“Uber is unfair” – it’s a slogan mostly used by taxi drivers, politicians on the left, and Slate columnists. But a new ruling potentially allows thousands of Uber drivers themselves to join a class action lawsuit against the company, alleging that drivers deserve higher pay and more benefits.
At the heart of the issue is a legal distinction that, though it sounds meaningless, carries drastic implications for Uber’s business model. Uber currently classifies its workers as “independent contractors” or “1099 contract workers,” named after the tax form contractors fill out instead of a W-2.
Unlike with employees, companies do not have to pay payroll taxes on behalf of their independent contractors. They are also exempt from a series of labor rules including overtime pay requirements and expense reimbursement laws.
But several drivers are arguing in court that they should be reclassified as “employees.” On Tuesday, a judge agreed that there was some merit to this argument. In his 68-page ruling, Judge Edward M. Chen of the Federal District Court for the Northern District of California in San Francisco concluded that the class action could proceed, though he did limit the drivers that could be certified in the class.
Though the ruling is a small step and Uber will undoubtedly appeal, this debate could mean danger for Uber’s business model.
It’s easy to understand why Uber and other transportation companies classify their drivers as independent contractors rather than employees. Classifying Uber drivers as employees would require the company to increase compensation by as much as 20 to 30 percent, providing additional benefits and complying with a wide range of labor and wage laws.
There’s a legitimate argument to be made that Uber does not exercise enough control over its drivers to correctly call them employees. Uber does not set shifts and its drivers can work as much (or as little) as they want. Drivers can choose which area of the city they work in and which passengers to pick up, always using their own cars.
Yet at the same time, the plaintiffs in the lawsuit have some grounds for complaint. Uber controls the price that drivers charge and charges tips to passengers without distributing them to drivers. Uber’s star-rating system also solidifies company oversight of drivers, and “the evidence further shows that Uber actually uses this information to reprimand or terminate drivers who do not meet Uber’s standards,” said Judge Chen.
Some experts argue this case illustrates that current laws are outdated and don’t neatly apply to the modern sharing economy. As seen above, Uber drivers don’t fit perfectly into either the employee or contractor classification.
Alan Hyde, a law professor at Rutgers, wrote in Quartz that the US could follow the lead of countries like Canada or Sweden, creating a class of workers called “dependent contractors” to accommodate workers that fit in between the two existing categories.
Other experts believe more flexibility is the answer. “A US government study showed that more than 80 per cent of independent contractors and self-employed workers would not choose a different employment structure,” said Arun Sundararajan, a business professor at NYU, in the Financial Times. “The law should not force such a choice on them.”
Sundararajan advocates for labor laws to be streamlined so that social safety net benefits do not only extend to full-time employees. Making it easier for companies to offer benefits to contractors without submitting to mountains of regulation could incentivize Uber to increase workers’ benefits in order to compete.
But if the courts force Uber to classify its drivers as employees instead of contractors, it could end up being worse for drivers. Though tempting to claim that Uber is “ruthlessly exploiting” drivers, as Michael Hiltzik argues in the LA Times, it’s important to remember that drivers can stop driving at any time if it’s not worth their time. For many drivers, Uber provides a flexible, second job that didn’t exist before.