Working for Uber: Full-Time Employment or Just a Side ‘Gig’?

The New Jersey Department of Labor and Workforce Development recently fined Uber and its subsidiary Rasier $100 million for wrongly classifying its drivers as independent contractors. Under New Jersey’s worker misclassification law, a worker can be classified as an independent contractor if they meet three prongs: first, the worker is free from control or direction over the performance of their services, both under their contract and in fact; second, the worker’s service is either outside the usual course of the business for which such service is performed, or, such service is outside of all the places of business of the employer; and thirdly, the worker is customarily engaged in an independently established trade, occupation, profession or business (also known as the “ABC Test”). The significance of being classified as an employee is that it entitles workers to benefits in case of unemployment and disability, and gives rights to minimum wages, overtime pay, and insurance for self and family. The employer is required to contribute to these benefits which, for giant companies with hundreds of employees, can equal huge amounts, but they do not need to make such contributions for independent contractors.

Although Uber paid the fine, it contested New Jersey’s classification of its workers as employees and reasoned that an “overwhelming amount [of workers] do this kind of work because they value flexibility” and are not required to work any minimum number of hours. However, the New Jersey Department rejected this reasoning and said that there is “no reason temporary, or on-demand workers who work flexible hours, or even minutes at a time can’t be treated like other employees”.

Although this seems like a classic case of a giant corporation’s efforts to protect its margins, upon a deeper examination, there appears to be some merit to Uber’s claim which can also have wider impacts on the economy and the workforce. If Uber is required to treat all of its workers as employees, it will be able to operate in fewer cities and consequently, retain a smaller fraction of its current employees. This is because rides will become more expensive to cover increased costs, resulting in customers taking less rides and thus, the number of driver employees required by Uber will be reduced. This is demonstrated through a study conducted by Uber to analyze the effects of a reclassification in California. They estimated that ride prices would increase between 25–111% to cover additional costs, depending on the area as larger cities are likely to absorb costs better than less urban areas. Higher prices would reduce demand for trips between 23–59% across California. To manage the fixed costs per employee, Uber will have fewer workers perform longer hours – at least 40 hours per week in Uber’s estimate. This will not only reduce demand for drivers, but also exclude those drivers who prefer to work less than 40 hours a week. This means that the number of active drivers in California will be reduced from 209,000 to 51,000 in a single quarter. These numbers, even if analyzed through a pessimistic lens given that it is a self-interested survey, still highlight the significance of the issue.

Uber has actively resisted a reclassification of its workers as employees. In California, Assembly Bill 5 was enacted which extended the application of the ABC Test to all employees unless they were specifically exempted. To fight this, Uber along with Lyft, DoorDash and other gig companies sponsored a ballot initiative (Proposition 22) in November 2020 which would “ensure driver flexibility” by maintaining contractor status of workers and provide “new earning guarantees and benefits”. Although Uber and its associated companies won the ballot initiative, a California Court struck down Prop-22 holding it unconstitutional for unduly restricting the legislature’s right to amend Prop-22, and the matter is on appeal before the Ninth Circuit Court.

Uber claims that 91% of its U.S. drivers work less than 40 hours a week, and a reclassification will not only lead to job cuts because of costs, but will take away the flexibility of drivers who wish to work lesser hours and earn a side income. Moreover, a reclassification as employees will nullify the ability of the drivers to work for more than one company, i.e., both Uber and Lyft for instance, and force them to choose between one owing to non-compete obligations on an employee. An independent study put forth a more modest figure and suggested that in Seattle, only 2/3rd of Uber’s drivers work less than 32 hours a week. However, the 33% of drivers that work more than 32 hours account for 55% of Uber’s trips. These numbers show that both sides of the debate have crucial interests, and it may be worth considering solutions that could address them collectively.

Uber’s CEO Dara Khosrowshahi has advocated a “third way” for gig workers to escape the employee-contractor binary. He proposed that lawmakers need to establish a benefits fund that will entitle workers to cash that can be used for the benefits they want (like health insurance or paid time off), and requiring all gig companies to participate to allow workers to switch benefits between apps. Dara argued that this was better than providing health insurance as most drivers had some form of insurance through another job, a family member or the Affordable Care Act. Additionally, Dara suggested that gig-companies be required to provide medical and disability coverage for injuries on the job, along with non-discrimination obligations. The reason why Dara insists this change needs to come from lawmakers and cannot be initiated by gig-companies is that these actions without instruction can be interpreted to reduce the independence of its workers and construe them as employees.

Although a very plausible proposal, this wouldn’t address the concerns of those who drive as their primary source of income. An alternative proposal that could be considered by the companies, and would be more acceptable to the regulators, is having two distinct classes of drivers with different conditions of service. The class of employees would be required to work minimum hours a week and could not work with other companies or accept/reject rides, while the class of independent contractors could have the ability to choose the hours they work, reject/accept rides, and work with other companies. The latter would be similar to “freelance writers”, a category of people who are exempted under California’s Assembly Bill 5, as long as they are not used by hiring entities to displace workers who do the same type of work as employees. This means that such freelance writers are not hired with the intention of avoiding costs of employment, but rather for the actual independence that comes from when and how they do their work. Through this exemption in California’s law, the ABC Test does not automatically apply to freelancers, but such workers are considered under the ‘Borello Test’, in which the three factors of the ABC Test are only some of the many others that are considered in determining the true nature of a relationship.

Granting gig workers an exception from the ABC Test, as is the case with freelance writers, could achieve both the objectives of regulators and Uber, as the drivers would still be screened for employment on the basis of their conditions of service. This arbitral award which addressed claims by part-time Uber drivers shows that under the Borello factors, holding such part time drivers as independent contractors is a reasonable conclusion given that the vehicles are not provided by Uber, the driver is paid per ride, drivers have independent businesses or occupations, and that they are free to work for Uber’s competitors like Lyft too.

Thus, having two classes of employees is a model worth considering as it can provide benefits both to gig companies and employees. It is a better deal for gig companies in comparison to the alternative where all their drivers would become employees. For workers, those using it as a primary source of income can adhere to stricter conditions of service and enjoy employee benefits, while those who wish to use these driving apps for a side income can have the flexibility to do so with reduced benefits which Uber is willing to provide as aforementioned.

Tasneem Zakir is a Corporation LL.M. candidate at NYU and serves as a Graduate Editor of the NYU Journal of Law & Business. She received a B.A.LL.B. with Honours from National University of Juridical Sciences, and is admitted to practice with the Bar Council of West Bengal, India.