The more things change, the more they stay the same. As our “on-demand” society continues to develop and services are offered in ever new and more convenient ways, businesses must remain mindful of the traditional factors that determine whether the individual providing those services is an employee or an independent contractor. Rulings from two California federal judges last week involving innovative ride-sharing competitors Uber and Lyft illustrate this point.
Uber and Lyft are built upon very similar business models: a customer requests a ride using either a Lyft or Uber app on his smartphone, the customer is picked up by an Uber or Lyft driver and taken to his destination, the customer's credit card is charged, and the customer can rate the driver on his smartphone. Uber and Lyft both classify their drivers as independent contractors.
In two separate class action lawsuits pending in California federal court, Uber and Lyft drivers have sued the companies, arguing that they are actually employees and not independent contractors under California law and are being denied the benefits and protections that an employment relationship provides ( i.e., minimum wage, overtime, tax withholding, unemployment benefits, expense reimbursement, etc.). If the drivers succeed, these cases could threaten Uber’s and Lyft’s business models, which are structured around their drivers being independent contractors.
Uber and Lyft both filed motions for summary judgment on the ground that their drivers are properly classified as independent contractors. Last week, those motions were denied, clearing the way for juries in the respective cases to determine whether the drivers are independent contractors or employees.
While Uber’s and Lyft’s business models are relatively new concepts, the California courts still applied the traditional, multi-part common law test used in most states—including Tennessee, Alabama, Mississippi, and North Carolina, with some variations—for determining whether an individual is an employee or an independent contractor. This multi-part test includes analyzing the following factors:
- whether there’s a right to control how the worker does his job;
- whether a worker has set hours or can work whenever he or she wants;
- how the worker is paid i.e., by the hour (which points toward employment) vs. by the job (which points toward an independent contractor relationship);
- whether the business provides the tools to perform the job;
- whether a written agreement exists classifying the worker as an independent contractor or employee;
- the permanency of the relationship, with an indefinite term pointing toward employment and a defined term pointing toward an independent contractor arrangement;
- whether the work requires a special skill; and
- whether the services rendered are an integral part of the employer’s business.
Both federal judges questioned whether this traditional test was past its prime, especially when compared to Uber’s and Lyft’s business models. “As should now be clear, the jury in this case will be handed a square peg and asked to choose between two round holes,” District Court Judge Vince Chhabria concluded in the Lyft decision. “The test the California courts have developed over the 20th Century for classifying workers isn’t very helpful in addressing this 21st Century problem.”
When analyzing the two decisions, the judges considered several factors that pointed both ways on whether the drivers were employees or independent contractors. As with most employee or independent contractor classification questions, the principal issue is whether the business has the right to control the individual’s manner and means for accomplishing the job. If the right to control exists, then this points toward an employment relationship.
The Court in the Lyft decision found that this factor “tends to cut” toward a finding that the drivers are employees. While the driver decides when and how often he or she wants to work, once a ride request is accepted, Lyft exerted control over how the drivers performed their service. For example, Lyft published ”Rules of the Road” and FAQs that instructed drivers not to talk on the phone with a passenger present, not to have anyone else in the car besides the passenger(s), not to request tips, not to smoke or permit the vehicle to smell like smoke, to wash and vacuum the vehicle weekly, to greet passengers with a fist bump and a smile, to ask passengers their music preference, to offer passengers a cell phone charger, and to use the route chosen by the GPS system if the passenger does not have a preference. While Lyft argued these were merely suggestions with no ramifications for noncompliance, the Court disagreed because Lyft reserved the right to penalize or even terminate drivers who did not comply with the “Rules of the Road” as well as the right to terminate drivers “for any or no reason.”
Similarly, in the Uber case, the Court held that it was a disputed issue of fact whether Uber had the right to control how its drivers performed their job. It was disputed whether Uber could fire the drivers without notice or cause and whether Uber exerted control over how many rides its drivers chose to accept. Similar to Lyft, the plaintiffs in Uber argued Uber imposed restrictions on how they do their job by requiring its drivers to dress professionally, text the customer 1–2 minutes from the pickup location, have the radio on “soft jazz or NPR,” and open the door for clients. Further, Uber monitored their drivers’ performance by requesting comments and stars from customers to rate their drivers, reserving the right to terminate or discipline them for nonperformance or a substandard rating.
Other factors pointing toward an employment relationship in both of the decisions included:
- Lyft and Uber drivers perform a task—driving—that is “central, not tangential” to the ride-sharing companies’ businesses. This is in contrast to a prototypical independent contractor scenario when an individual is hired to perform a special and defined task that a company’s employees do not typically perform.
- The drivers require no special skills.
- Uber issued smartphones to its drivers. Providing tools to someone points toward an employment relationship.
On the other hand, other secondary factors pointing toward an independent contractor relationship in both of the decisions included:
- Lyft and Uber drivers can work as little or as much as they want, and can schedule their driving around their other activities.
- The drivers could reject rides if they want.
- The drivers and the companies believed they were entering into an independent contractor relationship based on the language in written documents.
- The drivers provide their own cars.
- The drivers were paid based on the job, not the hour.
Although ultimately the juries will decide whether Uber or Lyft drivers are independent contractors or employees, all employers can learn from Uber and Lyft when running their businesses to avoid similar misclassification lawsuits by applying the traditional common law factors listed above—no matter how innovative the business model is (check your governing state law for any variations). Until courts or legislatures begin to modify this traditional test, these rules still apply in our increasingly “on-demand” society.