How Ruling That Drivers Are Employees Upends Uber Business Model

By | June 19, 2015

If you’re a freelance writer who occasionally sells articles to a website, are you actually an employee? If you live in California, I think the answer might be — yes?

The California Labor commissioner has ruled that Uber drivers are employees, not contractor, because they can’t be Uber drivers without the application, because the company pulls DMV records and does background checks, and because the company specifies various rules about how the work may be performed and cuts off access to the application if you get persistently low ratings or are inactive for 180 days (presumably since they no longer have good data on your driving ability).

On the face of it, this ruling seems ludicrous. Raise your hand if you’ve ever had an employer who said: “Hey, as long as you don’t actively alienate the customers, you can just show up and work whenever you feel like. No need to let me know when you’re coming, just show up and I’ll pay you for any work you do. Just put in a couple of hours every six months, m’kay?” Yeah, I never had that job either, and neither did anyone else who wasn’t blackmailing the boss or working for a family member.

Not even freelance writers or contract columnists have this job. They have to turn in an article of a specified length, usually on a specified topic and almost always on a specified deadline, and they get paid under terms specified by the outlet. You have to follow ethics rules about how you may get the information you use, and style rules about how you may write it up. Once you’ve submitted a draft, your editor will probably come back to you with requests for changes. If you violate the publisher’s rules or your work gets too many complaints or fails to draw traffic, well … farewell, writer. We hardly knew ye.

If you look at the IRS guidelines for determining whether someone is an employee or an independent contractor, Uber’s model clearly tilts toward concluding “contractor.” So why does California’s Labor commissioner say an Uber driver is an employee, while a freelance writer is presumably still a contractor (at least for now)? My colleague Noah Feldman explores the issue, and it seems the ultimate answer is that the government relied heavily on the presumption in favor of finding that someone is an employee. I think this means that in cases where companies exercise some control over how the work is done, the commissioner would rather that people be employees than contractors, so they are, unless a court overrules the finding.

As numerous articles have already pointed out, this has big implications for Uber’s business model. But most of those articles have focused on things like minimum hourly wages, health benefits and payroll taxes — perhaps because these are the things that loom large in the minds of writers who have spent some time freelancing. However, Warren Meyer of Coyoteblog, who has a lot of experience doing business in California, points out that health benefits are, in fact, just the tip of the iceberg. The health benefits issue is actually pretty easy to engineer: Just program the software to cut people off after they work 25 or 28 hours in a week, which will be too bad for the Uber drivers, but which will free the company from having to offer health benefits, or pay overtime.

It’s the other stuff that’s a killer:

* Minimum wage: Do drivers get paid for all time spent driving, or only time spent ferrying passengers? If Uber has to pay for standby time, it might go out of business, or at least it would have to control its drivers a lot more to maximize their productivity: schedule them, tell them where to go, and so forth. This would pretty much ruin the appeal for drivers. Also, which minimum wage applies if you live in LA but pick up passengers today in Orange County?

* In California, according to Meyer, employers have an affirmative duty to make employees take mandated breaks after a certain number of hours — not just checking out of the system, but having procedures to document that they are actually taking a break.

* OSHA: Is Uber now responsible for making sure your work conditions are safe? How can they do this with your personal vehicle?

* As Meyer says: “Every employee is essentially his or her own manager. Does that now make Uber subject to ensuring every driver has all state-mandated manager training, such as sexual harassment training?”

* Liability: Employers are often liable for the actions of their employees, even if those employees are violating company policy.

* Paid sick leave: It’s about to become mandatory in California. How is that going to work with people working a variable number of at-will hours?

* Not just payroll taxes, but disability, workers’ comp and so forth. These programs are not only expensive, but also often “experience rated,” so if an employee hurts himself while he’s driving for you and files a workers’ comp claim, your premiums go up. Then you have to develop company policies to forbid drivers from doing whatever he was doing when he got hurt, which the drivers probably aren’t going to like very much.

* I quote Meyer again: “Unemployment could be real nightmare. Can drivers choose to drive for a while, then take unemployment for a while, maybe while tourist season in San Francisco is slow, then go back to driving? You think that can’t happen? A number of my seasonal employees work in the summer, then take unemployment all winter despite having no intention of trying to find work in the winter. I pay 7% of wages in California as unemployment taxes and would pay more except that scale is capped and I can’t get in a worse category than my current F-.” I assume this would be harder for Uber drivers, since the service doesn’t actually shut down in the off season, but how much harder?

* And most important, of course: Where do you put all the mandatory posters that have to be placed where employees can see them?

Uber has to worry about not just the expense of complying with all these mandates, but also the expense of documenting that it has complied with these mandates — which will mean more paperwork and hassle for Uber’s HR staff and for the drivers themselves. The effect would be to introduce a substantial wedge between what Uber spends to keep a driver on the road and what drivers actually get in their checks. How many people will still be driving when their work starts to be micromanaged and their checks are docked to pay for all the new requirements?

In other words, the possibilities for Uber drivers are probably not “status quo” or “status quo plus paid sick leave”; the possibilities are probably “status quo” or “figure out what to do next because Uber just went out of business.” Since economists generally assume that whatever that is, it’s a less attractive option than driving for Uber, that’s not a happy answer for the driver.

And in fact, these are exactly the complaints we are hearing from freelance writers as more places rely more heavily on staff, because with the economics of the internet, it make makes more sense to manage a small number of staffers than a large number of freelancers. The staffers are happy, because they’re working. The freelancers are miserable, however, because here the new version of our old “gig economy” does not support that many people; instead a small number of people get a staff job where they are forced to be much more productive than anyone was 20 years ago, while a large number of people can’t get paid anything close to what they need to survive, and eventually have to exit journalism for something that will pay their bills.

I’m sure that the person who sued is happy with this outcome, although nothing is truly settled until a court reviews the case. Presumably, the California labor commissioner is happy. And I’m sure that the owners of cab companies aren’t shedding any tears. But for the drivers, investors and customers of Uber, this “employee” label looks like a bad fit and a losing proposition all around.

Topics California Workers' Compensation Personal Auto Contractors

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Latest Comments

  • July 19, 2015 at 3:50 pm
    John says:
    Not sure what IRS rules you're reading but base on the IRS, drivers SHOULD BE CONSIDERED EMPLOYEES. Common Law Rules Facts that provide evidence of the degree of control and i... read more
  • June 22, 2015 at 9:29 am
    insurance_guy says:
    In a few short worlds, you summarized the problem very well.
  • June 19, 2015 at 5:54 pm
    Will says:
    I think you are missing the bigger issue. Uber claims to be just an app that connects people. However, it determines price. It determines who can drive and it also raises pric... read more

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