On August 6, 2015, Uber drivers in California sought preliminary approval of their motion for class certification in their independent contractor misclassification lawsuit. A hearing was scheduled in the U.S. District Court for the Northern District of California before Judge Edward M. Chen on the drivers’ motion for class certification. The parties argued their positions to the court but no decision is expected for a few weeks. There is a high likelihood that the court will permit the drivers to proceed in a class action instead of through individual claims. The legal burden to secure preliminary approval of class certification is not particularly high. Even if, as expected, the court grants such approval, Uber has at least three ways that it can still succeed in the lawsuit and ultimately maintain its independent contractor classification of drivers providing services to Uber’s customers: decertifying the drivers’ class action status at the final class certification proceeding; winning at trial; or restructuring and re-documenting its independent contractor relationships in a manner that enhances its compliance with state and federal laws governing independent contractors. The latter means for Uber to succeed is the subject of this blog post.
What already transpired in this case?
On March 11, 2015, Judge Chen denied Uber’s motion for summary judgment and ruled that a jury would have to decide whether the drivers are either independent contractors (who are paid on a 1099 basis and have no rights under state or federal wage or labor laws) or employees (who are paid on a W-2 basis and have rights under those laws protecting employees).
What evidence did the court focus on in deciding that a jury would have to determine if the drivers are employees and not independent contractors? Uber showed that drivers have the right to make themselves available for work whenever they want and that they are not required to accept available engagements – which is commonplace in the gig economy. The drivers showed that Uber expressly reserved the right to terminate the drivers’ relationship or terminate the use the company app if a driver’s customer ratings are deemed unacceptably low or for any reason at all. The court noted that this factor is a key one favoring employee status.
The court stated that while there are numerous factors that bear on whether a worker is an employee or contractor, the “principal” test of an employment relationship is whether the person to whom service is rendered has the right to control the manner and means of accomplishing the result desired. To that end, the court identified other factors favoring employee status, including Uber’s “Driver Handbook,” which instructs drivers, among other things, to “dress professionally,” send the client a text message 1-2 minutes from the pick-up location, “make sure the radio is off or on soft jazz or NPR,” to “make sure to open the door for your client,” and to “have an umbrella in [their] car for clients to be dry until they get in your car or after they get out.”
The judge also found evidence that Uber monitored their drivers’ performance to ensure compliance with Uber’s many quality control standards by requesting that passengers give drivers a star rating on a scale from 1 to 5 after each completed trip based on the driver’s performance. He found evidence that Uber uses these ratings “to monitor drivers and to discipline or terminate them.” Uber’s contract with drivers provides that it may terminate any driver whose star rating “falls below the applicable minimum star-rating.”
Although Uber argued that the Driver Handbook merely contained “suggestions,” Judge Chen dismissed that argument by referring to the mandatory language of the document and evidence that failure to follow the “suggestions” could be enforced by disciplinary action or termination.
As we stated in our blog post on March 12, 2015, that decision by the court does not mean that companies cannot prevail on independent contractor misclassification claims. In fact, the decision by Judge Chen pointed to two recent cases where courts in California found workers to be independent contractors as a matter of law. As the court noted, even though some factors may have “cut in favor of employee status,” courts will still find independent contractor status when “all of the factors weighed and considered as a whole establish that [an individual] was an independent contractor and not an employee.”
Is it too late for companies already operating in a less than ideal level of compliance to restructure and re-document a company’s independent contractor relationships in order to minimize the risk of misclassification liability? No. As we noted in our September 18, 2014 blog post entitled “Silicon Valley Misclassification,” tech companies that use the 1099 “on demand” business model are at risk if they “do not take care to structure, document, and implement their independent contractor relationships in a manner consistent with federal and state IC laws.” Likewise, as I commented on a May 19, 2015 webinar that also featured one of the lead attorneys for Uber, Shannon Liss-Riordan: “[T]he best time to [enhance independent contractor compliance], of course, is before you get a summons or court complaint from someone such as [Ms. Liss-Riordan] or before a regulatory challenge is commenced. And even for those companies that are in the midst of legal challenges, it’s not too late to minimize or avoid future independent contractor misclassification exposure. We’ve used a proprietary process called IC Diagnostics that has worked very well for companies that are trying to fit their business model into existing laws, both at the federal and state level.”
While it is ideal to structure and document independent contractor relationships properly from the start, many companies, especially tech start-ups in the on-demand sharing economy, have not done so. As noted in the May 10 webinar, many new and existing companies have resorted to IC Diagnostics™ to enhance their level of independent contractor compliance under the applicable tests for independent contractor status under governing state and federal law. That proprietary process also offers a number of practical, alternative solutions to enhance compliance with those laws, including restructuring, re-documenting and re-implementing the IC relationship; reclassifying 1099ers as W-2 employees; and redistributing 1099ers – as more fully described in our White Paper on the subject.
Companies that wish to retain an independent contractor business model generally opt for restructuring, re-documenting, and re-implementing their contractor relationships. While not all companies can eliminate most control and direction over workers treated as 1099ers, the overwhelming number can effectively restructure their contractor relationships to comply with federal and most state laws. The IC Diagnostics™ process provides the means to stress-test the relationship. If it can be effectively restructured to comply with contractor laws, the next step in the process is re-documentation. What seems like a simple act of dotting your i’s and crossing your t’s, though, is anything but; indeed, many independent contractor statutes and most judicial and administrative decisions in this area are often counter-intuitive.
As we observed in our August 29, 2014 blog post entitled “Earthquake in the Independent Contractor Misclassification Field,” we concluded that FedEx Ground lost a key case because of its misplaced reliance on an independent contractor agreement and its policies and procedures that were good, but not good enough. Plainly, FedEx is a savvy company, but close scrutiny by a court found one fallacy after another in the very documents FedEx created – sufficient in degree to lead the court to rule against FedEx. As we noted, “IC agreements and policies and procedures that are not drafted in a state-of-the-art manner, free from language that can be used against the company, can cause businesses that use ICs to face class action litigation or regulatory audits or enforcement proceedings they may be able to otherwise avoid.”
Lastly, the implementation of a legitimate independent contractor relationship is just as essential as the structuring and documentation. As shown by the court’s decision in this case in March, even when contractual provisions were drafted in a manner intended to be consistent with governing laws, it was argued that Uber failed to strictly follow the contractual limitations on direction and control when they put their contractor relationships into effect. There is no reason, however, why a company committed to complying with independent contractor laws cannot, when exercising both rigor and restraint, implement and carry out in practice an enhanced contractor relationship. Uber can take this step even if it loses at trial or (if it wishes to place itself in a better position sooner), before the trial and all appeals are completed.
Written by Richard Reibstein.