There was a time when everyone knew the difference between an employee and an independent contractor. An employee went to the office or factory, worked his eight hours for an employer (and only one employer), had his taxes deducted from his paycheck, and was paid two weeks’ vacation. The classic independent contractor was the plumber who came to the customer’s home (or business) in his own truck. The plumber told you when he chose to come, arrived when it was convenient for him, wholly dictated the price, used his own tools and waited to be paid on the spot. He then left, never to be seen again until the next leaky pipe.
The Rise of the Alternative Worker
The determination as to who is an employee and who is an independent contractor has become less clear over the years, mainly due to the expansion of the “alternative workforce” versus the employee workforce. This expansion was partly caused by the way businesses ran their operations to stay competitive in the global marketplace. In the 1970’s and 1980’s, recessions led to the downsizing of employee-rich bureaucracies leading companies to rethink their business models to include temporary workers, who may have been employed by someone, but were not employees in the place where they worked – they were part of an independent contractor force.
The next shoe to drop was globalization. The rise of technology and less costly transportation methods led to offshore production. Businesses simply could not afford a large employee workforce, and hiring workers on an ad hoc basis lowered their bottom lines and increased their profitability.[i] As of 2010, more than 10,000,000 workers, comprising 7.4 percent of the U.S. workforce, were classified by the Bureau of Labor Statistics as independent contractors, and another 4,000,000 worked in alternative work arrangements in which they were legally classified as independent contractors for one or more purposes. In that year, “alternative” workers, as they were called, accounted for approximately $626 billion in personal income, or about one in every eight dollars earned in the U.S.[ii]
The Common Law Tests
So, what is the law as it pertains to the employee versus the independent contractor conundrum? In 1926, the U.S. Supreme Court opined regarding who could be identified as an independent contractor in Metcalf & Eddie vs. Mitchell. In that case, the Court used well-established common law as its guide. In examining the performance of the contract at issue, the Court looked to whether (i) the performance of the contract involved the use of judgment and discretion on the part of the worker; and (ii) the worker was required to use his best professional skill to bring about the desired result. Thus, the Court concluded, if the worker enjoyed “liberty of action,” it “excludes the idea that control or right of control by the employer which characterizes the relation of employer and employee and differentiates the employee or servant from the independent contractor.” [iii] The key factor in these cases was level of control exerted by the putative employer.
New York courts apply the same common-law right-to-control test to determine whether a worker is an employee in several contexts.[iv] In Bynog v. Cipriani Group, Inc., the New York Court of Appeals identified five factors “relevant to assessing control, includ[ing] whether the worker (1) worked at his own convenience; (2) was free to engage in other employment; (3) received fringe benefits; (4) was on the employer’s payroll; and (5) was on a fixed schedule.”[v]
Then, there is the “economic reality test,” which is applied in connection with Fair Labor Standard Act (“FLSA”) cases, which focuses on “the totality of the circumstances.” In those cases, the “ultimate concern …[is] whether, as a matter of economic reality, the workers depend upon someone else’s business for the opportunity to render service or are in business for themselves.”[vi] The courts rely on several factors that are relevant in determining whether individuals are employees or independent contractors. These factors are derived from the Supreme Court’s decision in United States v. Silk and include (1) the degree of control exercised by the employer over the workers; (2) the workers’ opportunity for profit or loss and their investment in the business; (3) the degree of skill and independent initiative required to perform the work; (4) the permanence or duration of the working relationship; and (5) the extent to which the work is an integral part of the employer’s business.[vii]
Uber Drivers: Misclassified Employees?
In this complex world, it is impossible to make a snap determination as to who is an independent contractor and who is an employee. Thus, misclassification lawsuits have grown at a record pace. As of 2015, the number of wage and hour cases filed in federal court rose to 8,871, up from 1,935 in 2000, most pertaining to misclassification, including misclassifying workers as independent contractors when they are later found to be employees.[viii] That correlates to an increase of 358 percent, compared to the federal judiciary’s overall intake volume, which rose only a total of about seven percent over the same period.
Nowhere is the trend toward expanding misclassification litigation more apparent than when it comes to a company such as Uber. At first blush, Uber would seem to have a classic independent contractor relationship with its drivers. Let’s look at the basic facts: An Uber driver drives his/her own vehicle, obtains his/her own insurance, maintains that vehicle, drives when and where and for how long he/she desires. The driver is not issued any equipment by Uber and uses his/her own cell phone to access customers. Moreover, an Uber driver can drive for its competitor, Lyft, at any moment the driver wishes. It would seem the Uber driver has “liberty of action,” noted by the Court in Metcalf, and, thus, would not be considered an employee.
However, some courts and administrative agencies have ruled otherwise. In Berwick v. Uber Technologies, Inc., the first California decision to hold that Uber misclassified drivers as independent contractors, the California Labor Commissioner ruled that the Uber drivers bringing a class action were employees and not independent contractors.[ix] The Commissioner’s focus was on control.
Contrasting the factors listed above that would seem to contradict such control, the Commissioner found that Uber was involved in virtually every aspect of the operation. First, drivers can only avail themselves of Uber’s customers by utilizing Uber’s app. Next, Uber conducts driver background checks, sets the drivers’ compensation, and monitors drivers’ performance through customer reviews. Finally, Berwick held the work performed by the drivers was “integral” to the regular business of Uber – which is axiomatic.
Likewise, in June 2017, the New York State Unemployment Insurance Appeal Board held that three complainants were employees, stating, “Uber exercised sufficient supervision and control over substantial aspects of their work as Drivers,” similar to the analysis and holding in Berwick.[x] One of the factors considered by the Commissioner was that “Uber did not employ an arms’ length approach to the claimants” that the Commissioner believed would be present in a typical independent contractor relationship.
This raises interesting questions. Yes, Uber set the rates that could be charged and set certain conditions for drivers to follow, but one must assume some rules are necessary to establish consistency of the business model to attract and maintain customers for Uber and the drivers. Uber could not exist if it simply provided a means for drivers to pick up a passengers and left it to them to figure out the price of the service. However, what is an element of control, and sometimes what constitutes “control,” can be in the eye of the beholder.
Other Courts: Drivers Are Not Employees
There have been decisions to the contrary. In McGillis v. Department of Economic Opportunity, the Third District Court of Appeal of Florida upheld an administrative decision finding drivers were not employees.[xi] On the issue of “control” the court acknowledged that “both employees and independent contractors ‘are subject to some control by the person or entity hiring them. The extent of control exercised over the details of the work turns on whether the control is focused on simply the result to be obtained or extends to the means to be employed.’” Citing authorities, the court reasoned that if control is confined to results only, there is generally an independent contractor relationship, and if control is extended to the means used to achieve the results, there is generally an employer-employee relationship.
In Saleem v. Corporate Transportation Group, the Second Circuit addressed black car drivers in New York who were asserting claims against owners of black car “base licenses” and affiliated entities, pursuant to the FLSA. Like Uber, the black car drivers “possessed considerable autonomy in their day-to-day affairs.”[xii] They could determine when and how often to drive, without providing any notice to the Defendants, and they were at liberty to—and did—accept or decline jobs that were offered. In the end, the court found that the drivers were independent contractors, noting “[w]hile Defendants did exercise direct control over certain aspects of the CTG enterprise, they wielded virtually no influence over other essential components of the business, including when, where, in what capacity, and with what frequency Plaintiffs would drive.”[xiii]
What is the difference between the black car drivers in Saleem and the cases where Uber has been found to be an employer? The answer is very little. However, the law, like life, is nuanced. If the question is what constitutes control for purposes of making such a determination, one small factor could turn the tide either way. The real question is: has the economy and technology so changed that the normal paradigms we all think we understood regarding the nature of work and what it means to be “employed” mandate that a new way of looking at such concepts is in order-one way or the other?
[i] The Rise of the Supertemp, Jody Greenstone Miller and Matt Miller Harvard Business Review, May 2012.
[ii] The Role of Independent Contractors in the U.S. Economy, Jeffrey A. Eisenach, American Enterprise Institute; NERA Economic Consulting: December 1, 2010.
[iii] Metcalf & Eddie vs. Mitchell, 269 U.S. 514, 522 (1926).
[iv] Smith v. CPC Int’l, Inc., 104 F.Supp.2d 272, 275 (S.D.N.Y.2000) (“[T]he common law test of agency discussed in Darden is the same test applied by New York courts in addressing a variety of employer-employee relationships.”).
[v] Bynog v. Cipriani Group, Inc., 1 N.Y.3d 193, 198 (2003).
[vi] Brock v. Superior Care, 840 F.2d 1054, 1059 (2d Cir. 1988); see also Goldberg v. Whitaker House Coop., Inc., 366 U.S. 28, 33 (1961) (“‘[E]conomic reality’ rather than ‘technical concepts’ is to be the test of employment.” (quoting United States v. Silk, 331 U.S. 704, 713 (1947)).
[vii] United States v. Silk, 331 U.S. 704 (1947).
[viii] Why Wage and Hour Litigation is Skyrocketing, Washington Post, November 25, 2015.
[ix] Berwick v. Uber Technologies, no. 11-46739 EK, 2015 WL 4153765 (Cal. Dept. Lab. June 3, 2015).
[x] In the Matter of AK, JH and JS v. Uber, ALJ case No. 016-23858, New York State Unemployment Insurance Appeal Board (June 9, 2017).
[xi] McGillis v. Department of Economic Opportunity, 210 So.3d 220 (FDCA 3d Dist. 2017).
[xii] Saleem v. Corporate Transportation Group, Ltd., 854 F.3d 131 (2d Cir. 2017).