Since its founding in 2009, Uber has gained both praise and notoriety for shaking up the taxi industry by allowing individuals who meet minimum requirements to provide an on-demand car service via the Uber mobile app.  In December 2014, there were 162,037 active Uber drivers in the United States alone.  In San Francisco, where the taxi industry reportedly grosses $140 million a year, Uber now generates approximately $500 million a year.  Investors have flocked to Uber, too, pouring $2.7 billion into the company, bringing Uber’s estimated value to a whopping $41 billion as of December 2014.  But this meteoric rise has been accompanied by legal challenges in many jurisdictions around the world.  In particular, Uber is having to defend itself against claims that it has misclassified its U.S. drivers as independent contractors rather than as employees.

Why companies favor independent contractors

A company with employees must pay a variety of federal employment taxes and similar state taxes.  A company pays none of these taxes for an independent contractor, and the contractor pays its own expenses of doing business.  Thus, Uber’s independent contractors pay expenses such as gas and vehicle maintenance as well as self-employment taxes, all of which reduce Uber’s costs of doing business.

The risk of misclassification

It is difficult to calculate the monetary exposure Uber would face if all of its drivers were deemed employees, but the recent $228 million settlement between FedEx and 2,300 of its drivers provides an apt comparison.  In that case, the federal appeals court determined that FedEx had misclassified its California drivers as independent contractors.  Notably, the decision said: “Labeling the drivers ‘independent contractors’ in FedEx’s Operating Agreement does not conclusively make them so.”

Uber’s recent experience in California and New York

On June 16, 2015, the California Labor Commission awarded one Uber driver $4,000 in back wages and interest to which she was entitled as an Uber employee.  In the words of the hearing officer:

“Defendants hold themselves out as nothing more than a neutral technological platform, designed simply to engage drivers and passengers to transact the business of transportation. The reality, however, is that defendants are involved in every aspect of the operation. Defendants vet prospective drivers, who must provide to defendants their personal banking and residence information, as well as their Social Security Number. Drivers cannot use defendants’ application unless they pass defendants’ background and DMV checks.”

The decision further notes that Uber controls the prices and cancellation fees charged to riders, the payments to drivers, and the app that enables the drivers to work, all of which describe an employment relationship.  In addition to this regulatory proceeding, Uber is defending a pending class action lawsuit in California in which the judge, on March 11, 2015, denied Uber’s Motion for Summary Judgment.  The plaintiffs there are trying to extend the class action to include all drivers nationwide.

Uber’s followers did not have to wait long to see how similar cases would fare in other states.  On July 14, 2015, in an interview with Bloomberg TV, the chairwoman of the New York City Taxi and Limousine Commission gave the opposite opinion of the California Labor Commission: “We have wholeheartedly supported driver flexibility as independent contractors when we allow them, much to the consternation of the industry, to drive for several bases…so a driver is not an Uber driver.”

Takeaways from the Uber experience

Uber will likely face additional regulatory enforcement proceedings, lawsuits brought by individual drivers, and class actions representing many drivers in a variety of jurisdictions, each with its own laws governing the distinction between employees and independent contractors.  Thus, the results will likely be mixed.

Retailers should follow Uber’s experience and learn from it.  Know the relevant law in the state(s) in which you operate.  Also know that numerous federal laws – including those enforced by the IRS – are implicated by improper classification of independent contractors.  The IRS allows a company to submit Form SS-8 for a ruling as to the proper characterization of a contractor/employee, which a company may find particularly worthwhile if it has many of one type of contractor/employee.  As always, seek guidance from your lawyer regarding compliance with state and federal employment laws.