Could the world wake up one morning and find ride-hailing service Uber struck dead, shackled to hundreds of thousands of drivers that have suddenly been deemed expensive employees?
In the wake of a ruling from a California Labor Commissioner Wednesday that said Uber driver Barbara Berwick was an employee, it sounded like it was possible. The ruling was called Uber's "worst nightmare," a bad omen that "should frighten" and "blasts a big hole in" all contractor-based businesses. One reporter wondered on Twitter if Uber's $50 billion valuation priced in the fact that it could be "instantly vaporized" and said he'd been told the lawsuits were "an existential threat" to the company and others like it.
Well, not quite. A legal decision that could instantly cripple Uber would be years off and would likely only apply to part of its operations -- and in the meantime, Uber would have time to lobby for new regulations or tweak its business model to stay afloat, legal experts say.
"Nothing happens fast in the law," said attorney Beth Ross. She would know -- she's been going after FedEx Ground for misclassifying some of its drivers since 2000. But her biggest win wasn't until last year, when the Ninth Circuit Court of Appeals ruled that FedEx had misclassified some 2,300 drivers. FedEx settled that case last week for a whopping $228 million, one of the biggest employment settlements in recent history, she said. FedEx did eventually change its business model to make its contractors more like franchisees than drivers in the trucks, but that change didn't come until 2009.
The Berwick ruling doesn't look good for Uber. But it doesn't actually set any precedent for other cases -- it only applies to Berwick, and it's already been appealed. When it's re-heard in San Francisco Superior Court, it'll also be heard fresh -- de novo, in lawyer terms -- meaning the new decision won't take the Labor Commissioner's decision into account.
What Happens Next With The Case?
State and federal courts both have three levels: trial courts, courts of appeal and a Supreme Court. Only decisions made at the appeals level or higher are "binding" -- that is, that other courts in that jurisdiction have to follow them when faced with similar cases. The Berwick case will now go through San Francisco trial court, and then if that is appealed, it will go through the court of appeals -- a process that could take one and a half to two years total, said labor attorney David Rosenfeld. Uber is also appealing a ruling from a Florida agency that said a driver is an employee.
Meanwhile, a case in federal court filed by Shannon Liss-Riordan could advance. This one has gotten attention because it's not class-action yet but hopes to be, and because judges have made early rulings that seem to favor the employee argument. It will have a class-action certification hearing in August and is set to go to a jury trial after that, but "federal courts take even longer," said UC Hastings law professor Reuel Schiller. If the case becomes a class-action suit, the stakes are raised, and it might present a scarier financial risk to Uber.
Another limitation: the findings in both the Berwick state case and the federal case would be limited to California, even if they were upheld at the highest levels of court. The federal case was originally filed as a nationwide suit, but a judge limited it to California drivers last year.
Uber is quick to point out that not all labor commissioners feel their drivers are employees. In 2012, a California labor commissioner ruled that a driver was an independent contractor. Labor commissioners or labor departments in six other states -- Georgia, Pennsylvania, Colorado, Texas, Illinois and New York -- have come to the same conclusion.
If Berwick wins at the appeals level, that could open the floodgates of other plaintiffs who want to claim they are employees and get expenses covered. (Berwick was granted more than $4,000 for two months of work as an Uber driver.)
"That's when all hell breaks loose because everybody in the world can go to the labor commissioner and be told this is what you're owed," Rosenfeld said. "Lawyers will file more lawsuits."
But those lawsuits would be limited to drivers with the resources and energy to seek it out -- not a decision that would have sweeping consequences for all drivers. And many drivers who enjoy the flexibility of a contractor schedule -- 73% of drivers according to an Uber survey -- might not want it at all.
"There's no law that requires Uber or any other company to say, 'Oh, well, Schiller won, therefore we need to change our employment practices," Schiller said. "If Uber wanted to, they could contest every case. They could argue that the facts are that Schiller drives fewer hours than you, or any number of different factual distinctions."
"Does Uber mind paying out $4,000 a couple of times a month to the drivers who have the resources and time to bring these individual cases?" he added. "I don't know, but we both know they have that kind of money. ... The class-action mechanism is a more potent mechanism to generate a response."
A court could also issue an injunction against Uber from engaging drivers under its current contract, though those can be appealed, Ross said.
Could Uber Proactively Change Its Business Model?
Maybe. Ross once litigated an employment case against Carey Limousine, a large limousine company, on behalf of some of its employees but not a class-action suit. On the eve of trial -- "I was writing my opening statement," she said -- the company suddenly said it would switch all of its independent contractor drivers to employees. (A regional subsidiary of the company appears to have since declared bankruptcy, so there's that.)
Uber doesn't seem likely to pull an about-face for all of its drivers. But Uber and Airbnb have a history of making some accommodations to comply with the law. Airbnb, after initial resistance and regulatory tussles in San Francisco and New York, now has regulations in place in those areas, though it remains unregulated and operating almost everywhere else. Same with Uber: it has added insurance for drivers, but only when legislation -- which they lobbied hard to keep their costs down -- was about to pass or take effect.
Uber could draw out these legal battles long enough to reach some kind of regulatory resolution through other channels, Schiller said.
"If I had to guess going forward, Uber's strategy is not going to be to capitulate and declare all their drivers are employees, nor do I think they will tinker with the contracts they have with drivers," Schiller said. "They will probably to try to shape the regulatory environment."
But in the end, Uber could see the writing on the wall -- especially with the weight of a class-action suit -- and choose to make some changes to driver classification or contracts. "Those (legal) opinions do not bode well for Uber," Schiller said.
What About Other On-Demand Companies?
Another fear is that every other on-demand startup that uses independent contractors, like Postmates, Instacart, Handy and Luxe, is watching how cases like Berwick's play out to see if their business model has the same vulnerability. But George Grellas, a start-up lawyer, says that's not usually on founders' minds -- least of all deterring them from launching their companies.
"When I see founders doing companies like this, they're focused almost entirely on the tremendous changes that can come from the new model," Grellas said. "They know there's potentially regulatory and legal obstacles, but the attitude I've always seen is, 'We'll deal with those as needed.' Their fundamental assumption is the law will tend to evolve and allow for new models."
Grellas said he would be "utterly shocked" if a single legal decision severely affected Uber or similar businesses. Laws reflect changing social principles, which may grow to include workers who want flexibility more than they want the security of an employment relationship.
"I think they're a smart company and they'll do what it takes," he said of Uber. "Even if that means adapting some of their practices to shield themselves a little more on the side in ways that don't fundamentally affect the model."
