Coverage: Uber’s business model takes a hit

In a decision that could have far-reaching consequences for many start-ups and online businesses, California has decided to call Uber driver’s employees instead of contractors. While this might not have been the top story of the day, it’s definitely one that will set off a rash of lawsuits.

The New York Times had these details in a story by Mike Isaac and Natasha Singer:

In a ruling that fuels a long-simmering debate over some of Silicon Valley’s fastest-growing technology companies and the work they are creating, the California Labor Commissioner’s Office said that a driver for the ride-hailing service Uber should be classified as an employee, not an independent contractor.

The ruling ordered Uber to reimburse Barbara Ann Berwick $4,152.20 in expenses and other costs for the roughly eight weeks she worked as an Uber driver last year. While Uber has long positioned itself as merely an app that connects drivers and passengers — with no control over the hours its drivers work — the labor office cited many instances in which it said Uber acted more like an employer. Uber is appealing the decision.

The ruling does not apply beyond Ms. Berwick and could be altered if Uber’s appeal succeeds. Uber has also prevailed in at least five other states in keeping its definition of drivers as independent contractors. Yet the California ruling stands out because officials formally laid out their arguments for why Uber drivers are employees. That could bolster class-action lawsuits against the company in the state. California law expressly requires employers to reimburse employees for business expenses and several suits proceeding against Uber are based on that state law.

Companies like Uber and its rival Lyft, and Instacart, a grocery delivery service, have long faced questions about whether they are creating the right kind of employment opportunities for both the economy and for workers. The technology companies have contended that their virtual marketplaces, in which people act as contractors and use their own possessions to provide services to the public at the touch of a smartphone button, afford workers flexibility and freedom.

Katy Steinmetz wrote for Time that Uber planned to appeal the ruling, arguing that people want the flexibility of not being considered employees:

“Uber has essentially shifted to its workers all the costs of running a business, the costs of owning a car, maintaining a car, paying for gas,” says Shannon Liss-Riordan, a Boston-based attorney who has a class-action case pending against Uber in California federal court. “Uber has saved massive amounts …. It’s important that the labor laws be enforced so that the companies can’t take advantage of workers that way. Uber’s a $50-billion company and I think it can afford to bear the responsibilities of an employer.” She expects her trial will be underway by next year and will make arguments for class certification later this summer, saying this ruling “could be a lot of help.”

In a statement to TIME, an Uber spokeswoman said that its drivers embrace their status as independent contractors. “It’s important to remember that the number one reason drivers choose to use Uber is because they have complete flexibility and control,” she says. “The majority of them can and do choose to earn their living from multiple sources, including other ride sharing companies. We have appealed this ruling.”

Wired pointed out in a story by Davey Alba about the consequences that the decision could have for Uber or other companies:

It’s hard to overstate what a big deal it would be for Uber—and the so-called on-demand economy as a whole—if the company was required to treat all its drivers as true employees. A slew of startups today provide tech—usually in the form of a smartphone app—to connect workers with consumers who need a particular service, from getting your car parked to your groceries delivered. According to nearly all such companies, these workers shouldn’t be classified as employees, because they can choose their own hours and, ostensibly, be their own bosses. While such flexibility is presented as a win for workers, it also spares these companies a host of costs associated with employing workers full-time, from Social Security to workers’ compensation.

In the meantime, many of these workers are grappling with the challenges of these new systems, finding they don’t end up enjoying the flexible hours or wages they’ve been led to expect. Increasingly, the public as a whole is becoming more aware of these concerns even as some of these companies, especially Uber, surge in popularity and reach.

As regulators, courts, and lawmakers wrestle with the murky question of what defines an employee in these new marketplaces for labor, any decisive action such as the California commission’s most recent finding, looks like a beacon of clarity. But the reality on the ground is likely to remain muddy for a long time to come, and victory in the end may wind up looking more like compromise for everyone.

While employees might not have a decision anytime soon, this initial ruling could cause some companies to pause and reconsider their business models. It’s definitely an on-going case that will be watching closely by competitors as well as those in other industries.