California’s Uber driver decision could throw a wrench into the sharing economy

June 17, 2015, 9:05 PM UTC

On its way to becoming a company worth more than $40 billion, Uber has been steadfast in identifying itself as a platform—not an employer—that facilitates transactions between drivers and passengers. A ruling by the California labor commission that was filed in California State Court on Tuesday poked a giant, gaping hole in that theory.

The commission found that a former San Francisco-based Uber driver is not an independent contractor but an employee—a decision that, if upheld, could significantly alter Uber’s business model and reshape a sizable portion of the so-called sharing economy.

“[Uber holds itself] out as nothing more than a neutral technological platform, designed simply to enable drivers and passengers to transact the business of transportation,” the decision said. “The reality, however, is that [Uber is] involved in every aspect of the operation.”

The degree of control that Uber has over its drivers makes all the difference. Uber drivers must pass background and DMV checks, they must register their cars with Uber, and their cars must be less than 10 years old. Drivers’ passenger approval rating must not fall below a certain score. And Uber sets the price for each trip and the driver receives a non-negotiable service fee.

As Uber’s valuation has skyrocketed and other sharing economy companies that rely on independent contractors have gained traction, there’s been ongoing speculation about what might happen if a court or regulator threw such companies for this kind of loop. The ruling that surfaced on Tuesday might finally give us a chance to find that out.

It’s important to note that the commission’s ruling is not binding. Uber emphasized that point in a public statement. It also noted that the commission’s decision applies to a single driver and is in conflict with a previous ruling by the same regulatory body, which in 2012 said that a driver was not a bona fide employee. “Five other states have also come to the same conclusion,” the company said. “It’s important to remember that the number one reason drivers choose to use Uber is because they have complete flexibility and control. The majority of them can and do choose to earn their living from multiple sources, including other ride sharing companies.”

The commission’s ruling was attached to an appeal that Uber filed to the Superior Court of California in San Francisco on Tuesday. If Uber receives the same result in that court, it has the right to appeal to the California Court of Appeals. Beyond that, it can go to the California Supreme Court, but the justices there are not obliged to review the case.

What’s perhaps more worrisome for Uber is that the outcome of this individual driver’s case could inspire other drivers to file similar claims. And there’s the possibility that other regulators and trial courts could follow the California commission’s lead.

“An adverse ruling emboldens plaintiffs attorneys to file class actions and seek to certify classes [of drivers] in multiple states. They could also bring a collective action under federal law for Fair Labor Standards Act violations, which has a whole separate set of remedies for noncompliance,” says James Evans, a labor and employment lawyer at the firm Alston & Bird.

Uber is already facing a trial in an entirely separate case that will decide if its drivers are employees entitled to minimum wage, expenses, and workplace benefits. In March, a federal judge in San Francisco rejected the company’s argument that drivers must be considered independent contractors.

The ride sharing company’s massive success has, in part, resulted from its arm-distance relationship with its drivers. By classifying its drivers as independent contractors—not employees—it’s cut many costly corners of labor law, like not having to pay for Social Security and unemployment insurance or compensate drivers for overtime and breaks. As independent contractors, drivers have had to front expenses like vehicle maintenance and gasoline. If drivers are deemed employees, all those costs will have to be repaid, Evans says.

In recent years, Uber has become more than a ride sharing company; its name has become shorthand for identifying the sharing economy’s Next Big Thing. There’s an “Uber” for laundry, alcohol, medical marijuana, doctors that make house calls, even suitcase packing.

[fortune-brightcove videoid=4226134184001]

Uber’s stature in the startup world and the tech industry means the potential fallout from the labor commission’s ruling could be just as big.

Companies that rely on independent contractors should be on high alert, says Miriam Cherry, a professor at St. Louis University School of Law who has been tracking crowdfunding and the sharing economy since 2007. She is keeping tabs on 11 lawsuits against sharing economy companies made mostly by workers seeking employee benefits. Uber and Lyft are defendants in four of those lawsuits. Handybook, which lets users order home cleaning services, was sued for Fair Labor Standards Act violations, as was Homejoy, another platform for booking home cleaning services, just to name a few.

Even if courts decide that sharing economy workers are, in fact, employees, that won’t spell the downfall of the “Uber-for” economy. But such decisions will require these companies to regroup. “Companies can do well by acknowledging that they’re in the business of labor, and that involves paying a decent wage,” Cherry says. If not, she says, “they run the risk of going in front of juries, which creates uncertainty for their business models, workers, investors. It makes more sense for them to figure out what compliance looks like.”

The other option: these companies can give up some of the control they exert over the individuals who use their platforms. This seems like Uber’s most feasible option. Courtroom losses certainly won’t spell its imminent demise. The company is so well capitalized, Evans says, it has the resources required to loosen its reins on drivers so they fit back into independent contractor mold.

Read More

Great ResignationDiversity and InclusionCompensationCEO DailyCFO DailyModern Board