Disrupting Disruptive Innovation: Are Uber Drivers Employees of Uber? Part I

The Short Version:

  1. Part of the success of companies flourishing through facilitation of the gig economy is a result of their being able to create companies offering services that are performed by workers classified as independent contractors–not employees–to whom the companies are subject to neither minimum wage and health insurance requirements nor liability for their worker's misdeeds.
  2. A class action lawsuit filed by Uber drivers against Uber for allegedly skimming their tips has the potential to uproot this foundation for success because it is predicated on finding the drivers to be employees of Uber and not mere independent contractors.
  3. While far from an assurance of victory to Uber drivers, the most recent decision by the San Francisco district court judge presiding over the case points to a willingness on the judge's behalf to find that the drivers without whom Uber could not exist are employees, and such a finding could have monstrous ripple effects on the future viability of businesses taking advantage of the gig economy.

During my first year of law school, my legal writing course was centered on an assignment with a set of facts that required me to determine if a person injured while working for a company was, under California law, an employee of that company or an independent contractor. A complicated test that can require weighing 8 or more non-dispositive factors ranging from who provides the tools to work to whether the work performed is a part of the employer’s regular business, the law distinguishing employees from independent contractors is one of the more difficult laws that I had to apply (& cram into 10 double-spaced pages with citations) in law school.

I bring this up because California—the state that holds employers to some of the most stringent standards in the nation—is home to many of the most successful startups in the “gig” economy,3 and while a variety of reasons can account for the success of these startups, it cannot be denied that one of these reasons for success is their ability to build companies around providing a service that is performed by workers classified as independent contractors instead of employees.

Companies dispatching work in the gig economy disclaim any employment relationship with the workers performing their service by claiming that they are merely software licensors acting as middlemen who link providers of skills or assets to people willing to pay for them. In doing so, these companies have been able to avoid a litany of labors laws to which their non-gig competition is currently subject. Operating their own digital labor marketplaces, “middlemen” like Uber, Fiverr, TaskRabbit, and Postmates are making out like bandits, soaking upwards of 25% of the proceeds paid for a worker’s services without having to worry about Stone Age employer requirements like paying minimum wage, providing health insurance, or even reimbursing a worker for supplies or other expenses incurred in performing the middlemen’s service.

But Ubertarians beware: a case currently making its way through San Francisco courtrooms has the potential to disrupt these disruptive innovators by uprooting this foundation for success. The case involves a class action lawsuit filed by two Uber drivers who allege the San Francisco-based ride sharing company is skimming the drivers’ tips. Although the actual facts and legal theories surrounding whether Uber is unjustly usurping a portion of its drivers’ tips is interesting in its own right, it is a claim that is largely based on one predicate fact: Uber drivers are employees of and not independent contractors for Uber.

While a determination that Uber drivers are employees of Uber would not bring the recently overvalued company to its knees, it would devour Uber’s profit margins by subjecting the company to basic employment laws that, among other things, require them to reimburse its drivers for gas, car insurance or other driving-related charges—costs for which most taxi companies already reimburse their drivers. More important, however, is the ripple effect that such a determination would have on the flourishing companies currently feasting on the gig economy’s habitant workers.

So are Uber drivers employees?

This case made news last December when attorney for the drivers, Shannon Liss-Riordan, championed a decision by U.S. District Court Judge Edward Chen of San Francisco, saying, “The judge essentially endorsed our legal theory and said we could go forward leading this claim.”

I wish I could share in that feigned optimism, but class action cases like these are long drawn out battles that require plaintiffs to win many victories before reaching the finish the line. Far from an “endorsement,” what Judge Chen actually did was reject Uber’s motion to dismiss the drivers’ claims4 and, in ruling on such a motion, not only was he required to take the facts alleged in the drivers’ complaint as true, but he was also not allowed to consider any contrary evidence that Uber’s counsel will later submit.

Yet, a victory is a victory and Judge Chen’s opinion did provide some valuable insight on his assessment of the Uber drivers’ underlying claims. When it comes to the law surrounding garnishment of their tips, Judge Chen does seem to lean in favor of a decision for the Uber drivers, particularly “if Uber communicated to passengers that the gratuity included in its fares was 20 percent.” However, like I said, this claim is still predicated on Judge Chen finding that an employment relationship existed between Uber and its drivers, and on that matter, his ruling was less of an endorsement and more of a let’s wait and see.

On the one hand, Judge Chen stated that the Uber driver’s “complaint contains sufficient allegations about [the amount of control Uber exercises over drivers] to make the existence of an employment relationship plausible.” On the other hand, Judge Chen also acknowledged that finding that an employment relationship existed between Uber and its driver would be “problematic” if Uber’s assertion that the drivers largely control their working conditions proves true.

Stay Tuned

Aside from eating away at Uber’s bottom line, a determination that Uber’s drivers are employees would greatly impact their expansion. Currently, Uber makes spectacle about their entrance into the taxi cab markets of other cities, but, as it stands now, their entrance really only requires marketing and drivers willing to perform the work. If, however, Uber drivers are reclassified as employees, Uber would, like other employers, have to implement and enforce policies that ensure their operations conform with the employment laws and regulations of each state in which they operate—a process that would make their expansion into U.S. cities far more onerous.

Although Judge Chen will likely have to wait through months of discovery and law and motion matters relating to the class action aspect of this case before he can make a definitive ruling on the employee-independent contractor classification of Uber drivers, I will get a head start on analyzing this matter in Part II of this post, where I examine the law behind designating a worker as an independent contractor or an employee as it relates to Uber and its drivers.


  1. Also known as the sharing economy, the gig economy is a term used to describe a shift away from the traditional employment model to a model where persons offer their skills or assets to a marketplace in which they are hired to perform a gig involving a particular task for a defined time with little to no connection to their “employer.”

  2. As is common with California employment litigation, the driver’s unfair garnishment of gratuities claim is pursued under multiple legal theories, including third-party beneficiary, unfair business practices, and quantum meruit, which was rejected by the court.

  3. Also known as the sharing economy, the gig economy is a term used to describe a shift away from the traditional employment model to a model where persons offer their skills or assets to a marketplace in which they are hired to perform a gig involving a particular task for a defined time with little to no connection to their “employer.”

  4. As is common with California employment litigation, the driver’s unfair garnishment of gratuities claim is pursued under multiple legal theories, including third-party beneficiary, unfair business practices, and quantum meruit, which was rejected by the court.

AJ Afkari | techlawgic

A.J. Afkari is a Los Angeles attorney who specializes in legal matters related to the Internet, technology, and all things intertwined. He received his B.A. from UCLA, his J.D. from USC, and his A.J. from his mother.

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