Employment Classification: California Drives Away Rideshare Giants and Threatens the Future of Independent Contractors

*Michael Blanchard

I. Introduction

Uber and other rideshare companies are making headlines as California seeks to bring an end to the classification of drivers as independent contractors.[1]  In a recently filed lawsuit, California Labor Commissioner, Lilia García-Brower, demands that rideshare companies reclassify drivers and is seeking millions of dollars in civil penalties, in addition to unpaid payroll and benefit taxes.[2]  The Commissioner argues that by continuing to improperly classify drivers as independent contractors, rideshare companies have not only avoided paying taxes and expenses, but also unfairly deprived their drivers of the right to basic employment benefits.[3]  

California recently enacted Assembly Bill 5, which sets the new standard for when a gig economy company can employ independent contractors.[4]  A gig worker is a temporary worker who is hired to complete a specific job or task.[5]  Under this new law, “California [gig] workers can only be [considered] independent contractors if the work they do is outside the usual course of a company’s business.”[6]  The new law also states that “workers must be [classified as] employees . . . if a company exerts control over how they perform their tasks, or if their work is part of a company’s regular business.”[7]  Uber and other rideshare giants maintain that they would not have to reclassify under the law’s new standards, reasoning that “they are not providing rides but rather [are] offering technology platforms” linking drivers to passengers.[8]  Uber and Lyft released public statements indicating they would shut down service in California—one of their largest consumer markets and home state—if compelled to reclassify workers.[9]  

On August 10, 2020, the Superior Court of San Francisco granted a preliminary injunction and ordered Uber and Lyft to comply with the reclassification.[10]  Both Uber and Lyft have filed appeals and will be able to continue to conduct business as usual while the matter is reviewed.[11]    Additionally, Uber and Lyft placed Proposition 22 on the November ballot, which seeks to create a new category for gig workers and exempt rideshare companies from Assembly Bill 5.[12]  In an attempt to address some of the State’s employment benefits concerns, the proposition also guarantees new protections for drivers, including expense reimbursement.[13]

II. Independent Contractor Classification and the Benefits it Provides to Employers

Rideshare companies have long avoided employment tax requirements, costly expenses, and legal liability issues by classifying their drivers as independent contractors rather than employees.[14]  Generally, a person is considered an independent contractor if “the [employer] has the right to control or direct only the result of the work and not what will be done and how it will be done.”[15]  The IRS devised a more fact specific inquiry that requires the evaluation of twenty factors to assess “whether [the company is] controlling the method, manner and means of the work.”[16]

“Unlike employees, independent contractors do not benefit from state workplace protections such as minimum wage, workers compensation, or . . . unemployment insurance[.]”[17]  Additionally, independent contractors are not reimbursed for expenses such as gas, maintenance, and vehicle depreciation.[18]  By classifying drivers as independent contractors, Uber and other rideshare companies have avoided payment of costly expenses, which allows them to offer their services at lower prices.[19]

Uber and other companies have also attempted to extend the use of the independent contractor classification to avoid liability when passengers are harmed.[20]  Over the years, there have been many reported cases where an Uber driver assaulted a passenger or was involved in a highspeed chase while working.[21]  Despite claiming they are not actual employees, third parties have successfully sued these rideshare giants under a theory of respondeat superior,[22] but are forced to show proof that the driver is an actual employee—a battle that does not come unchallenged.[23]  These significant cost-saving benefits have incentivized Uber and other rideshare companies to find loopholes—e.g., classifying drivers as independent contractors or labeling the company as a technology company.[24]

III. Future for Independent Contractors

The decision following the California employment classification dispute could have a major impact on other states as well as the overall rideshare industry.[25]  This topic has been a growing concern as many cities, private entities, and regulatory authorities have started to fight back against rideshare companies and their classification of employees as independent contractors.[26]  In 2019, the State of New Jersey attempted to collect over $650 million against Uber for unpaid employment taxes owed because of their misclassification of employees.[27]  Similar cases have developed in places like New York and Massachusetts, where local agencies have also sought to collect unpaid taxes.[28]

This dispute is particularly significant as it marks one of the first legislative actions taken against rideshare companies and has the potential to “upend the business models of companies that depend on armies of so-called independent contractors.”[29]  Uber operates its business model with lean margins, leaving little financial resources for large overhead costs such as taxi drivers or employment benefits.[30]  If rideshare companies are forced to comply with the reclassification under Assembly Bill 5, the service could cease to provide affordability, flexibility, and employment opportunity for many drivers.[31]  Additionally, this change would dramatically impact the transportation industry and limit the availability of cab-related services in more rural areas of the country.[32]  Given the high stakes and potential for detrimental effects on the overall rideshare industry, the developments from People v. Uber Technologies, Inc. will set the groundwork for future legislation, making it an important issue to watch.[33]

*Michael Blanchard is a second-year day student at the University of Baltimore School of Law, where he is a staff editor for Law Review and a member of the Honor Board. Michael is a law scholar for Professor Matthew Sipe’s civil procedure class, and is the Public Relations Chair for the Business and Tax Law Association. This summer, Michael interned for the Hon. Robert N. McDonald in the Maryland Court of Appeals and worked as a summer associate for Baker, Donelson, Bearman, Caldwell & Berkowitz P.C.

[1] See Sebastian Herrera & Tim Higgins, California Sues Uber, Lyft Saying They Misclassified Drivers as Independent Contractors, Wall St. J. (May 5, 2020, 4:10 PM), https://www.wsj.com/articles/california-to-sue-uber-lyft-saying-they-misclassified-drivers-as-independent-contractors-11588700626.

[2] Id. 

[3] Id.

[4] Id.; Assemb. B. 5, 2019–2020 Leg., Reg. Sess. (Cal. 2019) (enacted) (codified at Cal. Lab. Code §§ 2750.3, 3351 and Cal. Unemp. Ins. Code §§ 606.5, 621).

[5] See Adam Bergman, How California Assembly Bill 5 Affects the Gig Economy, Forbes (Jan. 10, 2020, 6:00 AM), https://www.forbes.com/sites/forbesfinancecouncil/2020/01/10/how-california-assembly-bill-5-affects-the-gig-economy/#54306ad47bf9.

[6] See Robert W. Wood, Uber & Lyft Ordered to Treat Drivers as Employees, Are Any Contractors Independent Now?, Forbes (Aug. 11, 2020, 9:53 AM), https://www.forbes.com/sites/robertwood/2020/08/11/uber–lyft-ordered-to-treat-drivers-as-employees-are-any-contractors-independent-now/#76ece96c5516.

[7] Id.

[8] Id.  

[9] See Preetika Rana, Lyft, Uber Get More Time as They Fight California Order, Wall St. J. (Aug. 20, 2020, 6:59 PM), https://www.wsj.com/articles/lyft-to-suspend-service-in-california-11597942614?mod=searchresults&page=1&pos=12.

[10] See People v. Uber Technologies, Inc., No. CGC-20-584402 (Cal. Super.Ct. Aug. 10, 2020) (order granting preliminary injunction).

[11] See Bobby Allyn, California Judge Orders Uber and Lyft to Consider All Drivers Employees, NPR (Aug. 10, 2020, 5:30 PM), https://www.npr.org/2020/08/10/901099643/california-judge-orders-uber-and-lyft-to-consider-all-drivers-employees.

[12] See Levi Sumagaysay, The Different Routes Uber and Lyft Could Take as They Fight California Law, MarketWatch, https://www.marketwatch.com/story/the-different-routes-uber-and-lyft-could-take-as-they-fight-california-law-11598645583 (Aug. 28, 2020, 4:42 PM).

[13] See Rana, supra. 

[14] See Erin Mitchell, Uber’s Loophole in the Regulatory System, 6 Hous. L. Rev. 75, 76–78, 85 (2015).

[15] See Independent Contractor Defined, IRS, https://www.irs.gov/businesses/small-businesses-self-employed/independent-contractor-defined (last updated Jan. 23, 2020).

[16] See Wood, supra.

[17] See Richard C. Auxier, Uber, Taxes, and the Question of Who’s an Employee in the Gig Economy, Tax Pol’y Ctr. (Aug. 20, 2020), https://www.taxpolicycenter.org/taxvox/uber-taxes-and-question-whos-employee-gig-economy.

[18] See Mitchell, supra.

[19] See Rana, supra.

[20] See Mitchell, supra.

[21] Id. 

[22] The doctrine holding an employer or principal liable for the employee’s or agent’s wrongful acts committed within the scope of the employment.  Respondeat Superior, Black’s Law Dictionary (11th ed. 2019).

[23] See Wood, supra.

[24] See Mitchell, supra at 79.   

[25] See Lauren Feiner, Judge Grants Preliminary Injunction Requiring Uber and Lyft to Stop Classifying Drivers as Contractors, CNBC (Aug. 10, 2020, 4:17 PM), https://www.cnbc.com/2020/08/10/judge-grants-preliminary-injunction-requiring-uber-and-lyft-to-stop-classifying-drivers-as-contractors.html.

[26] See Mitchell, supra at 76.  

[27] See Chris Opfer, Uber Hit with $650 Million Employment Tax Bill in New Jersey (3), Bloomberg L. (Nov. 14, 2019, 4:31 PM), https://news.bloomberglaw.com/daily-labor-report/uber-hit-with-650-million-employment-tax-bill-in-new-jersey.

[28] See id.

[29] See Josh Eidelson, California Governor Signs Labor Law, Setting Up Bitter Gig Economy Fight, Bloomberg L. (Sept. 18, 2019, 2:05 PM), https://www.bloomberglaw.com/document/X4DP0ETO000000?bna_news_filter=daily-labor-report&jcsearch=BNA%25200000016d4585d1b4a7fd47bf2b2c0000#jcite.

[30] See Armin Laidre, The Business Model of Uber, iPlanner.Net (Apr. 15, 2015), https://www.iplanner.net/business-financial/online/how-to-articles.aspx?article_id=business-model-uber.

[31] See Rana, supra. 

[32] See id. 

[33] See Feiner, supra. 

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