A California Ruling Just Challenged Uber's Entire Business Model

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Ready, Set, Fight! CA Rules Uber Driver Is an Employee

California’s labor commissioner said an Uber Technologies Inc. driver who connects with customers through the company’s app must be considered an employee, a decision that strikes at the heart of its business model.

San Francisco-based Uber, like other “sharing economy” startups, has built a business around a flexible car fleet piloted by people it contends are independent contractors. If Uber’s drivers were treated as employees, the company would be required to guarantee them a minimum wage, compensate them for mileage and pay into social security.

“We see this as a problem that’s growing larger with each year, with employees lacking security and even basic rights when they are treated as independent contractors,” said Steve Smith, spokesman for the California Labor Federation, which has backed tougher regulations on ridesharing companies.

Uber said in court papers it would appeal the decision. The resolution of the question in an economy that is the world’s seventh-largest may help define the future of Internet-enabled companies that depend on casual labor to provide car rides, shelter and even helicopter trips.

The company has scrapped with regulators from Houston to Berlin on issues from whether Uber is required to follow existing taxi laws to how it handles rider data and even whether its cars can pick riders up at airports.

Moving Californians

Uber has 22,000 drivers in San Francisco alone, 26,000 in New York and 15,000 in London, Chief Executive Officer Travis Kalanick said in a speech to employees June 3 marking the fifth anniversary of the company.

Uber and its competitor Lyft Inc. both face federal lawsuits questioning whether those workers have legal protections of employees. While courts and regulatory agencies ponder, Uber has been expanding into hundreds of cities and raising money at a $50 billion valuation, meeting resistance from regulators and cabbies as it goes.

It’s not just startups that test the boundaries: FedEx Ground Package System Inc agreed to pay out a $228 million settlement to 2,300 California drivers who said they were misclassified as independent contractors, according to a June 12 filing with the Securities and Exchange Commission.

Uber spokeswoman Kristin Carvell said in a prepared statement that the California decision applied to a single driver and contradicted previous rulings.

“The number one reason drivers choose to use Uber is because they have complete flexibility and control,” she said. “The majority of them can and do choose to earn their living from multiple sources.”

Five other states have concluded that drivers were independent contractors, Carvell said. However, the Florida Department of Economic Opportunity ruled in May that a former Uber driver was an employee of the company.

Money Fight

The ruling by the agency headed by Commissioner Julie Su, an appointee of Governor Jerry Brown, was filed in San Francisco state court Tuesday. It stemmed from a wage and reimbursement dispute.

“The defendants hold themselves out as nothing more than a neutral technological platform, designed simply to enable drivers and passengers to transact the business of transportation,” the commission said in the decision, filed alongside Uber’s appeal notice. “The reality, however, is that defendants are involved in every aspect of the operation.”

The commission said the company dictates such things as how old a driver’s car can be and who is qualified to offer services through the Uber platform.

For more, read this QuickTake: The Sharing Economy

The Labor Commission ruling applies to a single driver only “for the moment,” said David Rosenfeld, a law professor at the University of California at Berkeley.

Uber is gambling with an appeal because a loss may mean the decision will apply to all its drivers in California, the professor said.

“That’s the big risk they have,” Rosenfeld said.

With urging from the taxi industry and labor unions, California lawmakers have been working to regulate the companies. Last year, lawmakers required drivers to carry at least $1 million in insurance for personal injury and property damage. The law, which was opposed by Uber, takes effect July 1.

The state court filing is Uber Technologies Inc. v. Berwick, 15-546378, Superior Court of California, County of San Francisco. The federal cases are Cotter v. Lyft Inc., 13-cv-04065, and O’Connor v. Uber Technologies Inc., 13-cv-03826, U.S. District Court, Northern District of California (San Francisco).

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