By Ben Davis

Uber: Trouble in Paradise?

Over the past few years, Uber has been hit with an increasing number of wage and hour lawsuits over their decision to classify their drivers as “independent contractors,” rather than employees.Just last week, a federal judge in Boston rejected a proposed $100-million-dollar settlement between Uber and a class of 240,000 drivers out of California and Massachusetts. The judge stated that the settlement figure was unacceptable since the claims could be worth over $1 billion dollars for the drivers.[1]

Because the settlement was rejected, the case will now proceed toward trial.  This would lead to a declaration that Uber’s pay practices are unlawful, which would have a huge impact on the way Uber conducts its’ business in the future.

Even with all the pending litigation, Uber has refused to change their practice of classifying their drivers as contractors. This begs the question of what does Uber gain from this? More precisely, what impact does being classified as an independent contractor rather than an employee have on the drivers?

Why is Uber classifying drivers as independent contractors?

According to Uber’s own CEO, drivers are classified as contractors because “drivers value their independence – the freedom to push a button rather than punch a clock.. to drive most of the week or just for a few hours.”[2]

However, the plaintiffs that are suing Uber tell a much different story.  By classifying their drivers as contractors, Uber and similar companies are able to avoid paying a substantial amount of employment related costs to their employees. This includes:

  • Social Security and Medicare taxes
  • Unemployment benefits
  • Workers compensation benefits
  • Healthcare coverage
  • Overtime wages, minimum wages, sick pay and vacation pay
  • Costs related to 401(k) savings plans

These tax and legal obligations represent anywhere from 20% to 40% of an employer’s labor costs.  As a result, by classifying drivers as contractors, Uber is able to save substantially. Consequently, drivers end up incurring substantial costs that they otherwise would not incur if they were employees. These costs can include:

  • Having to pay taxes that would typically be deductedimg_3496bfree
  • Work related expenses such as:
    • Gas
    • Car insurance
    • Car maintenance
    • Cell phone data for GPS

Independent Contractor vs. Employee: What’s the difference?

Uber and companies like it are able to save a lot of money on labor costs by classifying drivers as contractors. But the question still remains, what defines a worker as a contractor or an employee?

In considering this complex question, courts have applied what they call the “economic realities test.” The six-part test attempts to evaluate the real nature of the relationship between the worker and the employer. Courts making these decisions consider:

  1. The degree of control the employer exerts over how the work is done
  2. The individual’s opportunities for profit or loss
  3. The individual’s investment in their own material or equipment
  4. The degree of skill required for the work
  5. The permanence of the working relationship
  6. How integral to the alleged employer’s business the work actually is

While every Uber driver may have had different employment experiences, certain aspects of Uber’s policies have led many to believe that all drivers are truly employees rather than contractors.  In particular, many lawsuits have focused on the control that Uber exerts over its drivers.  Examples of Uber’s control include:

  • Uber requires that its potential drivers provide banking and social security information before being allowed to work
  • Uber requires that drivers maintain a 4.6 star out of 5.0 rating for the drivers to maintain their employment
  • Drivers may not drive cars that are older than 10 years
  • Uber sets the price of each trip and then pays drivers a non-negotiable service fee

By dictating the terms of employment, Uber exerts a tremendous amount of control over their drivers. In this sense, Uber drivers are not “their own boss,” but rather employees who must comply with corporate policies. Unlike actual employees, the drivers are not afforded various legal protections and are forced to incur serious costs. Luckily, lawsuits continue to be filed against Uber and similar companies, providing employees that are misclassified as independent contractors with the ability to reclaim what they are owed.

[1] http://www.forbes.com/sites/danielfisher/2016/08/18/judge-rejects-uber-settlement-for-lowballing-california-labor-claims/#6fa47a866193

[2] https://newsroom.uber.com/growing-and-growing-up/.

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