Equity holders of Uber should be breathing a sigh of relief the ‘ride-sharing’ app is not listed on Wall Street. Sure, you want an exit. But sometimes patience is not only a virtue, it’s sound business.
Exhibit A is Tuesday’s ruling from the California Labor Commission. Its ruling, from earlier this month, but filed Tuesday (after Uber appealed), said former Uber driver Barbara Berwick was an employee and not a contractor. Uber will have to pay her $4000 in businesses expenses for her stint with the company.
The text of the ruling is damning for Uber. “The defendants hold themselves out as nothing more than a neutral technological platform, designed simply to enable drivers and passengers to transact the business of transportation,” the commissioner wrote. “The reality, however, is that defendants are involved in every aspect of the operation.”
The pushback from Uber is the ruling is only applicable to one driver. True, but a one driver ruling just finished the foundation of the class-action lawsuit against Uber by drivers wanting to be considered employees instead of 1099 contractors.
Uber was quick on the trigger with a response:
“Reuters’ original headline was not accurate. The California Labor Commission’s ruling is non-binding and applies to a single driver,” a spokesperson said. “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. 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 ridesharing companies.”
Yes, drivers for Uber do have some flexibility and control. Except for rate setting. And collecting tips. Oh, and its rules about the type of cars a contractor can drive. Plus, they can be fired based off ratings on the app.
That’s awfully hands on in the driving portion of what Uber says is nothing more than a matchmaking platform for consumers looking for a ride. The ruling from CA Labor points out the heavy controls fit the bill of an employer, not a business that fills a market need with temporary contractors.
What it means for Uber going forward
If Uber is forced to treat its drivers as employees, the business expenses just went through the roof for the company. It would immediately have to pay social security and Medicare taxes on all of its employees.
People that have been self-employed or a 1099 contractor have a special relationship with the self-employment tax. You pay the full FICA rate, instead of the traditional split between worker and employer.
Say the ruling goes wide. Uber’s status as a ‘tech’ company is gone. It becomes a taxi service with a nice mobile app. Under the 1099 model, Uber gets to maximize revenue without having to concern itself with employee responsibilities.
Are there potential ways to slip the ruling? Sure. One is through an appeal. Uber has won before, and no reason to think it can’t again. It boils down to the ruling’s text being so damning.
Another route is to use the trucking argument. Owner-operators have been deemed independent contractors. Uber won’t like the hit it takes on revenue over paying drivers more, but it offers a path with case law on its side.
In 2012, a federal trial court tossed a lawsuit from a group of truck drivers who wanted to be considered employees. In Judge Esther Salas ruling, he analyzed six factors: the degree of the company’s control; the owner-operators’ opportunity for profit or loss; the owner-operators’ investment in equipment; whether the owner-operators possessed a special skill; the permanence of the working relationship between the company and the owner-operators; and whether the services rendered by the owner-operators were an integral part of the company’s business.
The court found four of the six made the owner-operators 1099 independent contractors:
The court held that the company’s setting a work schedule and requiring the owner-operators report to a given location at a given time was not the degree of control required to establish an employer-employee relationship. Additionally, the court found that the owner-operators exercised control over their work because they determined driving routes, the method of securing the load, and the maintenance, repair, financing, and insuring of their vehicles. The owner-operators also possessed an opportunity for profit and loss because they were paid on a per trip basis and had the ability to acquire additional trucks and employ drivers. The owner-operators also invested in their own equipment through the structure of the lease agreement. The court further held that the owner-operators satisfied the requirement of having a special skill because they possessed commercial drivers’ licenses.
Uber can cite the setting of a schedule with ease. It is a matchmaking app and drivers can work when they want to. The opportunity for profit or loss is there as is the driver’s investment in their car. Uber may want to back off the branding aspect of its driver car rules to align with safety standards instead.
Next is the permanence of driver as a part of Uber. Damn the company is lucky Lyft is hanging around. Competition and citing turnover could be a possible answer.
It can make a logical argument for four of the criteria the federal judge used. The issue at hand is getting the right judge and the company’s willingness to adopt a model similar to the trucking industry.
Does CA’s ruling strike a blow for the contractor economy? Not really. The rules are clear governing designating 1099 contractors.
Uber is pushing the limits of this designation, and if further rulings go against it, the company better have a Plan B. That impressive valuation with each funding round comes with increased scrutiny. Regulators are turning their eyes towards the company with increasing frequency. Drivers are finding out being 1099 can suck. And the court cases are stacking up.