Uber and Lyft Face Scrutiny Over Work Classification

By: Megan J. Muoio, February 6, 2015

As ride-sharing services such as Uber and Lyft expand across the United States, many employment law scholars are carefully watching two cases in the United States District Court for the Northern District of California. Both cases, O’Connor v. Uber Technologies Inc. and Cotter v. Lyft Inc., are wage-and-hour class action lawsuits in which drivers have challenged the companies’ classification of them as independent contractors rather than employees. Although the class action plaintiffs have sought to represent all Uber and Lyft drivers nationwide, the judges in both cases have limited the suits to drivers operating within California.

The Uber case follows a recent 2014 win in federal court by FedEx delivery-truck drivers who had been misclassified as independent contractors by FedEx, even though they were required to wear FedEx uniforms, drive company vehicles, and adhere to FedEx’s appearance standards. In the Uber and Lyft cases, the drivers also claim that they are employees and that, as a result, they are entitled to a 20% gratuity now being taken by the companies. The drivers claim that they are subject to the companies’ control over their work and that the companies screen the drivers and set the rate for fares. The drivers have made motions for summary judgment in both cases and seek a determination by the federal court that they are employees of Uber and Lyft.

In contrast, Uber and Lyft have argued that they are simply “referral services” or “lead-generating services” for drivers, who then use their own cars and control all aspects of the service provided to the end-user customers. In court in January 2015, judges in both cases hearing arguments on the drivers’ motions for summary judgment expressed skepticism and some hostility to the companies’ arguments. United States District Judge Edward Chen, in the Uber case, argued that Uber “could not operate and exist without the drivers” and that Uber’s control over rates and surge pricing might indicate control sufficient to classify the drivers as employees. In the Lyft case, United States District Judge Vincent Chhabria pointed out that California’s labor laws were “woefully outdated” to handle the setup between Lyft and its drivers, but the fact that Lyft retains control of many aspects of the business – including the ability to terminate drivers who do not accept enough driving jobs – may mean that the drivers are employees.

Judge Chhabria noted that the California Supreme Court had not been asked to apply California law to this particular situation and considered certifying the issue to the California Supreme Court for determination. Nonetheless, a review of the analysis of the classification of independent contractors versus employees under the federal Fair Labor Standards Act (FLSA) may provide some guidance. Under the FLSA, the facts determining the classification falls under three categories: behavioral control, financial control, and the type of relationship between the business and the worker. Behavioral control factors consist of the types and degree of instruction from the company, the system used to evaluate the worker, and the training provided by the company. Financial control consists of the investment required by the worker, whether the worker is subject to the possibility of incurring a financial loss, whether the worker is free to seek out other business opportunities, and the method of payment by the company. Finally, the evaluation of relationship considers how the parties work together despite the fact that the worker’s contract may state that he is an independent contractor, whether and what kind of benefits are provided, how central the worker’s services are to the company, and the permanency of the relationship.

Employment law watchers are waiting to see whether Uber and Lyft’s business model is permissible for two reasons. First, Uber is the most highly valued U.S. technology startup with a highly anticipated IPO in 2015. Uber recently was valued at $40 billion after conducting a new $1.2 billion funding round. The ride-sharing business is a popular one: on February 3, 2015, Google announced that it would enter the ride-sharing business to compete with Uber (but will be using self-driving cars).

Second, the Uber and Lyft cases could have wide-ranging effects for many other newly developing businesses in the “sharing economy.” There are many startup businesses coming out of Silicon Valley that use a similar independent contractor model and these business have attracted billions of dollars in venture capital funding. For example, Washio (laundry pickup and delivery), BloomThat (flower delivery), and Shyp (package delivery) all utilize independent contractors to provide services to customers through an app. Whether these businesses’ control over their independent contractors rises to the level of an employee-employer relationship varies from business to business, but increased attention on Uber and Lyft has called into question this increasingly popular business model.

A decision on the summary judgment motions in the Uber and Lyft cases is expected shortly.


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