Uber Hits a Legal Snag in California: What's Next?

SMITH BRAIN TRUST -- The California Labor Commission sided this month with an Uber driver who argued that she should be classified as an employee of the company, not an independent contractor. The decision means that the woman is entitled to reimbursement of expenses she incurred driving for Uber for three months last year, some $4,152.

The commission says she's an employee because Uber sets its drivers' rates and has strict guidelines for how they do their jobs. The decision involves only one person, and Uber has appealed, but the case adds to the debate over how workers in new-economy businesses like Uber, Lyft and Instacart should be treated. Being classified as employees would qualify them for unemployment insurance and workman's compensation, among other things. (Other states have concluded that Uber drivers are, in fact, independent contractors.)

Brent Goldfarb, an associate professor of management and entrepreneurship at the University of Maryland's Robert H. Smith School of Business, appeared on the Knowledge@Wharton radio program, on Business Radio on Sirius XM, on Tuesday, to discuss the case with host Dan Loney and Shannon Liss-Riordan, a Boston-based lawyer representing Uber drivers in a class-action suit.

Goldfarb said the decision was more of a "red flag" than an immediate danger to Uber's model, and he predicted that the company would fight the decision not just in legal forums but in the court of public opinion.

"Uber's strategy all along has been to use its popularity as a service as a political force to reign in political burdens on it," said Goldfarb, who is also academic director of the Smith School's Dingman Center for Entrepreneurship. "I would expect that if these sorts of cases become a real danger to Uber's business model, then they would seek to change the regulations upon them. Moreover, they would probably be successful. Uber is an enormously popular service. People love it. Those people vote."

He also cited work by Scott Wallsten, vice president for research and senior fellow at the Technology Policy Institute, showing that when Uber entered New York and Chicago, complaints about traditional taxis went down. Competitive pressure appears to have improved the service of taxi drivers generally, which raises questions about whether reining Uber in serves the public interest.

Goldfarb suggested that, at least where wages and expense reimbursements are concerned, classifying Uber drivers as employees would not make much of a difference. Uber would explicitly define some payments as reimbursements, and others as wages, "but the drivers would wind up with almost precisely the same income … The reason is that driving a car, be it for Uber or taxis, is low-skilled work. Because of that, the wages are going to go toward minimum wage. Taxi drivers earn about $12 an hour; Uber drivers earn about the same. Their average here in Washington is about $17, and I bet about $5 or $6 of that goes to covering their mileage expenses, at 60 cents a mile. I don't see how this is going to change any labor outcome in a major way."

Liss-Riordan suggested that many drivers did not realize what they were getting into with Uber, that they were blindsided by how deeply the cost of operating a car, or even buying one, would cut into their earnings. Goldfarb replied: "There are hundreds of thousands of Uber drivers and there's no doubt some fall into that trap. … On the other hand, based on a survey — albeit run by Uber but also endorsed by an economist, Alan Krueger, from Princeton — about 87 percent of Uber drivers liked to set their own schedule, and they liked determining their work-life balance. Seventy-four percent of drivers who responded to the survey said that Uber made their lives better. Only 5 percent said made it worse

"So one could say that if this class action is successful, the 5 percent would be better off, but the 74 percent might be worse off," Goldfarb said. "It might be harder to find employment, and many of them might never become Uber drivers in the first place."

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