A hearing officer for the Labor Commissioner’s local office in San Francisco concluded earlier this month that an Uber driver was an employee of Uber, not an independent contractor. As a result, the hearing officer awarded the Uber driver $3,878.08 in reimbursable business expenses for mileage and bridge tolls incurred while providing Uber rides. Uber has filed an appeal and, as a result, a trial on the matter will proceed in state court. The hearing officer’s decision, which only became widely known after Uber filed its appeal, has received a great deal of publicity and rekindled the debate about employees versus independent contractors, particularly in the changing services economy.
The approach taken by the Uber driver represents one avenue through which a business may have an independent contractor classification challenged. At any point, an individual who a business believes is properly classified as an independent contractor, and has been treated as such, may file a claim with the local office of the Labor Commissioner for unpaid wages, unpaid overtime, missed meal and rest break penalties and unreimbursed business expenses. If such a claim is filed, it will ultimately be decided by a hearing officer who will apply California case law to determine whether the individual is an employee or independent contractor. In the case of the Uber driver, the hearing officer focused on the fact that the Uber driver was providing services the hearing officer believed were an “integral part of the regular business” of Uber. The hearing officer reasoned that without drivers Uber could not exist, therefore the drivers are integral to the business. Ultimately, this factor seemed to be the most important to the hearing officer and the hearing officer rejected Uber’s argument that Uber is a technological platform allowing riders and drivers to transact business.
In addition to filing a claim with the Labor Commissioner’s office, an individual classified as an independent contractor versus employee may file for unemployment benefits after a contract ends. When this happens, the Employment Development Department (“EDD”) will determine whether the individual is an employee or independent contractor applying the standards used by the EDD. If the EDD determines the individual is an employee, it will trigger an audit of the company’s EDD account in which the EDD will determine whether other individuals are improperly classified as independent contractors. The EDD audit will look back several years and can result in a significant assessment against the business.
Significantly, the EDD also engages in interagency sharing of information with the Internal Revenue Service (“IRS”). As a result, those companies subject to an EDD audit should expect the IRS to also take an interest in any challenged independent contractor classifications.
There are many reasons why a business may prefer to use an independent contractor rather than an employee for certain projects or services. However, the decision to classify any relationship as one of independent contractor rather than employment should be done thoughtfully and with an eye toward the prevailing legal test. As we have discussed in previous Alerts, the most significant issue is whether the alleged employer retains control over the “manner and means” by which the alleged independent contractor performs services.
If you currently use or are contemplating using independent contractors, examine how much control, either in the independent contractor agreement or in practice, the company maintains over how the “independent contractor” performs services. If independent contractor status is challenged, the company will need to convincingly prove not only that the independent contractor agreement did not allow the company to maintain control over the “manner and means” by which the contractor performed services, but also, that it did not in practice exert control over the manner and means by which the independent contractor performed services.