Independent Contractor v. Employee: How Uber Shows the Risk of Misclassification

Worker classification — that is, categorizing workers as independent contractors or employees — has become a contentious issue affecting more and more companies in the burgeoning “1099 economy.” Uber is the leading example of a company that has based its business model on classifying its entire workforce as independent contractors. This use of independent contractors, rather than employees, allows Uber to shift much of the costs of running its business to its workers.

However, in June the California Labor Commission ruled that Uber had misclassified one of its drivers as an independent contractor, rather than an employee. The Commission focused on the fact that drivers are an integral part of Uber’s business. This ruling applies only to the particular worker that brought the complaint, but Uber is concerned that the same logic could be applied more broadly by courts in California and other states.  In fact, yesterday a federal judge in San Francisco granted class-action status to drivers challenging Uber’s independent contractor classification. If those plaintiffs prevail, Uber will be forced to reimburse its drivers for all expenses they incurred while driving for Uber, which would be considerable. The Labor Commission ruled that the complaining driver in the case before it was entitled to over $4,000 in reimbursable expenses and interest. With over 160,000 active drivers in the United States, Uber could face $640 million in damages if its U.S. drivers were classified as employees, as well as ongoing costs that might make its model unsustainable.

Although Uber has become the leading example of the independent contractor vs. employee debate in California, this issue affects companies of all sizes and in all industries. On July 30, 2015, the California Court of Appeal published an opinion ruling that an employer had misclassified its employees as independent contractors. In Garcia v. Seacon Logix, Inc., the court ruled that truck drivers were employees, not independent contractors, primarily because the trucking company they worked for controlled the “manner and means of their work.”

It is often very difficult for businesses to predict how a court will classify their workers, and thus make staffing decisions, because courts use a long list of factors in weighing their decisions and give very little deference to the parties’ classification of the relationship. The Seacon Logix decision stated that the employer’s level of control over its workers was the primary factor in deciding the classification of a worker, but it also cited to a list of 8 additional factors that are relevant. The court ruled that the defendant employer had significant control over its workforce since it regulated the workers’ start and end time, their hours worked, and whether they could take time off. This seemed to be the deciding issue for the court, but the decision also discussed:

(1) the employer’s right to discharge at will;
(2) whether the work constituted a distinct occupation from the employer’s business;
(3) whether the workers worked under the employer’s direction or without supervision;
(4) whether skill was required to complete the work;
(5) if the employer provided the instrumentalities, tools, and place of work;
(6) whether payment was by time or by job;
(7) if the work is part of the employer’s regular business; and
(8) the parties’ belief regarding the nature of their relationship.

None of these factors are determinative on their own, and the totality of the circumstances is most important to the court.

The law generally recognizes individuals’ freedom to contract, and one would normally assume that if both parties agreed to an independent contractor relationship the agreement would be respected. But that is not the case in California. The parties’ belief regarding their employment relationship is the factor given the least weight by courts. Accordingly, employers cannot rely on an agreement with their workers accepting independent contractor status. Employers must give careful consideration to all of the factors listed above in their totality. Most importantly, employers must consider the level of control, rules, and regulations imposed on their workers. If, for example, a business owner intends to regulate his workers’ schedules, impose a dress code or uniform requirement, or intimately control the way workers perform their jobs, he or she should be very hesitant to classify workers as independent contractors, even if they sign an agreement with “Independent Contractor Agreement” in bold letters at the top. As the Uber decision shows, a misclassification of workers as independent contractors can result in significant consequences for businesses, such as reimbursement to workers of business expenses, wage and hour disputes, Affordable Care Act liability, workers’ compensation coverage issues, and IRS audits. California has also recently added to these risks by enacting California Labor Code § 226.8, which imposes a fine from $5,000 to $25,000 for willfully misclassifying a worker as an independent contractor.

Due to these risks, businesses should carefully consider whether they want to classify their workers as independent contractors. There is no danger in classifying a worker as an employee, as it is a favored status and there are no penalties for misclassifying in that direction. Accordingly, businesses should always seek legal counsel and err on the side of employee status if the circumstances are unclear.

Laura Payne

Laura Gladwin Payne is an associate attorney with Brown White & Osborn LLP.She is a former clerk for a federal judge, and she handles a wide variety of civil litigation.She has a special interest in employment and entertainment law.
Laura Payne