. Not only would Uber and Lyft be required to pay certain taxes and reimburse drivers for expenses, but they would also have to provide other employment-related protections, such as unemployment benefits, health insurance, and workers’ compensation coverage. Drivers would also be protected by federal and state laws guaranteeing minimum wages and overtime.
Some of the drivers have challenged their independent contractor status in various lawsuits against Uber and Lyft around the country. Uber and Lyft have responded by arguing, at least in part, that because drivers control how frequently and when they work, they are independent contractors. Determining whether the drivers are employees hasn’t been simple.
Existing legal tests to differentiate employees from independent contractors may be inadequate for addressing the modern labor market, including the emerging sharing economy, because they focus on more traditional business models. One court addressing whether Uber’s drivers are employees explained: “The application of the traditional test of employment—a test which evolved under an economic model very different from the new ‘sharing economy’—to Uber’s business model creates significant challenges.”
If the drivers prevail, they could be reclassified as employees, entitling them to all the protections of wage and hour laws, health insurance under the Affordable Care Act (ACA), and other employee benefits. Such a change could have a significant financial impact for the companies and directly challenge their existing business model built around independent contractor drivers. In addition, such a change could set a precedent for other businesses in the sharing economy that also use independent contractors.
Summary judgment denied
Uber and Lyft drivers filed separate lawsuits in California federal court against the companies for which they drive, claiming they should be classified as employees and entitled to all of the attendant benefits and protections. Both Uber and Lyft filed summary judgment motions in which they asked the courts to dismiss their respective lawsuits on the grounds that they have properly classified their drivers as independent contractors under the law. Both federal judges applied the multifaceted test analyzing the relationship between the companies and the drivers.
Although both judges independently questioned whether the test was antiquated, they each determined that dismissal without a trial was inappropriate because the test suggested that drivers should most likely be classified as employees. The courts considered the most significant factor the ability of Lyft and Uber to control the manner and means of accomplishing the task of driving passengers. Of course, the companies protested the amount of control they have over drivers.
Companies attempt to avoid judgments through settlements
Uber and Lyft are apparently trying to avoid any possible rulings against them. In April 2016, Uber settled two lawsuits in which drivers in California and Massachusetts claimed they were employees of the company rather than independent contractors. Both lawsuits were class actions involving around 385,000 past and present Uber drivers.
According to the public settlement, Uber agreed to pay the drivers at least $84 million and up to $100 million (depending on whether the company goes public and its financial performance) in exchange for the drivers agreeing to continue to be defined as independent contractors. A federal judge must still approve the agreement. Some drivers in the class have filed objections to the settlement with the court. Although the settlement, if it’s approved, would resolve these two lawsuits, it doesn’t provide binding precedent for the many other cases around the country.
In January 2016, Lyft settled a similar lawsuit that was pending in California for $12.25 million. According to that settlement, drivers will remain classified as independent contractors, and Lyft will provide additional benefits, such as giving drivers notice before they are cut from the program.
California Labor Commission rules in favor of driver
In June 2015, a deputy labor commissioner with the California Labor Commission issued an opinion that Uber’s drivers are employees. Barbara Ann Berwick filed the case, claiming Uber should pay for costs associated with driving customers around in her personal vehicle. Uber responded that its drivers are independent contractors who bear those costs themselves.
The commission rejected Uber’s position, concluding the company was “involved in every aspect of the” transaction between the rider and the driver, and Berwick was therefore its employee. It then awarded her $4,000 in unpaid expenses plus interest. Although the decision is not applicable to other drivers beyond Berwick, it certainly sets the stage for many more challenges.
Potential liability for drivers’ actions
There has been debate over whether companies like Uber and Lyft are liable for drivers’ actions, including car accidents. For example, a wrongful death and personal injury lawsuit was brought against Uber in San Francisco after an UberX driver hit a six-year-old girl and her mother in a crosswalk. The child was killed.
The companies have attempted to disclaim any liability on the grounds that they don’t employ the drivers. If the drivers are ultimately classified as employees, companies like Uber and Lyft may be vicariously liable for some of the unlawful or negligent actions of their drivers. As long as the drivers’ conduct falls within the scope of their employment, the companies may find themselves defending against lawsuits based on drivers’ on-duty actions. Some courts seem reluctant to allow the companies to skirt liability even if the drivers are independent contractors.
Shared message
According to the DOL guidance issued in 2015, most workers should probably be classified as employees. However, businesses in the modern sharing economy are trying to distance themselves from an employment relationship with the individuals who provide services on their behalf.
Uber and Lyft are testing the waters. They will likely continue to face additional lawsuits and agency actions over the classification of their drivers. So far, courts and agencies seem to favor designating drivers as employees. Uber and Lyft are attempting to avoid or mitigate the harm such rulings could have by settling disputes before decisions classifying their drivers as employees are handed down.
The lesson to be learned is that companies will likely be compelled to reclassify the individuals who provide services for them in the sharing economy as employees. Those companies may wish to classify service providers as employees from the start to avoid the legal entanglements, penalties, and interest that may result if lawsuits challenging the independent contractor designation are brought. 
Companies that use independent contractors should keep a close eye on what happens because developing precedent may have an impact on their own classifications.
Ryan B. Frazier is an attorney with Kirton McConkie in Salt Lake City, Utah. He may be contacted at rfrazier@kmclaw.com .
Need to learn more? The “Uber” model of doing business has thrust independent contractors, dependent contractors, and freelancers into the legal spotlight. Join us November 15-17 for the 2017 Advanced Employment Issues Symposium, where Ryan Frazier will present ‘The Uber Effect’: How to Conduct Wage and Hour Audits to Determine Proper Classification of Contractors and Employees.’ This 3-hour workshop will cover how to tell which multi-factor tests your company should use based on where you’re located and, importantly, where your employees are located, the process for conducting an effective audit to determine independent and dependent contractor misclassifications under the FLSA, and much more. For more information, click here.