Will Uber Employee Status Ruling in California Impact Its Business Model?

A California Labor Commission ruling in June that an Uber driver is an employee and not a contractor opens the door to more scrutiny over the rideshare giant’s business model, but that was just the proverbial tip of the iceberg in a series of challenges that didn’t go the right way in the last few months for the rideshare provider.

In early September U.S. District Judge Edward Chen in San Francisco ruled California drivers could sue as a group on the question of whether they are employees or contractors, and over their demand for payment of tips that were not passed on to them.

The judge ruled Uber drivers are entitled to class action status in litigation over whether they are independent contractors or employees. Three drivers sued Uber in a federal court in San Francisco, contending they are employees and entitled to reimbursement for expenses, including gas and vehicle maintenance. The drivers currently pay those costs themselves. Drivers’ attorneys must submit more evidence to sue as a group for reimbursement of other expenses.

The Labor Commission’s ruling in June only pertains to one particular case, in which the ruling was on an appeal by Uber of a labor commissioner’s award of about $4,000 in expenses to San Francisco-based driver Barbara Ann Berwick, who filed her claim in September. She worked as an Uber driver for just over two months last year.

“The California Labor Commissioner’s decisions in a Berwick wage claim applies to the claimant, that employer and the facts presented in that particular case,” DIR spokeswoman Erika Monterroza said. “The Labor Commissioner’s evaluation of whether someone is an independent contractor or an employee is done case-by-case based on the facts before her.”

This case is similar to other ongoing employee classification cases. In another case earlier in June, Uber lost a bid to force arbitration in a federal lawsuit brought in San Francisco by its drivers. Earlier this year, the same U.S. District Court rejected Uber’s bid to classify its drivers as independent contractors, saying a jury would rule on their status.

In Florida, a state agency ruled earlier this year that Uber drivers are employees.

In New York, taxi-enforcement agents seized almost 500 Uber cars for illegal street pickups, over half of all its seizures for illegal-pickup violations, the city’s Taxi and Limousine Commission said.

In a response to the media reports out in the Labor Commissioner matter, Uber emphasized that the ruling does not apply to all drivers, only one, and that commission’s ruling is non-binding.

“Indeed it is contrary to a previous ruling by the same commission, which concluded in 2012 that the driver ‘performed services as an independent contractor, and not as a bona fide employee. Five other states have also come to the same conclusion,” Uber stated in an email response to a request for comment. “It’s important to remember that the number one reason drivers choose to use Uber is because they have complete flexibility and control. The majority of them can and do choose to earn their living from multiple sources, including other ride sharing companies.”

Harry Campbell, a Newport Beach, Calif., blogger for Forbes who goes by the handle “The Rideshare Guy,” said many of the followers of his blog and his website dedicated to ridesharing do not want to be considered Uber employees.

But they also don’t like the current model in place, he said.

“It shows the current model is not clear cut,” Campbell said.

As it stands now Uber does have some control over when a driver works. Drivers must accept 90 percent of ride requests, so they must keep themselves available for rides anytime their app is on and they must accept all rides, even short rides in which a driver earns little to nothing, Campbell said.

“Uber is kind of getting the best of both worlds,” he said. “They’re able to expect some of that employee control, but they’re not having to pay any of the costs.”

On what’s considered a minimum fare ride, which is $4, a California driver only nets $2.40 after Uber takes its $1 safety fee and 20 percent cut.

It’s difficult to earn money on these short rides, and it has become more problematic for Uber drivers as the service has gained popularity and drivers are starting to see of these short ride requests, he said.

As for the California decision, it may only represent one driver, but Campbell believes it could “speak to the ongoing lawsuits.”

“I think it holds more importance than this one driver,” he said of the commission’s decision.

A recent study from consumer finance site NerdWallet shows Uber drivers in six major U.S. cities would receive paid holidays and healthcare benefits worth an average of $5,500 a year, plus thousands of dollars more in mileage reimbursement, if the San Francisco-based firm provided them with the same benefits as its full-time employees.

The NerdWallet study outlined the benefits costs for those employees in paid holidays, health insurance, mileage reimbursement and auto insurance.

Based on Uber’s stated average hourly wage for full-time drivers, the change in employment status adds up to $1,264.32 for nine paid holidays each year. Health insurance costs vary by area, but in Los Angeles it’s $2,859 per year, while in New York it’s $3,585 per year, according to NerdWallet.

To calculate estimated mileage reimbursement the study uses driving totals from Berwick in the Labor Commission matter, which if extrapolated to full year would add up to 38,808 miles. An employee driving those miles would get $22,315 in reimbursement.

Auto insurance rates also vary by locale, but in Los Angeles it’s $1,175.61 and in New York it’s $1,614.71, the study shows.

Aside from the implications of the class-action suit, should the Labor Commissioner’s decision be upheld, some believe more rideshare drivers could be motivated to seek status as full-time employees.

Jeffrey Chu, the author of the NerdWallet study, believes the figures in the study are enough to entice some drivers to consider upping their rideshare driving each week.

“If Uber provided full-time benefits, that would motivate more drivers to become full-time,” Chu said.

Uber has argued that many rideshare drivers don’t want to be full-time, because they drive to augment their existing income and they don’t want to give up their flexibility and independence.

According to a poll by Uber of its own drivers: 85 percent of respondents cited more flexibility in their schedule and balance their work with life and family as a major reason to work with Uber; 50 percent of U.S. Uber driver-partners drive on average fewer than 10 hours per week; and 65 percent of driver-partners changed the number of hours they worked by more than 25 percent from one week to the next.

Linda T. Pierce, an attorney and area executive vice president with global brokerage Arthur J. Gallagher in Glendale, Calif., views workers’ comp as a major consideration for Uber going forward if the Berwick decision is upheld and other drivers seek the same status.

Pierce believes workers’ comp judges overseeing disputes involving Uber drivers could use the Labor Commissioner’s ruling as guidance.

“It would likely be a test a workers’ comp judge would use,” Pierce said. “I think that’s a real possibility.”

The Berwick case fits an existing mold in which for years people have been classified as an independent contractor and have brought a case to get workers’ comp benefits, unemployment benefits or disability benefits.

“There’s all sorts of different agencies that are pitfalls for California entities that use independent contractors,” Pierce said.

As soon as enough Uber drivers are hurt on the job and they begin seeking workers’ comp benefits, that’s when trouble may arise between Uber and its insurer, she added.

“If they get claims put in, they run the risk of being audited by their carrier and being assessed a huge premium,” Pierce said, adding that there’s also danger the carrier would just rescind the policy.

Reuters contributed to this report.