Corina Uber Blog.v2
Classifying workers may raise fundamental questions for on-demand economy startups.

The emerging on-demand and sharing economy has presented no shortage of legal issues for tech startups.  One of the key factors underlying the success and future of these companies lies in the way they harness and classify their workforce. Startups entering this space must be aware of the developments in employment law because worker misclassification can have drastic financial consequences on their business.  So critical is the classification of workers as independent contractors to the on-demand economy that many of these business models would crumble under an employee (as opposed to independent contractor) worker classification schema.

And there is no dispute that the class action litigators are gunning for companies whose cost structure relies on the 1099 workforce.  The pending Uber cases provide prime examples of this issue in the on-demand economy, but misclassification cases are by no means restricted to companies operating in this space. Starbucks, FedEx, Lyft, Homejoy, Postmates, and Caviar are all companies that have been on the receiving end of these attacks.

The Uber Class Action Lawsuits

Uber has been under legal fire for class action lawsuits filed by their drivers accusing the company of misclassifying them as independent contractors rather than employees.  Among other things, these workers claim that their services are central to Uber’s business and that Uber has the requisite level of control over them to place them in the employee bracket. We covered key factors that courts and the IRS consider in a previous post.  In essence, the drivers claim that they are Uber employees even though they benefit from a work environment that allows them complete flexibility of scheduling, no minimum required hours, and the freedom to work for competitors of Uber.  Ultimately, the drivers and their advocates want better protection and compensation packages for these workers, benefits that are typically reserved for employees as opposed to freelance independent contractors.

In response, Uber has asserted that there is no such thing as a single type of Uber driver.  All sorts of people are drawn to working for the company due to its flexible scheduling and the manner in which drivers can perform the services.  Uber continues to maintain that its core business is a platform that allows these drivers to use it as they wish.

But in 2015, U.S. District Judge Edward Chen stated in court that “The idea that Uber is simply a software platform, I don’t find that a very persuasive argument.”  It is not enough for a company merely to assert that they are a logistics company or a software platform to retain the benefits of a 1099 workforce. These cases will set significant precedent with regard to worker classification for companies operating in the on-demand economy.  Jury trial for the California Uber class action lawsuit is scheduled to commence in June 2016.

Consequences of Worker Misclassification

In a previous post, we also discussed strategies for defining the employer-worker relationship and avoiding worker misclassification.  But how much of a problem can worker misclassification really cause?  The short answer is that the ramifications can be substantial.  Companies may be liable for thousands, millions, or billions of dollars (if you’re Uber) in back wages and taxes, fines, penalties, insurance contributions, and workers compensation costs.  And it is important to remember that the company’s intentions regarding the misclassification are irrelevant – intentional or not, you’re still on the hook for misclassification damages.

The Proposed Third Category of Worker or a Revised Test

The sharing economy is powered by so-called “micro-entrepreneurs,” workers who want the flexibility of scheduling and use of personal resources to earn what they need when they want.  According to peers, the “future of work will include a portfolio of income streams” that enables workers to have the choice to “build their work around their life, not their life around their work.”  Arguably, it is a different breed of worker that calls for the jobs provided by companies operating in the on-demand economy.  But they cannot have it all.  And this goes for both sides of the coin – employers and workers alike.

If workers for companies such as Uber are classified as employees rather than independent contractors, the added costs might run the company into the ground, or at least cause it to raise its fares.  This is an undesirable situation for everyone, calling for new solutions in the field of employment law.  One such solution is the proposed third category of worker, the “dependent contractor.”  Under this category, dependent contractors would gain some (but not all) of the protections or benefits afforded to employees while retaining the flexibility and control over their work.  Similarly, it seems clear that the current standards used to evaluate worker classification need to be revised to address the features and needs of on-demand workers and companies operating in this sector.

It is difficult to imagine the crash of the on-demand economy, but only time will tell as to how these companies evolve in response to worker classification issues.