CA Labor Commission Has Just Killed Uber, Though It May Take Years to Bleed Out

A while back I wrote a long article about all the ways the government is making it nearly impossible to employ low-skilled labor.  I worried that because it is getting harder and harder to profitably employ low-skill labor, the country would soon sort itself into those with skills and jobs and those on government assistance, with little or no opportunity for people in the second category to move to the first.

As part of that article, I observed that much of the capital in this country is flowing to new business models that use minimal numbers of employees.  I wrote:

Is it any surprise that most entrepreneurs are pursuing business models where they leverage revenues via technology and a relatively small, high-skill workforce?  Uber and Lyft at first seem to buck this trend, with their thousands of drivers.  But in fact they prove the rule.  Uber and Lyft are very very careful to define themselves and their service in a way that all those drivers don't work for them.  I would go so far to say that if Uber were forced to actually put all of those drivers on their payroll, and deal with they myriad of labor compliance issues, their model would fall apart.

Well, we are going to find out if my last statement is true.

The California labor commission has ruled that an Uber driver qualifies as an employee, not a contractor, of the company.  As a result Uber will have to reimburse a driver for expenses accumulated in the line of duty. That includes $256 in tolls and the IRS rate of $0.56 per mile for use of a personal vehicle for business purposes.

The actual issue in this case of reimbursement of expenses is pretty narrow, and actually kind of stupid.  Uber is already paying drivers effectively by the mile by giving them a percentage of the mileage-based fee customers pay.  All this will do is cause Uber to reduce the share of revenues drivers get by something like 56 cents a mile and then hand the $0.56 to them in a separate check.  Its an extra accounting and paperwork hassle, but business people deal with mitigating such government-imposed stupidity 10 times a day.

No, the real danger of this ruling lies far beyond expense reimbursement.  A few top of head thoughts

  • This would obviously make Uber drivers subject to minimum wage.  How does one even figure that out?  Now that there are local minimum wages (e.g. LA soon to be $15 an hour) how do you compute minimum wage for a trip that begins outside of LA but ends inside the city?  Or vice versa?
  • Uber drivers currently only get paid for transporting passengers, but what about their time driving around waiting for a passenger?  Will that be classified as standby time for which the employer must pay for?  You can expect the standby time class action in California in 3..2..1..
  • This changes the whole relationship between Uber and its drivers.  Currently, Uber does not have to worry about driver productivity or work ethic, as long as they get good customer ratings when they do drive. Why?  Because Uber is not paying them except when they haul a passenger.  Now, if they have to pay them by the hour, Uber suddenly must police them for productivity and set minimum revenue generation targets for drivers.  The flexibility that drivers love will be gone.
  • And then there is Obamacare.  If drivers drive more than 29 hours a week, Uber would have to provide health care or pay really expensive penalties.  Will Uber find it necessary, as my company has and many other service businesses have, to cap driver hours at 29 hours a week max?
  • What about California break law?  Employers have an affirmative duty to make sure employees take a 30 minute unpaid meal break after X hours.  And just allowing for it (ie allowing drivers to put themselves in unavailable status) is not enough - employers have to have processes and documentation in place to make sure the employee takes their break (I kid you not).
  • What about CalOSHA?  Is Uber suddenly responsible for working conditions and safety in the vehicle?  And how does it do that if it does not own the vehicle?
  • Every employee is essentially his or her own manager.  Does that now make Uber subject to ensuring every driver has all state-mandated manager training, such as sexual harassment training?
  • Employers are typically liable for actions by their employees, even if those employees are breaking the rules and ignoring the employer's wishes.  Is Uber now liable for a driver who, say, verbally harasses a passenger?  In the past, that gets sorted out pretty fast by the rating system, but does Uber have to take a more direct hand now do avoid a deluge of lawsuits?
  • As of July 1, California employers must provide paid sick leave to employees.  They must provide unpaid leave under the family and medical leave acts.  In fact, California requires employers provide and track literally dozens of forms of mandatory paid and unpaid leave (including leave for victims of stalkers, just as one example of the scope of these requirements)
  • The taxes and required fees owed by employers for each employee are myriad.  State and Federal income tax must be withheld, Social Security and Medicare taxes paid, California state disability tax paid, unemployment tax paid, and workers compensation premiums paid.
  • Unemployment could be real nightmare.  Can drivers choose to drive for a while, then take unemployment for a while, maybe while tourist season in San Francisco is slow, then go back to driving?  You think that can't happen?  A number of my seasonal employees work in the summer, then take unemployment all winter despite having no intention of trying to find work in the winter.  I pay 7% of wages in California as unemployment taxes and would pay more except that scale is capped and I can't get in a worse category than my current F-.
  • Then there are a myriad of smaller issues that probably can be solved but consume bandwidth of a company's management that would otherwise be innovating.  As one small example, one has to post about 20 different state and Federal labor posters in CA where all employees can see them.  Where would that be for Uber drivers?


  1. NL7:

    I agree with your point, this is a huge mess of new rules and regulations, and precisely because the drivers are setting their own hours and are away from supervisors, I would argue it's not an appropriate designation. You hit all the top ones - except unionization. It's not crazy to think that a workforce disproportionately drawing on Bay Area students might be prone to a union drive.

    I knew at least one company that immediately stopped hiring new contractors in an entire state when one state board in one Midwestern blue state found one contractor to be an employee. That designation didn't apply to federal purposes or even necessarily for other state purposes, but they saw it as toxic. For their business model, employee status was potentially lethal and they didn't want to gut out an appeal as a young company.

    Separately, I had a family member who as a claims adjuster (and an acknowledged W-2 employee) could live in any state except California. His employer the major insurer would fly him to his worksite every couple weeks and then fly him home ten days later, so the job was flexible. Yet California was verboten because it would import too many rules to deal with.

    I don't think Uber can plausibly write off California, its home base, headquarters, and biggest state. So I assume an appeal is in the works. Their legal strategy up to now has been to fight and to flaunt bad rules, so I imagine they will resist this. Of course, the best strategy is to get a special law passed making your workers per se contractors. A few industries have done that nationwide and others do it at the state level (e.g. agriculture tends to get crazy tax and labor cut-outs). I don't think they have the juice to make that happen, but they could always try.

    Note that while some worker classification fights happen either because of revenue hunting (by states), activism (by lawyers or unions) or worker fights (disputes over expenses or taxes withheld), a fair number of them happen because the workers fail to grasp their status. A big part of defensive planning is just writing into the contracts very explicit language that the worker is not an employee and agrees they cannot claim worker comp or unemployment insurance from the job.

    Uber has some decent arguments. Workers are not supervised, they set their own hours, they are not regularly reviewed by the company, they keep the money they earn, they provide the equipment used to perform the job, and they tend to work sporadic and irregular schedules. But the main argument against them is sometimes a killer: they are providing the front-line product of the company. Some state rules (I confess that I've forgotten California's rules) make it difficult to be independent if you are not used in a secondary function.

  2. ErikEssig:

    I never researched the issue, but I was always skeptical that Uber could get away with classifying drivers as contractors. State (and of course the Feds) departments of labor are pretty aggressive (OK, I'm in NY so I'm jaded) in imposing their will on businesses.

  3. morgan.c.frank:

    the initial article appears to have reported the situation inaccurately.

    it has been updated.

    "Reuters' original headline was not accurate. The California Labor
    Commission's ruling is non-binding and applies to a single driver.
    Indeed it is contrary to a previous ruling by the same commission, which
    concluded in 2012 that the driver 'performed services as an independent
    contractor, and not as a bona fide employee.' Five other states have
    also come to the same conclusion. It's important to remember that the
    number one reason drivers choose to use Uber is because they have
    complete flexibility and control. The majority of them can and do choose
    to earn their living from multiple sources, including other ride
    sharing companies."

  4. Wilhelm Arcturus:

    The problem I see with some of your questions is that they get answered pretty easily by asking how the taxi industry deals with these same issues, so shouldn't exactly be treated as mysteries.

  5. jdgalt:

    Uber is also appealing the ruling to a state Superior Court in San Francisco, which will hear it de novo. The state Labor Commission is small potatoes.

    It's not time to panic yet.

  6. Mike Powers:

    Exactly. The point is not "ZERMAGERD, DEYS KILLIN OOBER", the point is that now Uber has to actually admit that it's a taxi company instead of saying "fuck you we're just connecting cars to drivers" and giving a middle finger to the regulations involved.
    And you can say "well that's bullshit because those are bullshit regulations that only exist because of bullshit", and that's true, but it's not like they *don't* exist. I mean, would you rather people just ignore *every* regulation they don't like? Like, say, "don't emit tetraethyl lead" or "don't mix polychlorinated biphenyls into food"?

  7. Fitz157:

    The problem I see with your reply here is that you fail to recognize Uber was a response to an under-performing taxi industry.

  8. Arrian:

    The taxi industry has central hubs where employees come in to work, and the companies own and maintan the cars. That changes how they deal with almost all of the issues that Warren raised. Uber has no set hours for drivers, no central location where they come in to to begin work, and they own their own cars. Completely different set of logistical issues.

  9. morgan.c.frank:

    but uber is not a taxi company. taxi companies own taxis. uber does not. it puts people with cars together with people who want rides.

    it's a fundamentally different business model.

    your whole argument is just an extended inability to grasp the difference in business model wrapped in a logical fallacy.

    it's just appeal to practice. even presuming that your claim about uber "not following" regulations (not true in many cases and places) is accurate, so what?

    those regulations are anti consumer and anti liberty. they establish a guild system that provides outsized profits for owners and substandard service for consumers while taking away everyone's liberty.

    rosa parks did not want to follow regulations either. was she wrong?

    you are making inapt comparisons. uber is not violating anyone's rights. dumping poison on someone is.

    we must first ask "is the regulation just and consistent with personal rights and liberty?"

    taxi guilds are not. breaking them up serves the good. if you want to take a cab, great, do it. but do not try to to tell me i cannot pay a driver without a medallion for a ride. how does taking away my freedom of consensual commerce aid anything?

    to equate giving me a choice as to who will take me to the airport with giving me the right to dump PCB's in a river is simply hyperbolic posturing. those 2 things are NOT analogous.

    the former increases freedom and harms the freedom of no one, the latter is deadly and destructive.

    are you telling us you really cannot see the difference?

    also note: taxi companies do NOT generally count drivers as employees. mostly, they own cabs and medallions and lease cabs to drivers on a per shift basis. they are not subject to min wage laws. they do not provide healthcare. they are in the leasing business. if your goal is to treat uber like a cab company, then you cannot ask them to count their drivers as employees.

  10. Not Sure:

    " I mean, would you rather people just ignore *every* regulation they don't like? Like, say, "don't emit tetraethyl lead" or "don't mix polychlorinated biphenyls into food"?"

    Nobody is suggesting "ignoring every regulation you don't like." How about we use a little common sense here...

    "Don't emit tetraethyl lead." Does that harm people? Yes? Then don't do it.
    "Don't mix polychlorinated biphenyls into food." Does that harm people? Yes? Then don't do it.
    Maybe it's just me, but I'm not seeing how people choosing, through their own free will, who to pay for rides harms anyone.

  11. Addie B:

    And the solution is to allow people to choose whether to work for the taxi cartel or to work for Uber. Workers are voting with their feet in overwhelming numbers.

  12. Addie B:

    Isn't this a great experiment to determine whether workers and customers prefer the regulated taxi cartel system versus the Uber system? Why not let it play out? What is the point of regulations if not to serve the customers?

  13. Brian Miller:

    If the ruling stands, it doesn't "kill Uber." It just adds California to the list of village idiot jurisdictions where the sharing economy has been ruled "illegal." There's still plenty of opportunity in sane states.

    Californians will either pay MUCH higher prices, or they'll just lose Uber altogether. Either way, we Floridians will continue to enjoy our services.

  14. Brian Miller:

    It's a lovely example of why trying to "innovate" inside permission-based economies like those in California, Oregon and California is a great way to lose money.

    The path forward is to abandon those economies and go to places with freer markets and lower barriers-to-entry. Uber, as a creature of the Silicon Valley, is unable to let go of the abusive parent called "California," and will suffer because of it.

    Uber also isn't a "taxi company" -- it doesn't own a fleet, which is the basic requirement of being a "taxi company." It also doesn't accept hails, nor queue in taxi lines.

    Uber is something new that the regulatory system is alternating between attempting to destroy or attempting to shoehorn into its existing centrally-planned categories.

  15. esoxlucius:

    Can someone please answer a question for me? Why can't Uber split their company into two pieces. They leave the developers in California where the developers want to be under a *new* company name where their main client is the Uber parent, and move the servers and rest of the company to a country where they can flip the proverbial bird to the labor laws in the United States? How does the US enforce labor law for a company that is digital, virtual and out of their jurisdiction?

  16. Trapper_John:

    Warren--apparently you are now "An anonymous California employment blogger at the Coyote Blog." Congrats on making it into a Vox article!

    I find their rebuttal of your points... unconvincing.

  17. Jen G.:

    Given how labor boards love to impose feudal relationships on everything they can (in order to promote their primary client - the unions), I'm skeptical that uber can survive for long with the "contractor" model absent more powerful government interests.

    I find it funny that THIS is the 'no, really she's an employee' ruling for a Silicon Valley company. I've worked in tech as a contractor and vendor-contractor (similar to many folks in SV I'm sure) where the border between contractor and employee is a legal fiction. As a contractor I:

    - Had to show up to and leave the location at specific times
    - Worked overtime at the client's convenience and at their direction
    - Had to be available on-call as needed
    - Had a manager for the company I was "contracting" for that told me what to do and when
    - Had to request time-off or make arrangements if I couldn't make my "shift"
    - Lost my job at the company that was paying me if the company I was working for didn't want me anymore
    - Worked on on-going tasks unconnected to any specific project
    - Was not allowed to provide similar services for another company
    - Etc.

    My husband has just started driving for Uber. We don't know yet whether it will be profitable enough to keep at it, but as far as working conditions:

    - He can start and stop whenever he wishes
    - He can work 2 hours a day or 16 hours a day as he wants
    - He is only "on-call" if he wants to be
    - Nobody tells him where to go or when to do something
    - He can take time off whenever he wants with no pre-notification
    - Can provide the same service to as many companies as he can fit phones on his dashboard for

    All-in-all, there are hundreds of thousands of people working in Silicon Valley right now who have a much better case that they are really employees - except nobody wants to kill the only thing making money in that state. Uber is about as close to what real contracting should be.

  18. jimbino:

    You forgot an important item in your final list: the fact that Uber drivers offer the same services to other companies, making them more like consultants than employees.

  19. jimbino:

    The point of regulations is to give unwarranted power to politicians and lobbyists.

  20. Addie B:

    Sure, but I'm giving them the benefit of the doubt.

  21. vikingvista:

    I pulled into a California Jack in the Box late one night after a long trip, probably about 30 minutes before closing. I appeared to be the only customer. The kid on the speaker said, "Sorry, we are open, but we can't serve you. Our boss said that because we forgot to take our breaks earlier today, we all have to take it now or she could get into bad trouble."

  22. 3rdMoment:

    That Vox piece is actually pretty good. It explains why many of these changes will be bad for drivers and consumers, even if they do not destroy Uber. Tim Lee is about the only person at Vox worth reading.

  23. NL7:

    Agreed, that's the flipside of working sporadic and irregular hours.

    The IRS listed them separately in the 20 factors, but didn't mention competitors in Publication 15-A. Instead, it's implied as part of the nature and permanency of the relationship. My perspective is that making that argument as the employer tends to bog you down in numbers that are usually unverified or lower than you'd think. Often, the number of dual workers in your population is probably relatively low as a percentage, even when the workers have short hours and work remotely (i.e. even in the easiest situation for working through multiple companies). And it's not always a strong argument to authorities, not least since a number of common law employee professions are known for the same thing (e.g. a waiter who works at two establishments, a pizza driver who delivers for two chains).

    I think it was vaguely written to try to capture independent trade workers, like a plumber or a driveway fixer. They go around working for a dozen or more clients in a month, or hundreds of clients in a year, and that would probably be dispositive (which one of those hundreds of customers is supposed to be paying UI and withholding FICA?). But I think the IRS and states are just fine with the idea of people having two or several employers for whom they work each month. I've never seen it get much traction, even though technically it's a factor.

  24. NL7:

    Seems like the manager should've taken your order, if salaried.

  25. vikingvista:

    Apparently the manager wasn't there. I suspect if the manager were on site, s/he would've made sure the employees took their breaks earlier. Given some independence, the employees responsibly applied common sense when serving people throughout the day sans breaks, only to later find out that common sense has nothing to do with legislation.

  26. NL7:

    My understanding is that most taxicabs are either owner-operated or driver-leased and only a small number use employee status. In either an owner or lessee situation, the driver is an independent contractor with respect to the payor, the exact designation that California just ruled illegal for Uber.

    So the solution for taxicabs is either: the driver owns the cab/medallion and runs it as a small business (independent contractor) or the driver leases the cab/medallion and runs it as a small business (independent contractor). The minimum wage doesn't apply, just the taxi cartel rules on minimum pricing.

  27. NL7:

    It probably made a lot of sense to the legislators when they wrote a rule. "Breaks are good! Stupid factory bosses shouldn't force starving workers to go twelve hours a day without a second to rest!"

    Which somehow morphed into mandatory workless breaks every five hours, enforced by fines, even if the employee wants to work. Nobody should legislate a strict general rule while only imagining the worst case scenario.

  28. NL7:

    Are you W-2 or 1099? It sounds like you may be a leased employee, which is a subtly different thing. States and IRS care less as long as somebody is withholding all the taxes.

    Microsoft contractors sued in the 90s (Vizcaino case) and won the right to stock options because they were employees in almost every way but benefits. Now stock option plans are written to exclude people whose job class is contractor, even if they are reclassified as employees by a court, so the same thing won't happen at a company with halfway decent planning.

  29. vikingvista:

    I've no doubt that for the legislators it was merely responding to the request of a special interest group.

    It is a mistake to think legislators care for "starving workers" or anyone else who doesn't serve their ends.

  30. Jen G.:

    I'm FTE now. I know all about the Microsoft case and about "leased" employees. However, even the genuine 1099's still had the same working conditions.

    My overall point was that when you have a large group of "contractors" whose entire employment is completely controlled by a single "contractor" it seems ridiculous that this is the line in the sand that the CLRB is drawing. I refuse to believe it is based on anything more than that unions believe Uber drivers will be fundamentally easier to organize than computer programmers have shown to be.

  31. jdgalt:

    Yes. People should ignore regulations that interfere with business too much, and if that means all regulations become unenforceable, those doing really harmful practices will have to answer to public opinion directly anyway. (As opposed to needless rules like "don't emit tetraethyl lead." The air was clean enough in 1970, and the Clean Air Act is killing thousands every year by forcing people into less crashworthy vehicles.)

  32. jdgalt:

    Exactly. The regulations were written by phony capitalists -- company owners who use lobbyists to get THEIR business model mandated.

  33. jdgalt:

    I have 12 years in the tax business here in Sacramento.

    If the company had that much control, you were probably an employee. Both IRS and California's EDD have extensive documentation of how to properly classify workers.

    If your company says you're a contractor, but you think you're an employee, you can always file form SS-8 (at the IRS link above) to request that IRS make an official ruling one way or the other. You should probably wait until you leave that job to file it, though, because it will often get you fired. (If you file it and IRS determines you should have been an employee, you will not be liable for all those back payroll taxes -- the employer will be.)

  34. bannedforselfcensorship:

    You should have used diesel fumes in your example. CARB wanted to ban diesel fumes as dangerous.

    Luckily, a UCLA professor smelled a rat, and we found out the CARB "PhD" who said diesel was bad was a fraud.

  35. Jim Dean:

    I wish someone could explain how U***'s taking 25% of the revenue is justified. Drivers with whom I've talked don't understand their vehicle costs, are running on not-for-hire vehicle insurance (which will bite them in the butt if they're involved in a crash with a client in the car), don't get tips, etc.
    Florida has recently made the same employer-employee connection.

  36. markm:

    Drivers are business owners, so why would you tip them? Uber provides insurance. I have no idea how well the drivers understand their costs, but given your inaccuracy on the other items, I doubt you know any more than I do.

  37. "TheDixieDrifter":

    Another nail in Uber's coffin . It couldn't happen to a nicer company .............the end is near for Uber rideshare . I always said Uber rideshare is nothing more than a 21st century hitchhiking app that users must pay for service before they pick you up . and they don't service the poor communties of America or the elderly .

  38. "TheDixieDrifter":

    The taxi and livery industry deal with those issues properly They Pay and hourly wage plus commissions and anything over 8 hours worked is time and a half and time and a half pay on major holidays . that's how the taxi and limo industry pay I know I worked at it for more than 30 years . and driver are mandated to have 2 days off per week if you put in 60 hours in 5 days per NYC TLC regulations .

  39. jdgalt:

    Existing taxi regulation, including those about discrimination, is outrageous and needs to be defeated. If Uber doesn't succeed in doing so, the next try will.

  40. jdgalt:

    As soon as it employs a person in the US they have jurisdiction.

  41. "TheDixieDrifter":

    They don't pick up poor people or the elderly and that's a fact . and if you don't have a smart phone Uber will never pick you up .

  42. "TheDixieDrifter":

    Uber does not insure anyone's vehicle , that is the responsibility of the driver and the insurance Uber cars have is regular car insurance which is not enough for the work that they are performing .

  43. Kar:

    No, it's not a fact. And yes, if you need call Uber, you need a smartphone. Just like if you want to buy from a lot of companies, you need the Internet. So go get a smartphone.

  44. "TheDixieDrifter":

    I don't need a smart phone I got one . I'm just commenting on the 21 century Gypsy Cabs called Uber . It's the ill informed people like you who don't realize the dangers of using these rideshare gypsy cabs , who's drivers have not had the mandatory state background checks that cab drivers must go through . Also Uber cars have no Taxi or for-hire insurance .

  45. jdgalt:

    The only danger in Uber and Lyft is to the monopolies of cronyist fat-cats who should have been put out of business 50 years ago.

  46. "TheDixieDrifter":

    You don't know what your commenting about . show me some proof otherwise stfu. I have 32 years experience in this industry and you are just simply talking out your arse.

  47. "TheDixieDrifter":

    I'll bet you couldn't even find a cronyist fatcat in the NYC Taxi industry if you tried .

  48. jdgalt:

    Everyone who holds one of their medallions certainly is one.

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