man opening car door UBER LargeUber, the independent taxi service where you can “drive your car and be your own boss,” has long attracted controversy for classifying its drivers as independent contractors and not employees. Class-action lawsuits claiming that Uber has abused and misused the 1099 form have been filed and certified in courts across the nation, including California, Massachusetts, Arizona, Florida, and Pennsylvania.

Last week, the California and Massachusetts suits settled for the combined sum of $84 million (plus an additional $16 million if the company goes public and its valuation increases 1.5 fold during fiscal year 2016).  In exchange, among other concessions—such as increasing transparency for individual driver ratings—drivers in the Golden and Bay States have agreed to remain independent contractors.  While $100 million might sound like quite the pretty penny, it is a small price to pay in comparison to Uber’s billions of dollars of annual gross bookings.   It is no surprise that many legal commentators (and even Uber itself) view the settlement as a victory.

But victories like these are seldom free of transaction costs, and the settlement agreement has inspired the California Teamsters to accelerate organization efforts for both Uber and its chief competitor, Lyft. Uber continues to suffer legal troubles that have little, if anything, to do with the employer-employee relationship.  For example, in Pennsylvania, Uber was just slapped with a record-setting $11.4 million fine by the Public Utility Commission for operating without proper state approval.

While this may be of no concern to Uber, its rush to settle may encourage copycat suits against smaller, but no less innovative, concierge-style startups (or “people-powered” apps that can deliver take-out and do your laundry) that cannot voluntarily part with millions of dollars when the going gets tough and the independent contractors get litigious.

Settlement agreements also do not stop the Department of Labor from issuing its own interpretations, and the DOL’s definitive trend toward narrowing the independent contractor classification indicates that Uber may be working on borrowed time and delaying the inevitable.

As we have previously covered in HR Legalist, the DOL’s latest interpretation of the independent contractor-employee distinction asserts that the definition of “employ” is “to suffer or permit to work.” This is much broader than the traditional common-law control test, which looks to the employer’s degree of control over the worker.

The Massachusetts and California class-action suits were filed in June and July 2015, respectively—around the same time that Wage and Hour Division Administrator David Weil issued the interpretation. If Uber does not end up settling the Arizona, Florida, and Pennsylvania suits, it will be interesting to see whether, and to what extent, courts defer to and apply the interpretation.

Let this serve as a healthy reminder that whether you run a smartphone app-based taxicab startup or brick-and-mortar temp agency, if your business model depends on independent contractors, do not take those 1099 forms for granted!

As always, we at HR Legalist encourage you to consult your legal counsel and make sure your ICs are not, in fact, employees.


Alexander BatoffAlexander V. Batoff focuses his practice on counseling clients on federal and state employment laws and regulations and defending them in litigation.  He may be reached at 215-665-3048 or alexander.batoff@obermayer.com.