Like virtually every other company that makes up the emerging “Gig Economy,” Uber relies on the services of a labor force that the company largely classifies as independent contractors rather than employees.  Uber describes its business as a technology company that provides the means to connect independent, professional drivers with passengers needing transportation.

According to two federal judges, however, that business model might not pass legal muster.

For the uninitiated, Uber provides a smart phone application to connect customers desiring a ride with Uber drivers.  Uber classifies those drivers as independent contractors.  As a result, the company is not required, among other things, to pay its California drivers overtime compensation, reimburse them for their operating expenses, or provide meal and rest breaks. 

Several Uber drivers filed a class action against the company, claiming they are employees as opposed to independent contractors.  The action is pending in the U.S. District Court for the Northern District of California.  Uber filed a motion for summary judgment that the plaintiffs are independent contractors as a matter of law.  But Judge Edward Chen denied the motion, and disagreed with Uber’s self-characterization of its business model.

First, Uber’s self-definition as a mere “technology company” focuses exclusively on the mechanics of its platform (i.e., the use of internet enabled smartphones and software applications) rather than on the substance of what Uber actually does (i.e., enable customers to book and receive rides). This is an unduly narrow frame. … Uber does not simply sell software; it sells rides. Uber is no more a “technology company” than  Yellow Cab is a “technology company” because it uses CB radios to dispatch taxi cabs, … If, however, the focus is on the substance of what the firm actually does (e.g., sells cab rides, lawn mowers, or sugar), it is clear that Uber is most certainly a transportation company, albeit a technologically sophisticated one.   

(Order, p. 10.)

Judge Chen also found that Uber’s revenues are entirely dependent on the transportation of passengers by its drivers rather than distribution of Uber’s smartphone application (which is free).  Based on these and other facts, Judge Chen found that Uber drivers perform a service for the company and, therefore, are “presumptive employees.”

Although both parties argued that the Court could answer the employee/independent contractor question as a matter of law, Judge Chen ruled that the determination of employee or independent contractor status is a mixed question of law and fact that must ultimately be resolved by a jury. 

Nevertheless, Judge Chen pointed out several factors that could demonstrate Uber’s right to control its drivers, which could lead to a determination that the drivers are actually employees.  Among those factors: Uber’s software can “constantly monitor” various aspects of its driver behavior, and Uber appears to significantly control the “manner and means” of its drivers’ transportation services, including dress of the drivers, volume and types of music that can play in the car, and procedures for how to approach a passenger waiting on the street.

Uber disputed that it exercises significant control over its drivers, and, as an example, it strongly argued that its drivers have the freedom to control their own schedules.  But the Court found this was not a determinative factor in finding an employment relationship. 

Around the same time Judge Chen issued his order, another Northern District court denied a similar motion for summary judgment filed by Lyft in an employment misclassification class action against that company.  The Uber and Lyft rulings (along with other recent rulings in misclassification actions) serve as a reminder that employers must exercise caution in classifying workers as independent contractors.  They also might signal pitfalls for the pioneering companies of the “Gig Economy”; though Judge Chen pointed out that the traditional test for employment “evolved under an economic model very different from the new ‘sharing economy’” and hinted that the legislature might consider passing new laws that would specifically apply to companies such as Uber and Lyft.