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California Juries to Play Crucial Role in Determining Future of Ride-Sharing Industry

As is the case with most start-up enterprises, regulatory and legal questions currently facing the ride-sharing industry present serious challenges to sustainability. In the past, we have reported on the regulatory evolution of Transportation Network Companies (“TNCs”) in California. TNCs, such as Uber, Lyft and Sidecar, provide smartphone applications that connect people who need rides with drivers of personal, non-commercial vehicles. The California legislature has attempted to strike a careful balance when it comes to regulation of TNCs – drafting legislation that governs the industry without creating logistical challenges that might stifle the new marketplace.

Meanwhile, as increasingly more cases involving TNCs are litigated in California courts, the judiciary is faced with questions that will shape the future of the TNC industry. One such question – whether TNC drivers are “employees” or “independent contractors” under California law – was recently posed to two U.S. District Court judges in separate lawsuits against Uber and Lyft.

The two cases – O’Connor, et al., v. Uber Technologies, Inc. et al. (Case No. C-13-3826 EMC) and Cotter, et al., v. Uber Technologies, Inc. et al. (Case No. 13-cv-04065-VC) – are both venued in the U.S. District Court in San Francisco. Both lawsuits were filed by drivers who claim that, although the TNCs classify them as independent contractors, they are actually employees and are therefore owed certain benefits, reimbursements, and protections. The drivers are seeking class action status in both cases.

The answer to the question posed by these two landmark cases is of great consequence to TNC drivers, as California labor laws confer many protections on employees, while independent contractors receive minimal protection. The answer is also of great consequence for purposes of vicarious liability. Whether TNC drivers are considered employees or independent contractors is determinative as to whether TNCs can be found vicariously liable for their drivers.

Under California law, a multi-factor test is employed to determine whether a particular individual is a defendant’s employee. The most important factor is whether the defendant had the right to control how the individual in question performed the work. In addition to the right to control, the following factors tend to prove “employee” status:

  • The defendant supplied equipment, tools, and the place of work;
  • The individual was paid by the hour rather than by the job;
  • The work performed was part of the regular business of the defendant;
  • The defendant had an unlimited right to end the relationship with the individual;
  • The work performed by the individual was his/her only occupation or business;
  • The type of work performed is usually performed under the direction of a supervisor;
  • The type of work performed does not require specialized or professional skill;
  • The services performed were to be performed over a long period of time; and
  • The defendant and individual acted as if they had an employer-employee relationship.

The question of how to classify a worker is typically a question for the jury. A California court may only decide the question as a matter of law if application of the factors outlined above would require any reasonable juror to reach the same conclusion.

Determining the legal status of TNC drivers using the multi-factor test poses a difficult task for any reasonable mind. TNC drivers drive personally owned vehicles, are paid by the ride, are unsupervised, and have the freedom to decide if and when to work. However, TNCs provide the drivers with a smartphone equipped with the ride-sharing software, determine the rate charged, and provide certain rules and guidelines that the drivers must follow. As U.S. District Judge Vince Chhabria noted in Cotter, “at first glance, Lyft drivers don’t seem much like employees… But Lyft drivers don’t seem much like independent contractors either.” Judge Chhabria concluded that the multi-factor test “provides nothing remotely close to a clear answer” as to whether Lyft drivers are Lyft employees or independent contractors. U.S. District Judge Edward Chen expressed a similar opinion in O’Connor, stating, “The application of the traditional test of employment – a test which evolved under an economic model very different from the new ‘sharing economy’ – to Uber’s business model creates significant challenges.”

Accordingly, both judges ruled that a jury must determine whether TNC drivers are employees or independent contractors. In doing so, Judge Chhabria provided the following commentary:

[T]he jury in this case will be handed a square peg and asked to choose between two round holes. The test the California courts have developed over the 20th Century for classifying workers is not very helpful in addressing this 21st Century problem… absent legislative intervention, California’s outmoded test for classifying workers will apply in cases like this. And because the test provides nothing remotely close to a clear answer, it will often be for juries to decide.

If the juries decide that the drivers are employees, the TNC business model will be dealt a significant blow. TNCs rely on the independent contractor model to provide a cheap workforce, and to avoid considerable operating costs and tax obligations associated with employees.

Until the legislature enacts laws tailored to the unique ride-sharing industry, California juries will play a significant role in determining the fate of TNCs, as well as other startup enterprises whose business models rely on the new “on-demand, sharing economy.”

ABOUT THE AUTHOR: Morgan Van Buren is an associate at Tyson & Mendes LLP. He specializes in personal injury and high net worth insurance issues. Contact Morgan at 858.263.4107 or mvanburen@tysonmendes.com.

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Previous Articles on Ride-Sharing Industry: 
Update: Future of Ride-Sharing Industry Remains Murky  
Update: Uber and Lyft Respond to Mounting Pressure by Expanding Insurance Coverage for Ridesharing Drivers
Insurance Gaps Threaten Ride-Sharing Industry