(Bloomberg) — Uber Technologies Inc. will have to defend a group lawsuit brought by drivers seeking the pay and benefits of employees.
The judge’s ruling may slow the company’s growth and cut into its $50 billion valuation. It could affect the company’s drivers around the country, even though the San Francisco case is limited to some of the 160,000 in California.
Tuesday’s ruling by U.S. District Judge Edward Chen means Uber’s California drivers can press as a group for reimbursement for tips. Changing drivers’ status from contractors would entitle them to unemployment and workers’ compensation as well as the right to unionize.
Besides crimping Uber’s “drive whenever you have time” motto, a jury verdict concluding many of its drivers are employees, if upheld on appeal, would damp profits. Other U.S. courts may follow Chen’s lead as they grapple with similar lawsuits against companies operating in the sharing, “gig” or “on-demand” economy that pair customers with products through apps and typically avoid the costs of traditional employment.
The ruling is “a very big deal,” said Beth A. Ross, an employment lawyer who won a similar case against FedEx Corp. “The question in this case is whether Uber’s business model is lawful or unlawful. If that question gets to be decided on a class-wide basis, that’s the whole ball game,” Ross said.
Just how many drivers will end up being represented in the lawsuit is disputed by the two sides, and will be clarified by Chen over the next two months.
Uber’s lawyer, Ted Boutrous, said in an e-mailed statement that the company was pleased Chen rejected the “mega-class” plaintiffs sought. In a separate statement, Uber said Chen allowed only a “tiny fraction” of the 160,000-member class to go forward. Uber will probably appeal the ruling because it is based on “several key legal errors,” according to Boutrous.
The two lead plaintiffs in the case “cannot represent the interests of the thousands of other drivers who value the complete flexibility and autonomy they enjoy as independent contractors,” Boutrous said.
Shannon Liss-Riordan, a lawyer representing the drivers, said that tens of thousands of drivers are likely included in Chen’s ruling. She said more will join as the full scope of Chen’s ruling is sorted out in litigation.
‘Worth a fortune’
Uber’s financial exposure as a result of Chen’s ruling is significant because the claims “are worth a fortune,” Ross said. “The dollars add up really, really fast,” she said, saying the 2,000 drivers in her FedEx case pale in comparison to the potential 160,000 in Uber’s. In the FedEx case, also a class action, the company agreed to a $228 million settlement that is being considered by Chen.
An important factor in determining whether the Uber case could proceed was a determination that Uber exercises control over its drivers.
“Uber’s uniform and unilateral right to control its drivers’ compensation is important common proof that bears directly on the class members’ work status,” Chen wrote.
Chen allowed the plaintiffs to pursue reimbursement for expenses including mileage by filing further arguments within 35 days. Liss-Riordan said she will pursue those claims.
Chen’s ruling “will very much impact other jurisdictions even though the case is California law,” said Orly Lobel, a law professor at the University of San Diego who specializes in labor and employment issues.
In lawsuits challenging whether workers are independent contractors or employees, all U.S. courts, state and federal, use a similar test to weigh the “economic reality” of the position, and whether the worker is controlled by the employer in the sense of being hired and fired, or directed throughout the job, Lobel said.
Whether an individual is classified as an independent contractor or an employee can affect benefits, and an employer’s employee counts, under many different state and federal laws, including the Patient Protection and Affordable Care Act (PPACA) and the federal Family and Medical Leave Act (FMLA).
“The question of whether Uber drivers are employees will be determined by the very specific context and the particular circumstances of their relationship with Uber, and once one judge decides about their status this will be very influential for other judges,” Lobel said.
Uber argued that the vast majority of its drivers prize their status as independent contractors permitting them to work whenever and as often as they like. Uber has said it relies on as many as 17 different licensing agreements for drivers, which the company argued is typical of independent contractor relationships.
See also: Could insurance go “Uber?”
Chen rejected Uber’s argument, writing that Uber’s right to terminate its drivers, described in the licensing agreements, further demonstrates Uber’s control over its drivers and “weighs heavily in favor of class certification.”
The case is O’Connor v. Uber Technologies Inc., 13-cv-03826, U.S. District Court, Northern District of California (San Francisco).
—With assistance from Eric Newcomer in San Francisco.