What Does GrubHub’s Big Win In Its Independent Contractor Misclassification Trial Mean for Other On-Demand, Sharing Economy Businesses?

Earlier today, GrubHub, Inc. won its highly publicized case brought against it by a restaurant delivery driver / courier for allegedly misclassifying him as an independent contractor. The case drew sustained media attention during a non-jury trial in federal court in September 2017, as it was the first IC misclassification trial involving a gig economy business.

Magistrate Judge Jacqueline Scott Corley of the U.S. District Court for the Northern District of California released a lengthy opinion today where she issued a judgment in favor of GrubHub and against driver / courier Raef Lawson.  Is this a win for all on-demand sharing economy companies or only GrubHub?  The answer is, it depends.

What does it depend on? The facts in each case. According to the judge, while there were some facts that indicated a degree of control by GrubHub over the manner and means by which Lawson rendered his services, there were far more facts that, in the judge’s view, supported the conclusion that GrubHub did not control the details of how Lawson accomplished his work. As Judge Corley noted, the control factor is the most important legal consideration in any IC misclassification case.

If a number of the facts were different, though, the decision may have favored Lawson, except for one crucial circumstance: credibility. It appears that when there was a disputed issue of fact, the judge discredited Lawson’s testimony and credited the testimony of GrubHub’s witnesses. Why? Because, she found, Lawson engaged in “dishonest conduct” and that his “claimed ignorance of his dishonest conduct is not credible.”

The judge then evaluated eight “secondary factors,” finding that three favored GrubHub, four favored Lawson, and one was neutral. Finally, the judge distinguished a case that she said “has facts similar to those the Court found here.” By focusing on the differences between the facts in that case and this one, the judge confirms our view that it’s the facts that matter, not the industry. Thus, while this is most definitely good news for sharing economy businesses using an IC model, there is a compelling need to structure, document, and implement the IC relationship in a manner that, on the whole, can withstand a heightened degree of legal scrutiny – as GrubHub was able to do in this case.

The Issue of Control

Judge Corley recognized that the legal test for employee vs. independent contractor status is set forth in the 1989 California Supreme Court case of S.G. Borello & Sons, Inc. v. Department of Industrial Relations. She noted that under Borello (which the California Supreme Court is currently reconsidering), the key is whether GrubHub retained or exercised the right to control the details of how Lawson performed his services.

The judge examined a number of facts relevant to control. First, Judge Corley noted that the company did not control the vehicle Lawson used for deliveries or its condition and Lawson did not have to have GrubHub signage on his vehicle, although GrubHub made sure the vehicle was registered and insured and he had a valid driver’s license. The judge found this type of “oversight” did not weigh in favor of employee status.

The judge also found that GrubHub did not control Lawson’s appearance while making deliveries; while he could wear a company shirt and hat, he was not required to do so. While he agreed to wear a GrubHub shirt and hat in exchange for GrubHub providing him with an insulated bag for food deliveries, the company did not check to see if he was wearing the shirt or hat.

The judge found that GrubHub did not require Lawson to engage in any training or orientation, and he was not provided with a script to follow when interacting with customers. He was not told what supplies, if any, he needed to have with him.

While GrubHub conducted a background check on Lawson and reserved the right to perform a background check on any worker to whom he subcontracted his deliveries, GrubHub had no control over who would make deliveries or accompany him in his vehicle.

The court noted that GrubHub did not control whether and when he would work and for how long.  He could sign up for a block of time but decide not to work that block of time at any time before the period began.  Lawson could also reject any order offered to him during the block of time. As the judge concluded, “Lawson had complete control of his work schedule.”  Judge Corley concluded that GrubHub’s right to terminate Lawson for signing up for a block of time and not cancelling is “not controlling the manner and means of how Mr. Lawson performed deliveries; it is merely the right to terminate the agreement if one party does not do what he contracted to do.”

The judge also noted that GrubHub did not specify the amount of time in which a driver had to pick up an order or how quickly he had to complete the order. The judge also found that Lawson could pick his own route, and even make deliveries for other companies while delivering for GrubHub.

The court found that GrubHub did control some aspects of Lawson’s work. GrubHub determined the rates Lawson would be paid and the fees customers would pay for delivery service. It also determined which blocks of time to make available for driver selection and the length of each block. Finally, it determined the geographical boundaries of the delivery zones and required drivers to stay in or around their zone during scheduled blocks. In the judge’s view, such control was not exercised over the manner and means of performing the services, but over the result of the work – to ensure diners received their meals in a timely fashion.

The court did, however, find that GrubHub had a right to control Lawson’s work by its right to terminate his agreement at will, upon 14 days’ notice. The judge did not give that factor as much weight as other courts have given it because, she noted, Lawson was not dependent on GrubHub as he made deliveries for other companies and only sporadically performed services for GrubHub “so he could pursue his acting career.”

In assessing all of the above facts, the court concluded that “the right to control factor weighs strongly in favor of finding that Mr. Lawson was an independent contractor.”

The So-Called “Secondary Factors”

Next, the judge, following Borello’s teachings, considered eight other “secondary factors.”

Whether the worker was engaged in a distinct occupation or business. The judge concluded he was not, and found that this factor favored employee status.

Whether the work was performed under the principal’s direction or control.  The judge found that this factor favored IC status because there was insufficient direction and control over Lawson’s work..

The degree of skill required.  The judge found that the evidence showed that no special skills were needed, so she found this factor favored employee status.

The provision of tools and equipment. The judge found that this factor favored IC status as Lawson supplied his own vehicle, smartphone, and could even supply his own insulated bags.

The length of time for performance of services. The judge found that this factor also supported IC status because Lawson only made deliveries for GrubHub for four months, only worked half the days of those months, and could sign up for blocks of time he wanted and was not obligated to sign up for times he was unavailable.

The method of payment. The court found that, in practice, Lawson was paid on an hourly basis and, in fact, was paid at the minimum wage because he did not perform enough deliveries. The court concluded that this factor “weighs slightly in favor of an employment relationship.”

Whether the work was part of GrubHub’s regular business. The judge found that even though GrubHub started as an internet ordering business, and only in recent years added a delivery component, this factor favored employee status.

The parties’ intent. The court found that this factor was neutral. The judge noted that the agreement states that Lawson was an IC, but Judge Corley noted that a label placed on a relationship by a party that offers workers a low wage, low-skilled job should not be given much weight.

Thus, of the eight “secondary” factors, four favored employee status, three favored IC status, and one was neutral.

The Court’s “Upshot” and “Conclusion”

Judge Corley then penned a section of the opinion she called “The Upshot.” Interestingly, this section confirms that “the facts make the case.” In this section, Judge Corley compared this case with the 2006 case of JKH Enterprises, which the court said “has facts similar to those the Court has found here.” Yet, the judge then proceeded to distinguish and differentiate the facts in that similar case from those in the GrubHub case.  

Judge Corley’s “Conclusion” was short and succinct: “Based on what the Court observed at trial and the facts found, and after applying the Borello test, the Court finds that the four months Mr. Lawson performed delivery services for GrubHub he was an independent contractor.”

Analysis and Takeaways

This case will have more impact in the media and among gig economy commentators than it may have legally.  As noted in a prior blog post after the trial in this case: “Cases of this nature dealing with a single individual frequently turn on their particular facts, which can differ from case to case. Differing facts often lead to different results regarding the proper classification of workers. Thus, where the evidence varies from one case to the next, another court may reach a different decision in other cases involving drivers or other on-demand workers providing services to companies in the gig economy. Indeed, the decision in this case may not even be a precedent for other drivers at GrubHub.”

So, how much precedential value will other courts give to this case? Just as Judge Corley “distinguished” the facts in JKH Enterprises from those in this GrubHub case, plaintiffs’ lawyers in the next on-demand sharing economy IC misclassification case are likely to try to distinguish the facts in their case from those here. Meanwhile, lawyers representing the business in the next such case will likely argue that their facts are close enough to the facts in this GrubHub case that the result here should govern in their case.

The lack of precedential value is more pronounced in cases that might be fairly be characterized as falling in the “gray“ area – where some facts favor independent contractor status and other facts favor employee status. In those types of cases, a difference in one or more key facts can sometimes completely change the outcome of a legal decision as a matter of law. Moreover, where the facts on key issues are in dispute, the court has to decide which witnesses to credit and which to discredit, and that determination can critically affect the outcome of a case.  As noted above, the decision in this case by Judge Corley was undoubtedly influenced to some degree by her conclusion that Lawson was not a credible witness.

But, the judgment in GrubHub’s favor most assuredly signals that an on-demand sharing economy business can lawfully be structured on an independent contractor model. To that end, GrubHub prevailed in large part because it structured, documented, and implemented its IC relationships with an eye on compliance with IC laws.

Still, the case was close enough that another judge might conceivably have reached a different conclusion if Lawson was not such a poor witness, and a jury trial deciding a case like this one, brought by a sympathetic plaintiff, might render a verdict that the worker was an employee.

So, the takeaway for businesses in the gig economy is to maximize compliance with the applicable state and federal IC laws. How can a company do so? Some companies have resorted to a process such as IC Diagnostics™, which seeks to restructure, re-document, and re-implement IC relationships in a manner than enhances IC compliance.

Undoubtedly, GrubHub could have, based on Judge Corley’s decision, tightened up its IC compliance even more – despite the fact that it was able to endure the judge’s scrutiny. Companies that feel that their IC relationships will likewise survive a legal challenge should still consider further enhancing their IC compliance. For those businesses that have yet to upgrade their IC compliance, this win by GrubHub should be a positive signal that they, too, can structure, document, and implement their IC relationships in a lawful manner.

Richard Reibstein

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