Across the globe, Uber faces many legal challenges to its business model that brings drivers onto its network as independent contractors, rather than employees. In October, a British labor commission ruled that Uber drivers were employees. And in Late November 2016, a European Union court heard similar arguments. One of the original large labor cases against Uber was filed in California. These cases threaten to cripple Uber’s operations which rely on low overhead.
What is Uber’s business model? Technology network or a transportation system?
Uber claims that it’s a technology company, running phone apps that connect passengers to drivers. Most importantly, Uber asserts that the drivers are independent contractors, not employees.
Using drivers as independent contractors allows Uber to do many things to save money, shifting costs to its drivers. Uber can:
- Ignore existing taxi and ride-for-hire laws and regulations
- Ignore local taxes on rides-for-hire
- Avoid paying workers’ (accident) compensation insurance fees
- Avoid paying social security taxes on driver’s behalf
- Avoid corporate taxes by shifting revenues through companies in several countries, paying taxes on relatively small royalties
- Avoid labor laws (usually at the state level in the USA), which include minimum wage, overtime pay, guaranteed break and meal times.
- Avoid worker protections against discrimination and retaliation.
I want to look back at what the California judge, Edward J. Chen, wrote back in March 2016, in the case O’Conner v. Uber Techn226 Cal. App. 3d at 1292-1294
During the case, Uber’s lawyers asked for a summary judgement, which is their assertion that the case against Uber has no merit. If the judge agrees, the case is dismissed before trial.
Judge Edward M. Chen did not agree, denying Uber’s motion in an eloquent and forceful judgement. Soon after, Uber announced a proposed $80-100 million settlement of the O’Conner case. The settlement merged this California case together with a similar case filed in Massachusetts (Yucesoy, et al., v. Uber Technologies, Inc., et al.). (The settlement ballooned if Uber went public and reached a specified market valuation.)
The settlement was later denied by Judge Chen, a decision I support, because, while a winning lotto ticket for the plaintiff’s lawyer, it provided little for the drivers.
In the denial of a preliminary judgement, Judge Chen found that the question of independent contractor status didn’t pass two tests.
- Drivers provide a service to Uber, which is a technologically sophisticated transportation company, but a transportation company nonetheless.
- The Borello test, named for the case S.G. Borello & Sons, Inc. v. Dep’t of Indust. Relations, 48 Cal. 3d 341, 350 (1989), yields ambiguous results. The many factored test has elements that point to each side of the case, thus lending itself to trial.
Judge Chen’s consideration of the first test–whether the drivers perform a service to a transportation company, yields many great quotes.
Ironically, Uber takes Yellow Taxi’s position
Uber, the great disruptor of taxis, looks more like a cab company everyday. In the O’Connor case Uber takes a position similar to Yellow Taxi in a 1991 California case, Yellow Cab Cooperative, Inc., et al., v. Workers’ Compensation Appeals Board and Richard Edwinson (226 Cal. App. 3d at 1292-1294).
Yellow Cab Cooperative, Inc., employed its drivers, who were represented by a union. In 1976, the company filed bankruptcy. In 1979, it instituted a new business plan, under which the drivers, now considered by Yellow to be independent contractors, leased cabs from the co-op.
When driver Edwinson had an on-the-job injury, he brought his case to the Workers’ Compensation Appeals Board, arguing that he was an employee, and thus entitled to employer-paid insurance through the state of California. The Board agreed; Yellow appealed; and Yellow lost the appeal.
The obvious difference between Yellow Cab and Uber is the ownership of capital. Yellow owned the cabs, earning money from leasing them to the driver. Uber has little capital investment, because the drivers use their own cars.
But Judge Chen stressed the similarities in the the cab company’s operations and Uber’s.
Drawing on the Yellow Cab ruling Judge Chen writes,
“… The Court of Appeal flatly rejected Yellow’s argument that the drivers did not provide it a service, finding that Yellow’s actual ‘enterprise consists of operating a fleet of cabs for public carriage. The drivers, as active instruments of that enterprise, provide an indispensable “service” to Yellow; the enterprise could no more survive without them than it could without working cabs.’
“The reasoning of Yellow Cab Cooperative applies even more forcefully here. Unlike Yellow Cab, which received a flat fee and did not share in its drivers’ fares, Uber only receives its fees if a driver successfully transports an Uber ‘lead’ to some destination. Moreover, the precise amount of this fee is set by Uber, without negotiation or input from the drivers. Under such circumstances, it strains credulity to argue that Uber is not a ‘transportation company’ or otherwise is not in the transportation business; it strains credulity even further to argue that Uber drivers do not provide Uber a valuable service. Like the cab drivers in Yellow Cab Cooperative, Uber’s drivers provide an ‘indispensable service’ to Uber, and the firm ‘could no more survive without them’ than it could without a working smartphone app. Or, put more colloquially, Uber could not be ‘Everyone’s Private Driver’ without the drivers.
“[Plantiffs/Drivers] note that while Uber now disclaims that it is a ‘transportation company,’ Uber has previously referred to itself as an ‘On-Demand Car Service,’ and goes by the tagline ‘Everyone’s Private Driver.’ Indeed, in commenting on Uber’s planned expansion into overseas markets, its CEO wrote on Uber’s official blog: ‘We are “Everyone’s Private Driver.” We are Uber and we’re rolling out a transportation system in a city near you.’ (emphasis added [by judge]). Other Uber documents state that ‘Uber provides the best transportation service in San Francisco . . . .’”
In other areas of the ruling Judge Chen sought to stress the technological nature of Uber’s business, while emphasizing that at its core, the company provides rides.
“Uber’s revenues do not depend on the distribution of its software, but on the generation of rides by its drivers.”
“Put simply, the contracts confirm that Uber only makes money if its drivers actually transport passengers.”
Finally, in the most elaborate analogy of the ruling Judge Chen makes clear that technology is ubiquitous. Technology alone does not define most companies.
“Uber does not simply sell software; it sells rides.
Uber is no more a ‘technology company’ than
- Yellow Cab is a ‘technology company’ because it uses CB radios to dispatch taxi cabs,
- John Deere is a ‘technology company’ because it uses computers and robots to manufacture lawn mowers,
- or Domino Sugar is a ‘technology company’ because it uses modern irrigation techniques to grow its sugar cane.
Indeed, very few (if any) firms are not technology companies if one focuses solely on how they create or distribute their products. If, however, the focus is on the substance of what the firm actually does (e.g., sells cab rides, lawn mowers, or sugar), it is clear that Uber is most certainly a transportation company, albeit a technologically sophisticated one [formatting and emphasis mine].”
Given this evocative language, it’s not surprising that Uber moved to settle the lawsuit.