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Hirschfeld Kraemer LLP attorneys Daniel H. Handman and Derek Ishikawa recently authored the Law360 article "Welcome To The 'Wild West' Of Calif. Class Actions Uber." The piece explores the potential impact to the ride sharing service and to the "Sharing Economy" broadly of a pending class action lawsuit in California asserting that Uber workers are employees, rather than independent contractors.

The text of the article is below and can be found here.

Welcome To The 'Wild West' Of Calif. Class Actions Uber

The application of California’s voluminous labor code to employers in the “sharing economy” is unsettled to say the least. The nature of that economy, highlighted by companies such as Uber Technologies Inc., Lyft Inc. and Airbnb Inc., is new and constantly changing, yet most wage-and-hour laws date back to times when technology was much simpler.

So, when U.S. District Judge Edward M. Chen was faced with a class action involving 160,000 Uber drivers in O’Connor v. Uber Technologies Inc., a case involving the alleged failure to share tips with drivers, he was called upon to apply age-old common law principles — from cases which still use archaic terms like “master and servant” — to an economy largely premised on the use of smartphone apps.

That seemingly anachronistic body of law did not seem to be a problem for Judge Chen, who presides in San Francisco. In his view, not only was this centuries-old test flexible enough to apply to workers in the modern workplace, but it was also able to form the legal framework for a massive wage-and-hour class action that stands to disrupt Uber’s — to-date — very profitable business model.

Judge Chen ruled on Sept. 1 that Uber drivers could proceed in a class action and, in many instances, signaled an acceptance of their arguments on the merits.

The ruling has seemingly broad application both inside and outside the sharing economy, both for class action and independent contractor-related issues in general. This article looks at four of the biggest takeaways.

1. California Class Actions Pose a Major Challenge to the Sharing Economy

Several other worker misclassification class actions have been filed against “on-demand” companies by the same Boston attorney Shannon Liss-Riordan, with Uber being the only class action certified to date. Lyft, one of Uber’s chief competitors, is facing a similar class action that is pending before U.S. District Judge Vince Chhabria, with a December class certification hearing. Liss-Riordan has also filed similar class actions against companies such as cleaning service Homejoy Inc., the on-call laundry service Wash.io Inc., shipping company Shyp Inc., food delivery Caviar Inc., Handy Inc. and delivery services company Postmates Inc.

While Judge Chen’s decision to grant class certification in the case of Uber is likely to impact most if not all of these cases, the mere filing of these lawsuits has already had a noted impact on sharing economy businesses. In the case of Homejoy, the company shut down on July 31, with its CEO Adora Cheung stating that the “deciding factor” was several worker misclassification lawsuits that it had been fighting. While some similar companies may find the challenges of long, costly legal battles an unanticipated and unsustainable risk, other companies should heed the other takeaway from this decision: the continuing importance of revising arbitration agreements in the wake of recent state and federal decisions.

Following the California Supreme Court’s June 2014 Iskanian v. CLS Transportation ruling, many California employers rushed to insert class action waivers into their arbitration agreements with workers, with some optimistically thinking that Iskanian might represent a substantial reduction in the number and scope of class actions. In Iskanian, the court held that a limousine driver’s wage case against his former employer could be compelled to arbitration because employment arbitration agreements with mandatory class waivers are generally enforceable, with the noted exception of waivers of Private Attorneys General Act actions.

Judge Chen’s opinion demonstrates that class actions in California are alive and well, in part because businesses have been unable to have all of their workers or independent contractors to sign new agreements. In June, Judge Chen ruled on a motion to compel arbitration brought by Uber in a related case, determined that the arbitration agreement was unconscionable in part because it had a nonseverable PAGA waiver. Uber has appealed this decision to the Ninth Circuit, but pending conclusive determination of whether inclusion of such waivers renders arbitration agreements unconscionable, companies should review their existing arbitration agreements and should strongly consider removing PAGA and representative action waivers or face potential outcomes similar to that in Uber. As always, employers should also ensure that their class action waivers are explicit and clearly set out from other text in arbitration agreements.

2. Without Concrete Guidance, Independent Contractor Litigation Is the “Wild West”

The most unavoidable takeaway is that the independent contractor analysis really is the “Wild West,” seemingly unbound by black-and-white guidelines. To be sure, the central factor in these cases is the level of “control” exerted by the employer over the workforce at issue. But how one measures control is entirely subjective.

The California Supreme Court has taken on the independent contractor issue before, most notably in its 1989 opinion in S.G. Borello & Sons v. Dept. of Industrial Relations, a case involving agricultural workers. While the Borello court found that the central factor was on a business’ "right to control the manner and means of accomplishing the result desired," it gave very few specifics as to how to measure that right of control. In Uber's view, their drivers exercise exclusive control over when they work, how frequently they work, what car they choose to drive, what smartphone they use, whether they choose to have other jobs and what passengers they choose to take accept. It is that freedom from control, in Uber’s view, that wins the day, and the company cited ample case law from state and federal courts that seem to support that perspective.

In the court's view, however, the appropriate focus was on the complete control Uber exerted over the rates drivers charge passengers. The court highlighted that element of control because drivers “appear to be largely (if not entirely) economically dependent on Uber for their livelihoods.” That focus on the “economic realities” of the relationship, namely the degree to which workers are dependent on a business for earning a livelihood, should be central to any analysis of the issue — a position which is also supported by many cases and recently by the U.S. Department of Labor.

So, which is it? What type of control is the most relevant to guide employers in future independent contractor cases? The short answer: No one knows.

And if the issue of control was not confusing enough, the court devoted another 15 pages to "secondary factors" — 13 in all — that the Borello court found to be relevant to the inquiry. But, the weight to be given to any one of those factors varies from case to case, as the court and the parties seemed to agree.

This confusion leaves both businesses and workers in an impossible quandary. The lack of guidelines on how to evaluate the myriad overlapping and intersecting factors the court has identified, not to the mention the lack of any definition as to how to measure those factors, leaves everyone involved without any predictability for evaluating future workforces.

3. Surprising Focus on Uber’s Right to Terminate Independent Contractors

Surprisingly, the court placed great importance on the parties’ mutual right to terminate their relationship “without cause,” a factor which it believes “weighs heavily” in the drivers’ favor. The court maintains that a “bona fide independent contractor cannot terminate the agreement at will — if he was truly a contractor he would have to finish out his contract or pay damages to Uber for early termination.”

To be sure, courts have looked to the right to terminate the relationship unilaterally as a part of the independent contractor evaluation. In fact, just last year, in Ayala v. Antelope Valley Newspapers Inc., a case involving newspaper delivery persons classified as independent contractors, the California Supreme Court looked to the right to terminate at will as a relevant factor and indeed stated that it was “strong[]evidence” that those workers were employees. But ultimately, it overlooked that evidence and found that a found that class certification was inappropriate.

If that factor is of paramount importance, as Judge Chen’s opinion suggests, it is bad news for businesses everywhere since those relationships are frequently terminable at will. To the court, Uber’s right to terminate drivers allows it to exert control over employees who are economically dependent on it. But to Uber and businesses everywhere, the flip side of that control is the worker’s freedom to decide for themselves when, how and for whom they work. While workers and businesses may always have different perspectives on that issue, if it is singularly determinative, businesses will be hard-pressed to justify treating any worker as an independent contractor.

4. Workers’ Subjective Understandings Are Largely Irrelevant

Finally, Judge Chen’s opinion leaves no doubt that a worker’s subjective understanding or preference is of minimal importance. Uber submitted 400 declarations from drivers who seemingly understood themselves to be independent contractors, many of whom preferred that relationship. In the court’s view, while that factor is relevant, it is the least important. Why? Three reasons: (1) it is merely a “label” assigned by the business; (2) the court doubts that Uber drivers “correctly understand” the difference between employees and independent contractors; and (3) in the court’s view, “subterfuges are not countenanced.”

That view may seem one-sided, even a bit condescending to the drivers. But while some may view that as unfair, it comes as little surprise to employment lawyers. In the annals of employment law, particularly with overtime exemptions, courts routinely overlook agreements between workers and businesses or the subjective understanding of workers for the same reasons cited in this opinion.

Without question, this case leaves many questions unanswered. Judge Chen went out of his way to stress that the only issue he was deciding was whether class certification was appropriate, not the merits of the case and Uber has already committed itself to appealing the decision.

Conclusion

Regardless of whether the opinion stands, it seems wage-and-hour class actions are alive and well in California and that businesses face complex and unpredictable decisions about how to classify their workers. The independent contractor issue has always been an uphill battle for businesses — and the Uber decision only reinforces that.

—By Daniel H. Handman and Derek Ishikawa, Hirschfeld Kraemer LLP

Daniel Handman is a partner and Derek Ishikawa is an associate in Hirschfeld Kraemer’s Santa Monica, California, office.