Recently, on June 03, 2015, the California Labor Commissioner (the “Commissioner”) made the determination that Uber drivers are in fact employees and not independent contractors as the company claims. The implications of this determination are significant with a class action lawsuit already in the works. Uber has appealed. The Commissioner’s decision can be read here.

This case is an important one to watch for California employers who make widespread use of independent contractors. Employers can learn a lot from understanding how the Commissioner viewed the facts in Uber’s case.

Uber is a company that provides transportation services through its drivers, similar to a taxi service. Prospective passengers request rides from “active” drivers through a smartphone application. Unlike a taxi service, Uber drivers use their personal vehicles in transporting passengers and are not permitted to accept tips. Uber’s business model excludes tips in place of a set price for the trip. Uber drivers are permitted to refuse requests at their discretion and can set their own work hours. However, if a driver becomes inactive for 180 days, their access to the Uber application is terminated and they must reapply for access.

In determining whether Uber drivers are employees or independent contractors, the Commissioner first looked at the language of the agreement between Uber and its drivers. From the relevant portions of the agreement the Commissioner discussed several elements which included: (1) that drivers cannot become inactive for 180 days without losing access to the application; (2) that drivers need to obtain a permit to carry passengers from the California Public Utilities Commission as well as liability insurance; (3) that Uber uses a rating system for drivers and passengers where if a driver or passenger’s rating drops too low, he or she is blocked from the application; (4) that drivers use Uber intellectual property in the application but have no ownership or investment in it; and (5) that drivers can set their own work hours.

In California there is an inference of employment where the service is personal as opposed to business. Looking to previous case law holding that taxi cab drivers are employees, the Commissioner determined that this inference applied to Uber drivers. The Commissioner looked to elements of Uber’s control over the driver-passenger interaction, the integral nature of the drivers’ work to Uber business, Uber’s control of the tools used by the drivers, form of payment, and the degree to which the managerial skill of the drivers increases or decreases their profit to justify this inference.

Uber’s Control over the Driver-Passenger Interaction: Through the use of the star rating system Uber was able to control which drivers were permitted to accept requests. Additionally, if a driver became inactive for 180 days he or she lost access to the application and had to reapply for access. Thus, while Uber does not control the minutia of the driver-passenger interaction, it does control the interaction as a whole. Because the nature of the work being performed by the drivers is not complex, the holistic control exerted over its drivers by Uber is more like an employment relationship than an independent contractor-principal.

Drivers are Integral to Uber: Uber’s entire business model is based upon drivers and passengers. Without drivers, Uber could not exist. Therefore, drivers are integral to Ubers business making them more similar to employees than independent contractors. Additionally, where the worker does not furnish his or her own business or professional service, there is a trend to find employment. Uber drivers do not provide any service independent of Uber and so an employment relationship exists.

Uber’s Control over Driver Tools: While an argument can be made that Uber drivers must provide their personal vehicles for transportation services, the Commissioner found this factor to not be determinative. As a result of Uber requiring their drivers’ vehicles to fit specific parameters, such as being no more than ten years old, and because Uber requires their drivers to register their vehicles with the company, Uber exerts sufficient control over the drivers’ vehicles to show an employment relationship.

Form of Payment: Uber restricts payment to its drivers to a non-negotiable service fee and prohibits drivers from accepting any form of tip. Thus, Uber exerts significant control over the payment of its drivers similar to an employer-employee relationship.

Profit and Loss of the Drivers: As a result of Uber’s control over both the payment of its drivers and the driver-passenger interaction, the Commissioner found that the drivers’ managerial skills had little to do with whether the drivers made a profit. This was more similar to an employment relationship than that of an independent contractor-principal.

Taking all of these factors into consideration, the Commissioner found that Uber drivers are employees.   Of course Uber has appealed this decision to the Superior Court. Employers should take a cautionary note of this case. If Uber’s independent contractor workforce is determined to be employees, Uber will owe a staggering sum in back payroll taxes, penalties, overtime pay, meal and rest period premiums, reimbursement for the workers’ auto expenses, workers compensation, etc. The consequences for Uber are very serious. As this case progresses, we will provide updates on any new developments.