Management & Labor

Who’s an Employee? The Uber-Important Question of Today’s Economy

Sharing economy companies like Uber and Lyft claim that the people who work for them are “independent contractors,” thus ineligible for most employee benefits. That argument may prove difficult to sustain.
by | June 2016
(AP/Richard Vogel)

Two years ago, when Darrin McGillis started as an Uber driver in Miami-Dade County, he was pretty happy. In his first two months on the job, he made almost $10,000. Even when the company cut fares nationwide, he didn’t mind. He just traded in his sedan for an SUV to collect higher fares as an Uber “XL” driver. But McGillis’ feelings changed when someone on a scooter hit his car during a passenger drop-off and Uber refused to compensate McGillis for repairs. After weeks of disagreement over what the company owed, Uber directed its insurance provider to pay for the damages. Then, it deactivated his account.

McGillis, not surprisingly, has changed his tune about the company. “Uber doesn’t care about the passengers or the drivers,” he says. “They care about the money. It’s all about the money.”

McGillis isn’t alone in feeling frustrated about his experience. Former Uber drivers in a handful of states have filed lawsuits over everything from unpaid business expenses to the company’s practice of discouraging tips. In April, Uber agreed to pay $100 million to disgruntled drivers in California and Massachusetts who felt they were getting too little in pay and other compensation.  

But that settlement didn’t address the company’s most controversial policy -- its practice of treating its drivers as independent contractors, thus making them ineligible for most worker benefits, such as a guaranteed minimum wage, workers’ compensation and sick days. McGillis poses a more fundamental threat to Uber’s way of doing business. That’s because he isn’t suing the company for damages. He’s simply doing what most workers do when they get fired: He’s asking for unemployment benefits.

According to Uber, McGillis isn’t entitled to unemployment because he wasn’t an employee. The company says it functions as a digital marketplace, connecting self-employed business owners (drivers) with customers (riders), while collecting a fee for making the introduction. Drivers must sign a contract that says they’re independent contractors, not employees, before they can take any passengers.

Still, McGillis filed his claim, and the Florida Department of Revenue concluded that he had indeed been an employee and was due unemployment benefits. At a hearing held last year to examine the claims made by McGillis, as well as by a woman who used to drive for Uber, a supervisor from the Department of Revenue explained why both were approved for unemployment. “She got paid commissions. She got paid bonuses. She did not bill. He did not bill. She indicated that they told her when and where and how -- the sequence to do the work. She had an identification badge as well. And she received training … those types of things are considered to be various means of control.”

The Florida ruling drew national media attention because Uber has a multibillion-dollar valuation and more than 400,000 drivers across the country. If all those drivers had to be treated as employees, the aggregate costs might threaten its very business model. The company appealed the ruling and offered McGillis $5,000 to drop his claim. But McGillis made a counter offer of $8,000, and when he never heard back, he continued to pursue the unemployment compensation he believed was owed to him.

The dispute remains unresolved. An appellate agency, the Department of Economic Opportunity, reversed the ruling on McGillis’ claim, and as of mid-May, he was awaiting a final decision by the state’s Third District Court of Appeal.

"Uber doesn't care about the passengers or the drivers," says McGillis. "They care about the money." (Photo Courtesy of Darrin McGillis)

The McGillis case is at the center of a larger national debate about the legal status of people who work in the app-based “gig” or “sharing” economy. San Francisco, Seattle, Washington, D.C., and many other cities have recently passed labor laws intended to raise wages and mandate worker benefits. All these cities are seeing a growth in app-based businesses that don’t classify their workers as employees. Labor advocacy groups, such as the National Employment Law Project (NELP), point out that a $15 minimum wage is far less effective when more and more people are working under business arrangements that deny them protections. “If we care about wages, we need to care about people working for Uber,” says Rebecca Smith, NELP’s deputy director.

The stakes for state and local government are high. If the workers are indeed employees, the businesses ought to be paying into state funds for workers’ compensation and unemployment insurance. While no one has tried to estimate the potential revenue lost to states because of the nonemployee classification, the federal government misses out on a minimum of $3 billion to $4 billion in uncollected taxes for this reason each year, according to the nonprofit Jobs with Justice.

Even so, officials have been reluctant to take a hard stand against Uber, and a 2015 National League of Cities report explains why. The report’s authors interviewed public officials in 11 cities about their experience dealing with sharing economy businesses. Elected leaders recognized that the businesses might be breaking local transportation laws, but they felt a pressure to maintain their city’s reputation as a welcoming place for innovation. Being friendly to innovation was so critical to economic development that most cities decided they would let the companies operate illegally and figure out the regulatory details afterward.

“This is a challenge in a lot of jurisdictions,” says Seattle City Councilmember Mike O’Brien, who has sponsored legislation recognizing the labor rights of ride-sharing drivers. “There’s something that is very innovative about how [Uber and Lyft] use technology and how they think about mobility. And there’s something that’s very old-school about how they are making billions and billions of dollars on the backs of the lowest wage workers who have the smallest voice in our political system.”

Uber drivers in New York City protesting the company's decision a year ago to cut fares by 30 percent. (AP)

When Uber first arrived in cities, it drew protests from some transportation officials who worried about how existing regulations for taxis and for-hire drivers would apply to ride-sharing companies. Their concerns were mostly about traffic congestion and public safety. Would the vehicles clog busy downtown intersections? Did drivers have insurance? Could their cars pass a safety inspection? Would companies hire drivers with criminal records?

But in the last year, a different set of actors has begun to weigh in: state labor commissioners. Part of the reason they’re looking at Uber is the proliferation of complaints about low pay and the company’s deactivation practices. According to a study by Alan Krueger, a Princeton economist, and Jonathan Hall, Uber’s director of policy research, the median hourly earnings for UberX -- people using their personal vehicles -- was below $19 across 20 major cities in October 2014. After including business expenses, such as tolls and gas, the pay would have been lower. And those numbers predate Uber’s move to cut fares last year (the same cut that prompted Darrin McGillis to switch to UberXL). Smith of NELP says she’s met drivers whose real hourly pay is currently closer to $3.

While Uber is by far the most frequently cited villain in sharing economy labor disputes, the same kinds of lawsuits are being filed against other companies that insist their app-enabled workers aren’t employees. In the District of Columbia, former workers for Postmates, the app-based courier service, allege that the company is violating the district’s minimum-wage law and failing to reimburse couriers for essential business expenses, such as gas and phone data. Handy, a company that connects customers to painters, plumbers and housecleaners, has faced lawsuits over the alleged misclassification of workers. In response to a similar suit last year, Instacart, a grocery shopping and delivery service, announced it would offer its shoppers -- but not its drivers -- the option of becoming part-time employees with benefits. So Uber isn’t alone in using the independent-contractor model. But its sheer size has attracted more lawsuits and media attention than other such companies.

So far, Uber’s early success overcoming transportation regulations has not translated into success in disputes over workers’ rights. Last September, a state board in Alaska concluded that Uber’s drivers were employees and that the company owed the state almost $78,000 in unpaid workers compensation taxes for a six-month trial run in Anchorage. Uber settled with the state Department of Labor and Workforce Development and agreed not to operate in Alaska unless it reclassifies its drivers as employees. Last summer, the California Labor Commission ruled that an Uber driver was an employee and that the company owed her about $4,100 in reimbursable business expenses, such as out-of-pocket maintenance costs. The company is appealing the ruling.

With the McGillis claim and the California Labor Commission case still undecided, Uber opted to pay $100 million to settle the separate California drivers’ lawsuit. Under the settlement, the company agreed to revise its deactivation policy, allowing drivers to remain active while appealing their termination. Drivers will also be able to solicit tips, which Uber currently discourages. While the settlement might be seen as a concession by Uber, labor advocates expressed some disappointment that the lawsuit didn’t go to trial and receive a court ruling. By settling, Uber avoided having to classify its drivers as employees with benefits.

The next legal battle over the employment status of ride-sharing drivers could take place in Oregon. Last fall, Oregon Labor Commissioner Brad Avakian released an advisory opinion that he, too, considered Uber drivers to be employees, not independent contractors. Avakian said he had been fielding requests for clarification from state legislators and the Portland transportation commissioner, and wanted to signal how he would rule in future cases.

The definition of an employee varies by state and industry, but in Oregon a worker’s status is determined by an economic realities test. Avakian listed several factors in that test, such as the degree of control exercised by the alleged employer and the extent to which the work performed is integral to the alleged employer’s business. “While Uber drivers use their own vehicle and may accept or reject ride requests,” Avakian wrote, “Uber exercises a significant degree of control over the driver’s actual work.” Uber hires and fires its drivers, disciplines poor-performing workers and sets fares. “The driver’s work is not only integral but a necessary part of Uber’s business,” he wrote. By many measures, Avakian argued, the drivers appeared to have an employment relationship with Uber.

"The driver's work is not only integral but a necessary part of Uber's business," says Oregon's Brad Avakian. (AP)

Obviously states have a direct financial interest in reclassifying Uber drivers -- and other sharing economy workers -- as employees. It would mean an immediate boost in tax revenue. But Avakian also noted the importance of enforcing proper classification so that the Ubers of the world don’t have an unfair advantage over other businesses with employees on the payroll. When a company skirts its responsibility to pay employer taxes, he says, it’s “creating an uneven playing field for employers who do follow the rules.”

In all likelihood, states will arrive at different conclusions about the employment question, forcing the National Labor Relations Board and federal courts to take up the issue. When Jesse Panuccio, then director of the Florida Department of Economic Opportunity, denied McGillis’ unemployment claim, he spent four pages explaining why he thought the California and Oregon labor commissioners were mistaken in their assessments. “Uber operates not as an employer, but as a middleman or broker for transportation services,” he wrote. “Uber is no more an employer to drivers than is an art gallery to artists.” Panuccio also gave deference to Uber’s argument that McGillis had consented to being counted as an independent contractor when he was hired.

“Certainly if businesses are misclassifying workers for any purpose,” Panuccio wrote, “state and federal labor authorities should rectify those cases. But ... the real shift in our economy is that technology is allowing hundreds of thousands of people to go into business for themselves. We should not malign (or, perhaps, misclassify) that trend as worker misclassification.”

Uber offers a different argument for classifying their workers as independent contractors: The drivers want it. In response to a request for comment, an Uber spokesperson cited internal data showing that drivers prefer the flexibility of being their own bosses, setting their own hours and having the freedom to work for other companies. But Uber appears to be looking for compromises that concede some benefits without treating drivers as full-blown employees. In May, the company struck a five-year deal that allows drivers in New York City to form a guild affiliated with a prominent machinists union. Drivers are able to appeal deactivations, and buy discounted services, such as roadside assistance, but they still aren’t guaranteed a minimum wage or overtime. In a prepared statement, David Plouffe, the Uber adviser and former White House strategist, made his case for why a union-like guild was better than reclassifying drivers as employees with benefits. “There’s no one-size-fits-all approach,” he said, “that can address the myriad different needs of the drivers using our app.”

While states continue to wrestle with how to properly classify Uber drivers, some local policymakers think they’ve found a third option: allow independent contractors to bargain collectively for benefits. In December, the Seattle City Council passed legislation that allows ride-sharing drivers to form a union and participate in a bargaining process.

“We’re trying to be innovative on behalf of workers here to give them some leverage in negotiations,” says O’Brien, the Seattle councilman who sponsored the legislation. “There’s this race to the bottom to see how cheap you can go, often on the back of workers. I fundamentally believe that the cost of living for those workers should be borne by the people who use that [ride-sharing] system. It shouldn’t be a system where the workers get paid below living wages and then the public is expected to tax ourselves to pay for affordable housing or discounted electric utilities or whatever.”

The Seattle law is novel in the sense that its supporters aren’t challenging Uber’s classification of drivers as independent contractors. “They don’t fit neatly either as the employee or the independent contractor,” O’Brien says. “I think it’s possible that we need more classes of employment, but that may be years in the making.” In fact, some countries, such as Canada and

Germany, already have an intermediate classification called “dependent contractor” for freelancers who work mostly for one business and receive some protections, but not as many as full-time employees.

As with just about everything else in the debate over drivers’ employment status, the Seattle ordinance’s future is uncertain. In March, the U.S. Chamber of Commerce sued the city, arguing that the unionization ordinance violates federal antitrust laws. Even if the law survives the chamber’s challenge, it would still be at least a year before Uber and Lyft drivers could take a vote on whether they want to form a union.

Despite that uncertainty, New York City Councilmember Brad Lander has already called for replicating the Seattle ordinance in other places. “Independent contractors are currently excluded from most city, state and federal civil rights and workplace protections,” Lander wrote in a recent brief. “This can be easily remedied by cities that have such laws by extending them to cover contingent workers.”

The first of these efforts is already in the works. In March, California Assemblywoman Lorena Gonzalez introduced a bill that would allow Uber drivers and other independent contractors in the gig economy to form union-like groups and bargain collectively for wages and benefits. It’s considered a longshot this year, and officials in other states are waiting to see what happens with it.

“I think we’re at the beginning of this story about workers and the on-demand economy,” says Mariah Montgomery, a strategist for the Partnership for Working Families, a national labor advocacy group. “It’s going to require the testing out of new ideas. We’re wading into uncharted territory here, but it’s important to see what’s possible.”

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