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April 29, 2016 Practice Points

Has Uber Misclassified Its Drivers as Independent Contractors?

Uber’s $100 million fare to settle misclassification lawsuits with drivers serves as a reminder of what is at stake when classifying workers.

By Nina G. Beck

On April 21, 2016, Uber announced that it had reached a $100 million settlement with its drivers in class-action lawsuits pending in California and Massachusetts. Uber drivers alleged various federal and state-law wage-and-hour violations. If the settlement is approved, no determination will be made with respect to the ultimate issue: Has Uber misclassified its drivers as independent contractors? That question may not remain unanswered for very long as other Fair Labor Standards Act (FLSA) lawsuits are still pending against Uber, Lyft, and other similar companies across the country.

At issue is whether drivers were denied minimum-wage and overtime protections afforded under the FLSA because they were misclassified as independent contractors. Uber’s $100 million settlement payment is a reminder as to the important distinction between an employee and an independent contractor, and how federal laws and regulations impact that distinction.

Why the Distinction Matters

Employees are afforded certain benefits and protections under the FLSA. The FLSA imposes minimum-wage, overtime-pay, recordkeeping, and other employment requirements on employers of private- and public-sector employees. Because independent contractors are not covered by the FLSA, principals are not required to pay independent contractors minimum wage and overtime compensation, and independent contractors do not have a cause of action against their principal for failure to satisfy FLSA requirements.

Since January 2013, the U.S. Department of Labor (DOL) has prioritized the investigation of independent contractor misclassification through the “Misclassification Initiative.” As part of that initiative, in July 2015, the DOL issued an administrator’s interpretation declaring that “most workers are employees under the FLSA’s broad definitions.” According to the DOL, the FLSA’s broad definition of “employ” as “to suffer or permit to work” will not be satisfied by simply classifying a worker as an independent contractor.

The New Economic Realities Test

Historically, the primary method for determining a person’s employment status has been the “control test.” Under the control test, the most significant consideration was whether the purported employer had control over the worker’s performance or whether the worker generally performed his or her duties free from control.

Based on the recent guidance from the DOL, however, the control test has given way to the “economic realities test.” Importantly, instead of focusing on the degree of control a business has over an individual’s work, courts have begun to focus on whether the worker is economically dependent on the employer or in business for himself or herself. A worker who is economically dependent on an employer is “suffered or permitted to work” and, thus, always an employee under the FLSA.

When conducting the economic-realities test, the following six factors are often considered:

  • Is the work an integral part of the employer’s business?
  • Does the worker’s managerial skill affect the worker’s opportunity for profit or loss?
  • How does the worker’s relative investment compare to the employer’s investment?
  • Does the work performed require special skill and initiative?
  • Is the relationship between the worker and the employer permanent or indefinite?
  • What is the nature and degree of the employer’s control?

Each factor should be analyzed in relation to one another, and no one factor is determinative. Specifically, as it relates to the “control” element, the DOL has stated that this factor should not predominate the analysis. The DOL has stated that it will not only consider the control exercised by the purported employer, but will also consider the control retained by the employer.

The Uber Upshot

Twenty-nine states have now joined the DOL’s Misclassification Initiative. In Fiscal Year 2015, the DOL Wage and Hour Division’s investigation resulted in the recovery of $74 million in back wages for more than 102,000 workers. As the DOL continues to investigate this issue, states such as California and Louisiana are concurrently pursuing state-law-based wage-and-hour violations arising from the misclassification of employees.

In light of the DOL and states’ continuing focus on this issue and the broad ramification of the economic-realities test endorsed by the DOL, businesses must continually evaluate their contracts with workers to ensure compliance with state and federal labor laws. Uber’s $100 million settlement is undoubtedly a cautionary tale of what is at stake when employers must address the issue of worker classification.

Keywords: litigation, corporate counsel, FLSA, worker classification, independent contractor

Nina G. Beck, Godfrey & Kahn, S.C., Milwaukee, WI

Copyright © 2016, American Bar Association. All rights reserved. This information or any portion thereof may not be copied or disseminated in any form or by any means or downloaded or stored in an electronic database or retrieval system without the express written consent of the American Bar Association. The views expressed in this article are those of the author(s) and do not necessarily reflect the positions or policies of the American Bar Association, the Section of Litigation, this committee, or the employer(s) of the author(s).