July 1, 2015

The Future of Employment Law After the California Uber Decision

Ann C. Hodges, Employment, Social Security Act, Uber

by Ann C. Hodges, Professor of Law, University of Richmond

The recent decision by a California labor commissioner that an Uber driver is an employee rather than an independent contractor is of limited significance in and of itself. What it may signal for the future of the sharing or gig economy is far more interesting.

The decision is based on California law and, unless reversed on appeal, will require Uber to pay the driver several thousand dollars in business expenses. Determining whether an individual is an employee or an independent contractor is a complex decision based on a multi-factor test. Most employment statutes exclude independent contractors from their coverage, based on the theory that contractors are independent business owners that do not need the legal protection. In recent years, however, misclassification of employees as contractors has become a common practice. In some cases, misclassification may be mere error, but in others it is an attempt to evade employment laws, avoid deducting and remitting income taxes and escape payment of the employer portion of social security. Other advantages to the employer of the independent contractor classification are reducing the potential liability for any negligent or wrongful actions of the individual and avoiding payment of employee benefits.

The IRS is attuned to the issue and watching for misclassification, along with enforcement agencies for employment statutes and plaintiffs’ employment lawyers.  Enforcement resources are limited, however, so misclassification remains rampant. While all courts and agencies use similar multi-factor tests, differences in emphasis and weighting of factors result in different conclusions about similar workers.  For example, in a series of cases about FedEx drivers under a variety of employment laws, some courts and agencies have found them to be employees and others, contractors.  Some decision makers emphasize the amount of control exercised by the business while others put more weight on the availability of individual entrepreneurial opportunities.

The recent Uber decision is similar, emphasizing Uber’s control over many aspects of the drivers’ jobs. But this is just the application of one state statute, which is more employee protective than many, by one decision maker to one employee.  If more decisions find drivers to be employees under more statutes, however, the business model that supports the gig economy may be threatened.

The more interesting issue that the decision raises is the relationship between the gig economy and existing law.  Depending on the details of the business model, workers in the gig economy might be considered independent contractors, part-time employees, temporary employees, or casual workers.  Many laws exclude some or all of these groups of workers.   If this becomes the dominant work pattern of the future, laws will need to be changed to protect workers against exploitation by businesses.

Will the expansion of the gig economy model bring a return to the depression era practice of individuals underbidding one another to work for pennies in order to feed their families? Or will these new businesses bring a different ethic to the workplace? As a longtime observer of the workplace, I expect that as competition increases in these industries with accompanying downward pressure on costs, exploitation of workers will follow if not prohibited by law. 

The gig economy also undermines the uniquely American practice of delivering benefits through the workplace. With the passage of the Social Security Act in the 1930s, retirement was envisioned as a three-legged stool, social security, pension, and personal savings. While the pension leg is already being shortened by the shift from defined benefit to defined contribution plans and the many employers that offer no pension at all, a shift to a contractor economy will cut off the pension leg altogether, threatening retirement incomes already at risk. Health insurance, too, is largely delivered through employment, although the Affordable Care Act might ease the transition. Additionally, unemployment benefits are not available to independent contractors so, without a change in the law, workers between gigs will have no source of income support unless they are eligible for some other form of benefits.

For some, this may seem like the ideal economy, increasing independence and decreasing government benefits.  This economic model did not work well in the past, however, except for the privileged few. Further, economic transitions are always disruptive. The law is usually late to catch up. Legislators might do well to consider the impact of the sharing economy on law prior to serious disruption. Returning the concept of independent contractor to its original definition, individuals who own and operate their own businesses, marketing their services to multiple other businesses, would be a start. Stiffening penalties and stepping up enforcement for worker misclassification would be another. But finding political agreement on how to address the issue does not seem likely.