Employees or Independent Contractors? Uber and Lyft Avoid Reclassifying Their Drivers

By Nyla Knox.

Gig Economy giants Uber and Lyft have undoubtably transformed our society. The self-proclaimed tech platforms have provided a flexible work option to about two million drivers in the United States, who are afforded flexibility and discretion in creating their work schedule. However, the ridesharing companies are facing scrutiny over their stance that drivers are independent contractors rather than employees. In response to concerns that the companies have misclassified their drivers, robbing them of critical protections, a California court recently ruled that Uber and Lyft drivers are employees. However, a California ballot initiative will now allow drivers to remain independent contractors.  This ongoing nationwide debate has emphasized the important and conflicting interests that Uber, Lyft, and their drivers have in this controversial determination. 

“Uber Lyft Car” by Open Grid Scheduler / Grid Engine is marked with CC0 1.0

Employees or Independent Contractors?

According to a recent study, between 6.9 and 9.6 percent of workers in the United States are independent contractors, amounting to between 10.5 and 15 million workers. Many independent contractors enjoy freedom to make their own schedule and control their work. However, being classified as an independent contractor can have numerous ramifications.  Independent contractors do not have access to the same benefits as employees. They are not eligible for unemployment benefits, workers compensation coverage, paid sick days, or employer-provided health insurance. Furthermore, independent contractors are not protected by employment laws such as the Fair Labor Standards Act, which creates the right to minimum wage and overtime pay, the Occupational Safety & Health Act, which requires safe working conditions for employees, or Title VII of the Civil Rights Act, which protects employees and job applicants from discrimination based on race, color, sex, and national origin.

There are many factors to consider in determining whether a worker is an employee or an independent contractor. Courts typically look at the totality of the circumstances, resulting in a fact-based analysis. Agencies have created different tests to aid in making this distinction. For example, the Internal Revenue Service (IRS) considers three factors to determine whether a worker is an employee or an independent contractor. First, it looks at whether the business has control over the worker’s services. Next, it considers whether the business has financial control over the services, examining, among other things, whether the worker has unreimbursed expenses or offers its services to the general public. Lastly, the IRS considers the type of relationship that exists between the business and the worker. The Department of Labor and the Arizona Department of Administration have developed similar tests to classify workers. However, despite these efforts to create a clear distinction, worker misclassification remains a hotly debated issue, especially within the gig economy.

California

In October, a California Court of Appeals required Uber and Lyft to classify their drivers as employees. This decision affirmed the lower court’s finding that the companies were likely violating a new state law that reclassified gig workers as employees, entitling them to all employee benefits and protections. Uber and Lyft, though, refused to comply with the law, maintaining that it does not apply to them as tech platforms. Postmates, a food delivery platform, also refused to classify its drivers as employees for similar reasons. The court noted, though, that Uber and Lyft drivers are central to the rideshare businesses and are entitled to employee protections.

In the November election, however, California voters decided to implement Proposition 22. This initiative allows Uber, Lyft, and other food delivery apps, including Postmates and Doordash, to exempt themselves from the state law. Their drivers will now remain independent contractors with certain limited benefits. Uber, Lyft, and other online food delivery companies spent over $185 million in support of the proposition, making it the most expensive ballot measure in the state’s history. Some warn that this proposition is a great win for the ridesharing companies but a huge loss for workers.

Arizona

In Arizona, Uber and Lyft drivers remain independent contractors. In 2016, Arizona responded to concerns from employment-related lawsuits against gig economy companies and enacted legislation that creates a presumption of independent contractor status. To create this presumption, businesses may voluntarily ask workers to sign a declaration form stating that they are independent contractors. This form illustrates the worker’s acknowledgement of its relationship with the business. Workers may still present evidence that they are wrongly classified, but the signed declaration will serve as evidence that they are properly regarded as an independent contractor and provides businesses with additional state law protection. Arizonans may even expect to see initiatives resembling California’s Proposition 22 in the future, as ridesharing companies continue to work with law makers across the nation to solidify workers’ independent contractor status.

Competing Interests

Uber and Lyft have important interests at stake in this determination. Although the publicly traded companies are worth billions of dollars, they have yet to become profitable. The COVID-19 pandemic has exacerbated the rideshare companies’ financial difficulties. Uber’s core business of providing rides has dropped by nearly 75%. The company continues to generate revenue through its food delivery app, but its overall revenue has dropped by 30%. Uber has laid off about 6,700 office workers, and Lyft has laid off nearly 1,000 employees.

Uber and Lyft save a lot of money by classifying their drivers as independent contractors. The companies urged that reclassifying drivers as employees would bring unfortunate change to the rideshare experience. If drivers are reclassified as employees, analysts estimate that Uber could face additional costs of up to $500 million a year. To compensate for this expense, the company forecasts that the “size and scale of the business will be substantially reduced.” Only a small portion of current California drivers would be employed, cutting off work for thousands of Uber drivers. Furthermore, riders will likely see higher fare prices. Higher prices could lower demand, further reducing work opportunities for drivers. 

Drivers also have important interests to balance. Some workers fear that reclassifying them as employees may rob them of flexibility and their ability to create their own work schedule. Yet, many believe they should be afforded employee benefits. For example, Hector Castellanos was in an accident while driving for Lyft and missed eight months of work. Because he was an independent contractor—and ineligible for workers compensation—his daughter had to drop out of college to help with family expenses. Other drivers report they often make less than minimum wage, struggling to cover high driving expenses. Working as an independent contractor presents consequences to many Uber and Lyft drivers. California Superior Court Judge Ethan Schulman believes “these harms are not mere abstractions; they represent real harms to real working people.” Thus, many insist that drivers, who are central to the ride-sharing business, deserve employee protections.

The Debate Continues

It is immensely clear that Uber, Lyft, and their drivers each have important—and conflicting—interests in determining whether drivers are employees or independent contractors. While drivers will remain independent contractors in California, this debate persists across the country. Agencies, courts, and legislatures will likely continue their efforts to provide clarity in this murky area of the law in hopes of providing workers and businesses with an equitable solution. 

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By Nyla Knox.

J.D. Candidate, 2022

Nyla is a 2L Staff Writer from Phoenix, Arizona. Before law school, she earned her Bachelor of Science in Justice Studies from Arizona State University. In her free time, she enjoys trying new local restaurants and watching HGTV.

The opinions expressed herein are those of the individual contributors to the ASLJ Blog and should not be construed as the opinions of the Arizona State Law Journal or the Sandra Day O’Connor College of Law at Arizona State University.