Classifying Uber’s drivers as employees may turn out to be an even bigger roadblock to the company’s business than regulatory changes because it could change Uber’s cost structure.

Share story

In what could prove to be a ruling with serious implications for the on-demand economy, the California Labor Commission has ruled that an Uber driver should be classified as an employee, not an independent contractor.

The ruling, made June 3, came to light after Uber filed an appeal Tuesday. The ruling ordered the company to reimburse Barbara Ann Berwick, a former Uber driver, $4,152.20 in expenses and other costs for the period when she worked as a driver.

Uber has long positioned itself as a “logistics company,” an app that drivers and passengers use merely to facilitate private transactions and not a transportation fleet with tens of thousands of employee drivers. The company argued it did not exert any control over the hours its drivers worked and did not require drivers to complete a minimum number of trips, according to the court filing.

But the Labor Commission cited many instances in which it said Uber acted more like an employer. The ruling noted Uber provided drivers with phones and had a policy of deactivating its app if drivers were inactive for 180 days.

“Defendants hold themselves out as nothing more than a neutral technological platform, designed simply to enable drivers and passengers to transact the business of transportation,” the ruling states. “The reality, however, is that defendants are involved in every aspect of the operation.”

In a statement, Uber said “The California Labor Commission’s ruling is nonbinding and applies to a single driver.” The commission did not immediately respond to requests for comment.

Uber, valued at $40 billion and in talks to raise money at about a $50 billion valuation, has become the symbol of the on-demand economy. These online services and apps act as virtual labor marketplaces for people willing to use their own possessions — cars, homes, even parking spaces — to provide services to the public at the touch of a smartphone button.

The category of on-demand companies has exploded. Venture capitalists have invested more than $9.4 billion into such startups since 2010, according to data from CB Insights, a venture-capital analysis firm, spawning on-demand laundry services and on-demand hair primpers, among others.

Given that Uber has disrupted entrenched taxi and transportation industries, the company, which is based in San Francisco and led by Travis Kalanick, has often run into regulatory hurdles worldwide.

In China, local authorities have raided Uber offices in two cities over questions about whether its service is legal because drivers are not licensed. In the United States, cities including Portland have claimed Uber operated an “illegal, unregulated transportation service.”

Classifying Uber’s drivers as employees may turn out to be an even bigger roadblock to the company’s business than regulatory changes because it could change Uber’s cost structure, requiring it to offer health insurance and other benefits, as well as paying salaries.

On-demand companies have been premised on the idea that people who find piecemeal work through these online marketplaces are freelancers, not employees entitled to costly benefits.

Uber’s driver ranks have swelled globally. At a presentation this month celebrating Uber’s five-year anniversary, Kalanick said the company had 26,000 drivers in New York City alone, 22,000 in San Francisco, 15,000 in London, 10,000 in Paris and 20,000 in Chengdu, China. The company now operates in more than 300 cities across six continents.

“Every single month, Uber is adding hundreds of thousands of drivers around the world,” Kalanick said at the presentation.

Uber has faced legal action in the past over the status of its workers. Drivers have filed class-action lawsuits against the company, including in U.S. District Court in San Francisco, saying they were misclassified as independent contractors.

“Uber has been fighting very hard against any decisions like this coming out, and when a fact-finder sat down and looked at the situation, they determined that Uber is an employer,” said Shannon Liss-Riordan, a Boston-based employee and labor-rights lawyer who is involved in the class-action lawsuits on behalf of drivers against Uber.