“The test the California courts have developed over the 20th Century for classifying workers isn’t very helpful in addressing . . . 21st Century problem[s].”  So concluded the court in Cotter v. Lyft, Inc., one of two opinions handed down by the U.S. District Court for the Northern District of California on March 11, 2015, that highlight a growing problem in employee misclassification law.

Cotter and O’Connor v. Uber Technologies, Inc. are putative class actions by current and former drivers for the popular taxi alternatives Lyft and Uber who allege that the companies improperly classified them as independent contractors rather than employees.  On March 11, the courts in both cases denied motions for summary judgment, ruling that whether the drivers are employees is a question of fact to be resolved at trial.

The rulings are similar in many respects.  Applying California law, both courts ruled first that the companies are transportation companies—not mere intermediaries between drivers and their passengers—mainly because Uber and Lyft depend wholly on fees from transportation services for their revenue, exercise control over interactions between driver and passenger, and market themselves as transportation companies.  This put the burden on the employers to justify their classifications.

The courts applied the traditional, multi-factor common law test used in most states for determining whether an individual is properly classified as an independent contractor.  This multi-factor test includes analyzing:

  • whether there’s a right to control how the worker does his job;
  • whether a worker has set hours or can work whenever he or she wants;
  • whether the one performing services is engaged in a distinct occupation or business;
  • the kind of occupation, with reference to whether, in the locality, the work is usually done under the direction of the principal or by a specialist without supervision;
  • whether the work requires a specialized skill;
  • the alleged employee’s investment in equipment or materials required for his task and whether the principal or the worker supplies the instrumentalities, tools, and the place of work for the person doing the work;
  • whether the services performed for a defined or indefinite term;
  • the method of payment, whether by the time or by the job;
  • whether or not the work is part of the regular business of the principal;
  • whether or not the parties believe they are creating the relationship of employer-employee; and
  • the alleged employee’s opportunity for profit or loss.

Both courts admittedly struggled to apply the traditional multifactor test to the Lyft and Uber business models, noting that some factors cut both ways while others were ambiguous.  For instance, while neither company controls when its drivers were on duty, both exercise significant control over drivers when they work through established qualifications, performance standards backed up by customer reviews, and the reservation of  the right to terminate drivers deemed subpar.  Further, although drivers are paid per ride, neither company allows drivers to set the rates charged.  Finally, while drivers provide their own cars, the courts determined that driving requires no specialized equipment or skill and is central to the companies’ business model.  Ultimately, both courts found summary judgment inappropriate because a reasonable jury could rule either way on facts material to the employee/contractor test.

Cognizant of the increasing difficulty in applying “California’s outmoded test for classifying workers” to on-demand business models like Uber and Lyft, the Lyft court suggested that the legislature intervene and create a “new category of worker altogether, requiring a different set of protections.”  While the court certainly touched upon a growing concern, companies that take the time to create and maintain independent contractor relationships that comply with applicable laws can protect themselves and prevail on independent contractor misclassification claims.  Indeed, the Lyft court cited two recent California Court of Appeal cases upholding independent contractor classifications as a matter of law, “even while acknowledging that certain factors cut in favor of employee status.”  (See e.g., Arnold v. Mut. of Omaha Ins. Co., 135 Cal. Rptr. 3d 213 (2011) and Beaumont-Jacques v. Farmers Grp., Inc., 159 Cal. Rptr. 3d 102 (2013)).

Sheppard Mullin’s Labor and Employment Practice Group has a team of attorneys ready to assist in the creation, implementation, and maintenance of compliant independent contractor relationships.