Uber Might Briefly Shut Down In California After Court Rules That Drivers Are Employees

Photo: David Paul Morris/Bloomberg/Getty Images.
This story was originally published on August 11th, 2020.
According to some estimates, over 50 million people today may be engaged in some type of gig work. In the side hustle economy, gig work has become a necessity to make ends meet while also providing some flexibility that a typical 9 to 5 wouldn’t. But gig workers are facing an identity crisis now, especially those working for popular app-based companies like Uber, Lyft, Postmates, or Doordash. Are they their own self-employed bosses, or are they employees?
On Monday afternoon, a California court gave a firm answer, granting a preliminary injunction that orders Uber and Lyft to immediately reclassify drivers as employees. Though Uber has said it will appeal this order, the decision could have serious consequences for these companies, potentially even leading to a pause in services. Today, Uber CEO Dara Khosrowshahi announced that Uber services could temporarily be shut down in California if the company's request for a 10-day stay isn't successful, because it would be difficult to "switch our model to full-time employment quickly." He also added that if the ruling held, Uber's services in California could become more limited in the long-term, focused on cities rather than suburbs. Some have interpreted his statements as a kind of threat. Xavier Becerra, the California attorney general, told CNBC, "Any business model that relies on short-changing workers in order to make it probably shouldn’t be anywhere, whether California or otherwise."
Just hours before the injunction on Monday, Khosrowshahi published an op-ed in the New York Times arguing that there should actually be three types of workers as far as the law is concerned: people who work for an employer, people who are self-employed, and then something else, something uniquely for gig workers.
This Goldilocks of employment statuses would, according to Khosrowshahi, solve a problem of the current binary, which “forces every worker to choose between being an employee with more benefits but less flexibility, or an independent contractor with more flexibility but almost no safety net.” It’s Uber’s argument for why their workers should stay classified as independent contractors, and not be deemed as employees the way a number of laws have been declaring in recent years. But what does this really mean?
What are independent contractors?
The essence of an independent contractor is that they have control over how their work is conducted. They call the shots — but that means that they’re outside the reach of most employment protections and benefits. And there’s a lot of those, says Terri Gerstein, Director of the State and Local Enforcement Project at Harvard Law School’s Labor and Worklife Program. “That's minimum wage, overtime, workers' compensation — which gives you medical care and lost wages if you get sick or injured at work — the right to organize collectively bargain, form a union, anti-discrimination laws, social security, paid sick leave laws, all of them,” she explains.
In theory, because independent contractors are their own bosses, they have the means to simply not engage in business under terms they find disagreeable. But of course, it often doesn't work out that way. Workers in various industries have long been miscategorized as independent contractors, because it comes with much fewer obligations from companies — and so it's cheaper.
Are Uber drivers independent contractors?
Uber has long touted that, as a driver, you can be your own boss. And it’s true that being an Uber driver means you can technically set your own hours, driving as little or as much as you want. But “being your own boss” also implies that you can set your own rate, pick which passengers and routes you drive, and not be subject to supervision. Generally, though, Uber drivers can’t control most of these things. And in cities like New York, drivers can also face a quota system that affects whether they're given the opportunity to log on and drive at all.
Earlier this year, Uber started allowing California drivers to have some control over their fares and passengers — but this was a direct response to a new California law called Assembly Bill 5 that clarifies who exactly counts as an independent contractor. Laws like AB5 use what’s called an “ABC test” to determine if someone is an independent contractor. It asks A: if the worker has control and direction over what they do — as Uber’s recent changes in California attempt to address. Then it asks B: if the work is distinct from the company’s main business. If you’re a graphic designer hired by a firm that provides graphic design services, you’d likely be an employee under this test. If you’re a graphic designer hired by a rideshare app to retool its logo, there’s a stronger case for being an independent contractor. Uber, for its part, has maintained that it’s not a transportation company, but a tech platform, which has been met with much skepticism. Lastly, the test asks C: if the worker ordinarily operates an independent business in this line of work, with other clients and contracts. As in, do you have a business driving people around outside of Uber?
Even before AB5, states have been using ABC tests, and court rulings have declared that Uber drivers aren’t independent contractors. These rulings are costly for Uber, who was found to owe $649 million in unpaid unemployment taxes in New Jersey last year. A UC Berkeley study estimated that in California, Lyft and Uber should have paid $413 million into the state unemployment fund.
Do gig workers lose flexibility if they're employees?
The crux of Khosrowshahi’s argument is that if Uber drivers were employees, they’d lose flexibility. “Uber would only have full-time jobs for a small fraction of our current drivers and only be able to operate in many fewer cities than today,” he writes. “Rides would be more expensive, which would significantly reduce the number of rides people could take and, in turn, the number of drivers needed to provide those trips. Uber would not be as widely available to riders, and drivers would lose the flexibility they have today if they became employees.” An Uber spokesperson clarified to Refinery29 that becoming an employee would mean not being able to set your own hours, which the company says its drivers overwhelmingly prioritize.
But is the flexibility tradeoff a fact of life? “There is nothing in any employment law that says you can’t have an employee and give them flexible hours,” says Gerstein. “So I don't know what else to say about that.” She says that this line of reasoning has become something of a “trope” with businesses. “[They say] if you become an employee, you give up flexibility — that's because they've built their business model this way.”
Why does it matter?
“When workers are misclassified as independent contractors, it has a lot of serious implications,” says Gerstein. That includes all the protections mentioned above, which have been especially crucial during the pandemic. The CARES Act expanded unemployment benefits to cover self-employed workers, but if Uber drivers aren’t true independent contractors anyway, they shouldn’t have to rely on a temporary emergency expansion to receive their legal benefits. Nor should taxpayers have to fund the entirety of their unemployment, when other employers dutifully pay into an unemployment fund for employees.
Being an independent contractor also dramatically shifts which costs are paid by workers instead of companies. “There are tools that employees have to use in order to do their work,” says Gerstein. In some states, like New York, workers are explicitly protected from having to pay for them. “That's treated as an unlawful deduction from wages. Uber has shifted many of the costs of doing business onto their employees. The employees are the ones who buy the cars, who often find the financing and buy them specifically to drive with the company, the workers pay for the gas, the workers pay for the insurance, for repairs.”
In the case of one full-time rideshare driver in NYC interviewed by CNBC, the driver could make up to $72,000 a year from rideshare apps. But between inspections, registration fees, insurance, gas, repairs, and maintenance, he was looking at $17,000 in out-of-pocket expenses — not to mention the self-employment taxes he needs to withhold and pay each quarter, in order to be eligible for benefits like social security and Medicare.
Then there’s the fact that we’re dealing with a public health crisis right now. “If they were employees, they'd be covered by the federal Occupational Safety and Health Act,” says Gerstein. “And the company would be required — not as an act of charity or goodness — but actually required to provide safety and health equipment.” Uber has worked to provide PPE to its drivers, but right now, there’s nothing requiring them to do so. Lyft, meanwhile, came under fire this year for allegedly selling PPE to its drivers instead of providing it for free.
Uber suggests a “benefits fund”
In the op-ed, Khosrowshahi suggests that, instead of classifying gig workers as employees, companies should “establish benefits funds which give workers cash that they can use for the benefits they want, like health insurance or paid time off.” He claims that a driver in Colorado, “averaging over 35 hours per week would have accrued approximately $1,350 in benefits funds in 2019. That’s enough to cover two weeks of paid time off, or the median annual premium payment for subsidized health insurance available through an existing Uber partnership.”
Even if this math worked out in certain cases, it doesn’t seem to address that drivers may be paying upwards of $17,000 a year in expenses — or the value of the vast legal protections employees enjoy that contractors do not. It also seems to be saying that drivers need to commit a certain number of hours to get something meaningful, like health care, out of the benefits fund.
“It's a way to try to seem reasonable, I guess, but it's not reasonable,” Gerstein says. “They've been sued by the Massachusetts AG, sued by the California AG, and several county attorneys in California.” In both Pennsylvania and New York, Uber drivers have been determined to be employees for the purposes of unemployment benefits. “The tide is turning, and I think they probably feel like they have to do something.”
Khosrowshahi does suggest that new laws should protect independent contractors from discrimination while on the job, and says that all gig work companies should provide “medical and disability coverage for injuries incurred on the job.” While this would be a step in the right direction, it would be a half-measure that avoids the wide gamut of protections that being reclassified as an employee would give automatically.
“So many businesses large and small, all over the country, manage to follow these basic safety net laws we have about their obligations toward workers,” says Gerstein. “The diner down the street or some mom-and-pop hardware store can manage to have employees and pay unemployment insurance, get workers’ comp, pay overtime. And the big companies throw up their hands and clutch their pearls and make dire prognostications and say that they're unable to do it. It makes no sense.”

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