The Increasing Tension Between the Sharing Economy and Worker’s Rights: Law in an “Uberized” Economy

 

Screen Shot 2015-08-03 at 04.18.30.pngAfter the most recent round of funding, the company behind the ride-sharing app, Uber, is now valued at over $50 billion, beating Facebook in the process to set a new valuation record for private, venture-backed startups.[1] While this news illustrates the strength of and the potential behind the sharing economy, the valuation also comes as a bit of a surprise given the number of legal battles that Uber is currently embroiled in around the globe.

For what it is worth, an unfinished section of my draft PhD thesis touches upon some of these legal battles so for the sake of soliciting some comments and possibly crowdsourcing the editing process, I am throwing out a tiny chunk of my unpublished draft here for your review.

Apologies in advance!

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Circumventing the Law with Independent Contractors

Former US Labor Secretary, Robert Reich, recently noted that “[t]he rise of ‘independent contractors’ is the most significant legal trend in the American workforce – contributing directly to low pay, irregular hours, and job insecurity.”[2] He added the following explanation for his remark:

“This is the logical culmination of a process that began thirty years ago when corporations began turning over full-time jobs to temporary workers, independent contractors, free-lancers, and consultants. It was a way to shift risks and uncertainties onto the workers – work that might entail more hours than planned for, or was more stressful than expected. And a way to circumvent labor laws that set minimal standards for wages, hours, and working conditions. And that enabled employees to join together to bargain for better pay and benefits.”[3]

The crux of his argument lies in the fact that independent contractors, free-lancers, and other temporary workers provide businesses not only with flexibility, but also with ways to circumvent various labor laws. This begs the question, what is the point of having minimum wage laws and workplace safety regulations when there are legal mechanisms that allow businesses to circumvent them?

To briefly explain, independent contractors often do not get benefits such as “Social Security, a 40-hour workweek with time-and-a-half for overtime, worker health and safety, worker’s compensation if injured on the job, family and medical leave, minimum wage, pension protection, unemployment insurance, protection against racial or gender discrimination, and the right to bargain collectively.”[4] While some businesses have attempted to persuade their workers that being an independent contractor offers them flexibility and autonomy, many contractors have a hard time swallowing the fact that as contractors, they lack many of the employment protections that they would otherwise be entitled to: “[L]abor activists and others have said such roles – with people working as freelancers and having little certainty over their wages and job status – are simply a way for companies like Uber to minimize costs, even as they maintain considerable control over drivers’ workplace behavior.”[5] Distinguishing independent contractors from employees is a particularly sensitive issue for businesses in the sharing economy as their business model relies heavily on contractors and temporary workers. As the sharing economy continues to grow, we are seeing more and more friction between sharing and the law (i.e. not only limited to ride shares, but music shares and other P2P platforms), which will be described below.

Leaving aside the legal issue of distinguishing employees from independent contractors for a brief moment, consider the high demand for these services that rely on the flexibility of their workers: Uber, for example, is a collective public response for addressing the inadequacies of the public transportation system and traditional taxis that are often regulated by the government: “[D]isruptors [like Uber] challenge the way these powerful and lucrative businesses have operated for a very long time”[6] by offering the consumers an arguably better alternative (or at the very least, another option to complement the existing system). Simply put, services like Uber offer a great benefit to the general public. While this alone does not justify the exploitation of workers in anyway, it is worth noting the benefits that the service does provide.

Unlike the consumers, however, the legislators appear to be more apprehensive of this emerging trend, opting instead to restrain companies like Uber that compete with the taxi industry.[7] The government’s key argument is based on the safety and protection of the passengers and while their intention is good, their execution – by regulating these innovative business models as if they are traditional for-hire transportation vehicles – is uninspiring and potentially over-restrictive. Another key stakeholder in this dilemma are the drivers that work for the Ubers and Lyfts of the world who also have a vested interest in this fight as they want to be paid adequately and protected as an employee. If the government was to give into the drivers’ demands, thus improving the protections afforded to them, the collateral damage for doing so could be the dismantling of the sharing economy.

Regardless of whether one supports the government’s view, Uber’s view, or the drivers’ view, it is clear to see that each of the views have their merits and flaws. What it comes down to is that the issue of regulating the shared economy is about appropriately balancing governmental regulation, innovation and technology, worker empowerment and labor protection all mashed into one big conflagration with each party believing that they are in the right. The problem is that this fire is spreading: “Around the world, cities have grappled with the incursion of Uber and its competitors. There have been lawsuits in San Francisco and bans on the app across Spain, roadway-blocking driver protests in London and vehicles overturned in Paris.”[8] So what are we to do?

Uber Battles in California

Before we entrench ourselves in believing the correctness of one particular view over the other, we must first understand some of the facts. Uber’s legal plight, especially in its “home state” of California, illustrates their general struggle, which can be summarized with two legal questions: 1) Is Uber a “for-hire” transportation company or merely a technology company that offers an innovative app; and 2) is the aforementioned question of whether Uber drivers ought to be categorized as employees or independent contractors. Uber’s upward trajectory depends on how the courts will answer these two questions. With regards to the first question, in July of 2015, Administrative Law Judge Robert Mason of the California Public Utilities Commission answered that Uber is more than just a technology company and in ruling so, decided to fine Uber $7.3 million and ordered their operations to be suspended in California on the basis that Uber, as a for-hire transportation service failed to comply with state laws “designed to ensure that drivers are doling out rides fairly to all passengers.”[9] In other words, California Public Utilities Commission categorized Uber, not just as a tech company, but as a company that offers transportation services. Accordingly, the Utilities Commission deemed that Uber must obey and comply with the various laws regulating for-hire transpiration services if it wishes to continue its operations in California.

With regards to the second question of whether Uber drivers ought to be classified as employees or independent contractors, the California Labor Commission recently hinted that Uber drivers ought to be classified as employees and not as independent contractors.[10] In Uber v. Berwick, the Labor Commission of the State of the California awarded Barbara Berwick, a former Uber driver, compensation for 470.70 hours of work driving for Uber totalling $4,512.20.[11] The relevant law at the center of the case was California Labor Code §2802, which requires an employer to indemnify or reimburse an employee for necessary expenses in order for the employee to discharge his or her duties, including reimbursements for toll charges and taxes incurred while discharging a service for the employer. Thus, Berwick’s claim – that Uber should reimburse her for the costs she incurred as an Uber driver (plus interests) – hinged on the assumption that she was actually an Uber employee and not an independent contractor.

During the proceedings before the Labor Commission, Uber insisted that Berwick was merely an “independent contractor, and, therefore, she was not entitled to recover any claimed wages or to be reimbursed for her expenses.”[12] In determining the question of “employer” versus “independent contractor,” the Labor Commission relied on the precedent established by the California Supreme Court in S.G. Borello & Sons, Inc. v. Department of Industrial Relations, which created a list of various factors that the courts ought to consider in order to determine the nature of the employment relationship, including but not limited to factors such as the length of time for which the service was provided, method of payment, and whether the work was done under the direction of the principal or by a specialist without supervision.[13] While multiple factors must be taken into account, one factor has received more attention above others in recent history, which is the question of whether the employer exerted or had the right to exercise control over the worker. This attention on the sole factor of control, however, is somewScreen Shot 2015-08-03 at 04.17.21.pnghat misguided as the US Department of Labor admonished in its recent statement: “[A]lthough the common law control test was the prevalent test for determining whether an employment relationship existed at the time that the FLSA [Fair Labor Standard Act] was enacted, Congress rejected the common law control test in drafting the FLSA.” [14] Adhering to this standard, the California Court of Appeals in Yellow Cab Cooperative v. Workers Compensation Appeals Board – a case similar to Berwick – that was also cited by the Labor Commission in Berwick, held that workers that solicited potential clients on behalf of a delivery service ought to be classified as employees even though there was no actual control: The Court in Yellow Cab Cooperative argued that the solicitors must be considered as employees even in the “absence of control over the details,” because “an employee employer relationship will be found if the [Defendants] retain pervasive control over the operation as a whole, the worker’s duties are an integral part of the operation, and the nature of the work makes detailed control unnecessary.”[15]

Fighting an uphill battle in light of these precedents, Uber’s Product Manager Brian Tolkin reiterated during the Berwick pleading that Uber is merely “a technological platform, a smart phone application that private vehicles drivers (‘Transporation Providers’) and passengers use to facilitate private transactions.”[16] Tolin continued that Uber also does not “exert any control over the hours [their drivers] worked” nor are there “minimum number or required trips” for the drivers.[17] The Law Commission did not find these arguments persuasive, citing to Borello that it is “not necessary that a principal exercise complete control over a worker’s activities in order for that worker to be an employee.”[18]

In addition, the Labor Commission was quick to dismiss Uber’s claim that they are nothing more than a “neutral technological platform, designed simply to enable drivers and passengers to transact the business of transportation,” by citing to the fact that Uber “vet[s] prospective drivers,” “controls the tools the drivers use by requiring that the driver’s register their vehicle with Uber and pass background checks,” and so forth.[19] Taking into account these multiple factors, the Law Commission declared that Barbara Berwick was indeed an employee of Uber and thus should be reimbursed for expenses (along with interests) in accordance with California Labor Code §2802.

Broader Implications & Concerns

It is worth mentioning here that the Labor Commission’s ruling on Berwick, unlike a court decision, cannot be used as a precedent because the ruling by the Commission applies only to the parties involved in the case. This non-binding nature of the Commission’s rulings can be illustrated by juxtaposing the Berwick case to an earlier case by the same Commission in Alatraqchi v. Uber Technologies, which was decided in 2012.[20] In Alatraqchi, the same California Labor Commission – albeit with a different hearing officer – determined that Uber was indeed a technology company, and that their drivers were independent contractors based on various factors, including, but not limited to the fact that the drivers can set their own working hours, the drivers did not have their work supervised by Uber, and that the drivers were not paid until they submitted their invoice to Uber. Again, Labor Commission cases do not set a binding precedent, but it is interesting nevertheless to see how two hearing officers working for the same institution can reach almost antithetical conclusions based on very similar circumstances only three years apart.[21]

What is even more concerning is the fact that Berwick and Alatraqchi are  examples of how not only the California legislatures, but even the judiciary, appear to be poorly-equipped to handle and adjudicate “innovative” changes taking place (i.e. the emergence of the sharing economy and the collaborative consumption movement). While the US Department of Labor has attempted to standardize and clarify its stance on the employee/independent contractor distinction, even as far as going to state that “most workers are employees under the FLSA’s broad definitions,”[22] there is still plenty of lingering confusion. Part of the problem has to do with the vagueness of the multi-factorial ‘economic realities’ test, which focuses on whether the worker is economically dependent on the employer or in business for him or herself…”[23] While the US Department of Labor’s statement might provide some guidance, it remains uncertain whether this approach will actually reduce the instances of businesses wrongly categorizing employees as independent contractors or what kind of an impact it will have on the sharing economy as a whole.

Labor Law & the Sharing Economy: The Conundrum of Regulating Innovation

To reiterate, while labor laws play a very important role in our society, the attempt to paint Uber in the same category as a traditional for-hire transportation service can potentially erode the unique benefits that Uber offers to the general public in the first place, and there in lies our conflict: “The history of the car shows how a new technology fundamentally changes the way people do things and how policymakers and regulators are faced with the vexing challenge of figuring out how to protect the public and resist pressure from players with a vested interest in protecting the status quo.”[24] The current attempt by regulators to suppress the growing expansion of Uber might very well be a necessary step in order to protect the rights of the Uber drivers and other independent contractors everywhere. Be that as it may, derailing Uber’s business model will have an annoying impact on those citizens frustrated by waiting around for public transportation. Who is to say which side is more right than the other?

Whichever side one chooses to support, it is worth considering as a more general matter that the existing system of governance and its system of worker classification cannot adequately cope with the emergence of the sharing economy: As Senator Mark R. Warner (D-VA) noted, “[the Berwick] ruling from the California labor regulators demonstrates why federal policy makers need to re-examine the 20th century definitions and employment classification we’re attempting to apply to a 21st century work force.”[25] As New York City Taxi Commissioner added, when it comes to the emergence of Uber and its impact on the city of New York, “[w]e’re seeing unprecedented growth… [and] it’s difficult to study anything when the landscape is changing so dramatically and so quickly.”[26] While the lawmakers and our courts are attempting to catch up, disruptors like Uber is not waiting around:

“[Uber] has become known for aggressively barreling into new regions without much consideration for existing rules and norms, and has subsequently faced widespread pushback… More than a dozen lawsuits have been filed in recent months in countries across the continent, where some analysts say the company is in danger of being shut down or becoming so entangled in legislation as to be neutered.”[27]

But this won’t stop Uber from pushing forward, especially with the new influx of funding, and once enough consumers have experienced and benefited from Uber or services similar to it like Lyft, it will be difficult to put the genie back in the bottle and to force consumers to go back to waiting around at bus stops or trying to hail cabs. As Rachel Botsman noted, “ultimately, regulation should enable innovation that disrupts a market for the benefit of the majority,”[28] but there are reasons to doubt whether our legislators are up to the task. The likes of former Secretary Reich and other labor activists appear instead to be focusing on the problem that the sharing economy presents, stating that “the Uberized sharing economy” is operating “outside the labor laws”[29] to the detriment of many workers. While this concern is indeed worth paying attention to; it must also be recognized that the sharing economy has potential for much goodness, but the law, as it is currently being applied to the sharing economy risks eroding this potential. California District Court Judge Edward Chen, who is presiding over one of the cases against Lyft recently noted the following:

“As should now be clear, the jury in this case will be handed a square peg and asked to choose between two round holes. The test the California courts have developed over the 20th Century for classifying workers isn’t very helpful in addressing this 21st Century problem. Some factors point in one direction, some point in the other, and some are ambiguous. Perhaps Lyft drivers who work more than a certain number of hours should be employees while the others should be independent contractors. Or perhaps Lyft drivers should be considered a new category of worker altogether, requiring a different set of protections. But absent legislative intervention, California’s outmoded test for classifying workers will apply in cases like this.”[30]

So we are left wanting and waiting for the legislatures to update the law so that the benefits of the sharing economy can be preserved, while at the same time, ensuring that the businesses are prevented from relying on the “independent contractor” label to circumvent compliance with labor laws.

So Whats Next?

In attempting to predict how this quagmire will play out, two facts are worth bearing in mind: First, there are two federal class action lawsuits currently pending (one against Uber and one against Lyft) in the Northern District of California in addition to the Berwick appeal.[31] Depending on the outcome of these cases, companies with a vested interest in the sharing economy like Uber, Lyft, Instacart, Homejoy, TaskRabbit, and Postmates (just to name a few) that rely on independent contractors to deliver groceries, run errands, lend tools, or clean houses must proceed with caution.

The second point worth keeping in mind is the fact that recent cases coming out of California on the issue of categorizing workers either as employees or independent contractors have, more often than not, held workers to be employees rather than as independent contractors. [32] Add to this fact, the aforementioned statement released by the US Department of Labor about how “most workers are employees under the FLSA’s broad definitions.” These facts suggest that the sharing economy’s growth could be stunted in the near future due in large part to the “20th century classification of employment” to borrow Judge Chen’s words. While these developments might seem promising for labor law advocates and former Labor Secretaries, their optimism must be curved as “[u]nder California law, if reasonable people could differ on whether a worker is an employee or an independent contractor based on the evidence in the case, the question is not for a court to decide [but for] … the jury,” which is a roll of the dice. [33]

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[1]  D. MACMILLAN & T. DEMOS, “Uber Valued at More than $50 Billion”, The Wall Street Journal, (31 July 2015).

[2]  R. REICH, “Why We’re All Becoming Independent Contractors,” The Huffington Post, (22 February 2015).

[3]  R. REICH, “The Sharing Economy is Hurting Us Backwards,” Salon, (4 February 2015).

[4]  R. REICH, “Why We’re All Becoming Independent Contractors,” The Huffington Post, (22 February 2015). ; see also, U.S. DEPARTMENT OF LABOR WAGE AND HOUR DIVISION, “The Application of the Fair Labor Standards Act’s ‘Suffer or Permit’ Standard in the Identification of Employees Who Are Misclassified as Independent Contractors” (15 July 2015), at p. 1 (noting that “[w]hen employers improperly classify employees as independent contractors, the employees may not receive important workplace protections such as the minimum wage, overtime compensation, unemployment insurance, and workers’ compensation.”).

[5]  M. ISAAC & N. SINGER, “California Says Uber Driver is Employee, Not a Contractor,” The New York Times (17 June 2015).

[6]  R. BOTSMAN, “Why the Law Won’t Stop Uber,” Financial Review (11 July 2014).

[7]  B.R. SMITH, “City Hall and Uber Clash in Struggle Over New York Streets,” The New York Times (16 July 2015). (reporting that the reason for New York City Mayor Bill de Blasio’s reluctance to accept Uber is due to the fact that is “appears to be clogging Manhattan traffic”). The article also reports about how the “yellow-cab industry” was one of Mayor de Blasio’s “most prolific campaign contributors.”).

[8]  L.J. NELSON A. CHANG & P. DAVE, “Uber Should be Suspended in California and Fined $7.3 million, Judge Says,” Los Angeles Times (15 July 2015).

[9]  Ibid.

[10]  M. ISAAC & N. SINGER, “California Says Uber Driver is Employee, Not a Contractor,” The New York Times (17 June 2015).

[11]  Before the Labor Commissioner of the State of California, Barbara Ann Berwick v. Uber Technologies, Inc. et al. Case No. 11-46739 EK (3 June 2015). After the decision by the Labor Commissioner, Uber promptly filed for an appeal on 16 June 2015 with the Superior Court of California (County of San Francisco) CGC-15-546378.

[12]  Ibid., at p. 6.

[13]  S.G. Borello & Sons, Inc. v. Department of Industrial Relations, 48 Cal. 3d 341, (1989). This “multi-factor test” is the standard test for establishing an employment relationship not just in California, but in most other States and event abroad. See e.g. Chandler v. Cape PLC [2012] EWCA Civ 525.

[14]  U.S. DEPARTMENT OF LABOR WAGE AND HOUR DIVISION, “The Application of the Fair Labor Standards Act’s ‘Suffer or Permit’ Standard in the Identification of Employees Who Are Misclassified as Independent Contractors,” (15 July 2015), at pp. 1-2 (citing to Walling v. Portland Terminal Co., 330 U.S. 148, 150-51 (1947) and U.S. v. Rosenwasser, 323 U.S. 360, 362-63 (1945)).

[15]  Yellow Cab Cooperative v. Workers Compensation Appeals Board, 226 Cal.App.3d (1991).

[16]  Before the Labor Commissioner of the State of California, Barbara Ann Berwick v. Uber Technologies, Inc. et al. Case No. 11-46739 EK (3 June 2015), at pp. 4-5.

[17]  Ibid.

[18]  Ibid., at p. 8 (citing to Borello, supra, at 355-360 that “[t]he minimal degree of control that the employer exercised over the details of the work was not considered dispositive because the work did not require a high degree of skill and it was an integral part of the employer’s business. The employer was thus determined to be exercising all necessary control over the operation as a whole.”).

[19]  Ibid., at p. 9.

[20]  Before the Labor Commissioner of the State of California, Alatraqchi v. Uber Technologies, Inc., Case No. 11-42020 CT (1 August, 2012).

[21]  For what it is worth, California District Court Judge Edward Chen noted in response to the Labor Commission’s decision in Alatraqchi to call services like Uber or Lyft as nothing more than a technology company as “plainly wrong” and “fatally flawed.” See e.g. Patrick Cotter et al. v. Lyft Inc. et al., U.S. District Court for the Northern District of California, Case Number 3:13-cv-04065, Order Denying Cross-Motions for Summary Judgment, (11 March 2015).

[22]  U.S. DEPARTMENT OF LABOR WAGE AND HOUR DIVISION, “The Application of the Fair Labor Standards Act’s ‘Suffer or Permit’ Standard in the Identification of Employees Who Are Misclassified as Independent Contractors,” (15 July 2015), at p. 15 (adding that the courts ought to bear in mind the “very broad definition of employment under the FLSA as ‘to suffer or permit to work’ and the Act’s intended expansive coverage for workers must be considered when applying the economic realities factors to determine whether a worker is an employee or an independent contractor….” and “the factors should not be analyzed mechanically or in a vacuum, and no single factor, including control, should be over-emphasized.”).

[23]  Ibid., at p. 2, 15; see also, Tony & Susan Alamo Foundation v. Secretary of Labor, 471 U.S. 290 (1985) (establishing the employment test under the Fair Labor Standards Act).

[24]  R. BOTSMAN, “Why the Law Won’t Stop Uber,” Financial Review (11 July 2014).

[25]  M. ISAAC & N. SINGER, “California Says Uber Driver is Employee, Not a Contractor,” The New York Times (17 June 2015).

[26]  B.R. SMITH, “City Hall and Uber Clash in Struggle Over New York Streets,” The New York Times (16 July 2015) (quoting Meera Joshi, New York City’s Taxi Commissioner speaking about New York City Mayor de Blasio’s attempt to place a cap on Uber’s growth and relying on traffic studies to suggest that Uber leads to congestion and slower traffic speeds).

[27]  L.J. NELSON A. CHANG & P. DAVE, “Uber Should be Suspended in California and Fined $7.3 million, Judge Says,” Los Angeles Times (15 July 2015).

[28]  R. BOTSMAN, “Why the Law Won’t Stop Uber,” Financial Review (11 July 2014).

[29]  R. REICH, “Why We’re All Becoming Independent Contractors,” The Huffington Post, (22 February 2015).

[30]  Patrick Cotter et al. v. Lyft Inc. et al., U.S. District Court for the Northern District of California, Case Number 3:13-cv-04065, Order Denying Cross-Motions for Summary Judgment, (11 March 2015), at p. 19.

[31]  O’Connor v. Uber Technologies, Inc., Case No. 13-cv-03826 and Cotter v. Lyft, Inc., Case No. 13-cv-04065.

[32]  See e.g. Patrick Cotter et al. v. Lyft Inc. et al., U.S. District Court for the Northern District of California, Case Number 3:13-cv-04065, Order Denying Cross-Motions for Summary Judgment, (11 March 2015), at p. 17 (citing to .JKH Enterprises v. Department of Industrial Relations, 48 Cal. Rptr. 3d at 568–70 and Air Couriers International v. Employment Development Department, 59 Cal. Rptr. 3d at 38–39, which were two cases the courts held that freelance package delivery drivers ought to be classified as employees).

[33]  See Angelotti v. Walt Disney Co., 121 Cal. Rptr. 3d 863, 870 (Ct. App. 2011).

[NB: The footnotes for the blog entry have been abridged for the sake of space and aesthetics.]

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