Recent Rulings Provide Cautionary Reminders About Employee Vs. Independent Contractor Classification

Employers should use recent rulings in cases involving ridesharing companies Uber and Lyft as a reminder to periodically reassess whether their workers, partners, or others with whom they collaborate are properly classified as employees or independent contractors due to the potentially significant consequences associated with misclassification. New technologies and business models emphasize both the complexity and importance of this fundamental employment law determination.

Uber and Lyft are two separate, but similar, companies that provide “ride-sharing” services (akin to taxi services) to customers through eponymous mobile phone applications. In Cotter, et al., v. Lyft, Inc., and O’Connor, et al., v. Uber Technologies, Inc., two similar cases recently filed in U.S. District Court for the Northern District of California, the plaintiffs are groups of persons who earn income as drivers for Uber and Lyft.  The drivers are paid by Uber and Lyft to pick up customers, using the drivers’ personal automobiles, and drive the customers to their desired destination in exchange for a fare.  Uber and Lyft calculate customers’ fares using formulas that take into account the distance of the ride, duration of the ride, and customer demand for rides in the geographic region at the time of each ride.

Unlike with a taxi, Uber and Lyft customers must pay their fares electronically through a debit or credit card linked to the customers’ mobile phones through the Uber or Lyft mobile applications.  The fares are remitted electronically to Uber or Lyft directly, not to the drivers, and, in turn, Uber and Lyft pay the drivers for their services based, at least in part, on the fares the drivers generate. Both Uber and Lyft drivers are typically afforded significant flexibility in choosing how long and how frequently they work.

At the heart of the disputes in both the Uber and Lyft lawsuits is the claim by the drivers that Uber and Lyft improperly classify them as independent contractors when, instead, they should be classified as employees.  As the lawsuits illustrate, an employer’s misclassification of workers can result in a wide-range of potential legal issues.

For example, the drivers in both lawsuits claim their misclassification as independent contractors resulted in them being illegally required to pay for business expenses such as routine maintenance costs for their automobiles, fuel costs, and even the costs of the vehicles in the first place.  Additionally, the Uber and Lyft drivers claim they are not always paid at or above minimum wage, which is illegal if the drivers should be legally classified as employees, but permissible if the drivers are correctly classified as independent contractors.  Finally, Uber and Lyft drivers claim they are illegally denied itemized wage statements as a result of their alleged misclassification as independent contractors.

In addition to the above damage claims made by the plaintiffs in the Uber and Lyft cases, misclassification of a worker as an independent contractor can result in additional consequences such as the worker being denied certain benefits or being subject to different tax obligations.  Thus, proper classification is essential to prevent a variety of claims that workers may levy against their employers.

Recently, the judges in both cases denied Uber’s and Lyft’s separate motions for summary judgment in which the companies argued their drivers were independent contractors.  Essentially, the judges in both cases held there was enough evidence on either side that a reasonable jury could potentially find that either classification of the drivers was proper and that the cases should proceed toward trial.  For example, the judges felt the drivers had some traits of employees, in that the drivers receive specific instruction on how to perform their work, but other traits of independent contractors in that the drivers could work as little or as much as they liked.

As the Uber and Lyft cases demonstrate, proper classification of workers as employees or independent contractors is important for any employer in order to guard against potential exposure to litigation.  Proper classification of workers, however, can be a complex legal determination that depends on many guiding factors. Above all, a common theme in classifying workers is the degree of control the employer maintains and exercises over the worker. Generally, the more control an employer has over the method and manner of an employee’s work, the more likely the worker is an employee.  Nevertheless, as the denial of summary judgment in both the Uber and Lyft cases shows, some employment relationships are simply difficult to classify.

The recent rulings denying the Uber and Lyft motions for summary judgment carry two important lessons for employers. First, as the employer versus independent contractor distinction is complex, employers should periodically reassess whether workers, or others with whom the employers collaborate, are properly classified to guard against potential wage and labor code violations.  For example, a start-up business that initially begins referring certain tasks to a separate third party may eventually come to form a close working relationship with the third party, potentially converting a non-employment relationship into an independent contractor relationship and, ultimately, an employer-employee relationship.

Second, employers in novel industries or those that rely on innovative technologies (as with Uber and Lyft), should be sure to consider the effect their unique business models may have on the employee versus independent contractor determination.