Recent Uber Ruling Threatens “Sharing Economy” Business Model
LGC Staff
Fri July 3, 2015
7:48 PM UTC

By Patrick Klingborg

A California Labor Commissioner’s recent ruling that an Uber driver is an employee, not an independent contractor, represents a threat to the rapid rise of the “sharing economy” in which companies depend on the labor of workers classified as independent contractors.

Although completely separate from, and unrelated to, the ongoing O’Connor, et al. v. Uber Technologies, Inc. class action lawsuit currently pending in U.S. District Court for the Southern District of California, the Labor Commissioner’s ruling could foreshadow the reasoning that might underlie a future potential holding that Uber is misclassifying its drivers as independent contractors.

The Labor Commissioner’s ruling considered a former Uber driver’s claim that she was entitled to reimbursement of business expenses she incurred in using her car to transport Uber customers.  The complaint hinged on whether the Uber driver was an employee or independent contractor because, under California law, employees are entitled to reimbursement of business expenses while independent contractors are not. The Labor Commissioner held the driver was an employee because Uber was “involved in every aspect of the operation.”   Specifically, Uber vetted prospective drivers by requiring prospective drivers to disclose a variety of personal information; Uber controlled the tools the drivers used because Uber drivers’ cars must meet certain qualifications (such as being no more than ten years old); and Uber had the sole discretion to negotiate customer fees and fares.

Of course, whether Uber drivers are independent contractors or employees is the same question at issue in the O’Connor case, leading some to believe the Labor Commissioner’s ruling was a blow to Uber’s chances of prevailing in the unrelated O’Connor litigation.  In actuality, the Labor Commissioner’s ruling has no precedential value in U.S. District Court, or even in other Labor Commissioner rulings, for that matter. In fact, the Labor Commissioner considered this exact same question in 2012 in Alatrachqi v. Uber Technologies, Inc., and reached the opposite result in ruling the Uber driver in that case was an independent contractor.  As Labor Commissioner rulings apply only to the specific person who brings a claim, they have no binding effect beyond each individual claimant.

Regardless of whether the holding in the O’Connor case ultimately mirrors the outcome in the recent Uber Labor Commissioner case, the uncertainty over proper classification of workers represents a threat to the burgeoning “sharing economy” in which companies adopt a similar business model to Uber but for different services.  Many of the businesses that comprise the sharing economy classify their workers as independent contractors.  Depending on the level of the control the employer exercises over the worker, such a classification may be correct.   But given Uber’s recent legal issues, sharing economy businesses are sure to face increased scrutiny going forward, at the very least.

If sharing economy businesses are forced to reclassify their workers as employees, they stand to incur extra costs such as reimbursement to employees for businesses expenses and tax consequences. In turn, these extra expenses may be passed down to the consumer.  If the increase in price for sharing economy services proves to be too much for consumers to bear, sharing economy businesses may face significant adversity going forward.  Ultimately, the future of the sharing economy will depend on whether consumers determine any such increase in sharing economy prices is outweighed by the benefit these unique and convenient services provide.

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