Employee or Independent Contractor? A Legal Analysis of Uber’s Worker Misclassification

Uber stands as a tangible representation of the fruits of modern-day technological innovation, yet the company continues to exploit its drivers who are paramount to its success. As of May 2024, Uber holds over 75 percent of the U.S. ridesharing market, with 149 million active users and 1.5 million drivers in the United States alone. With the sheer ubiquity of Uber’s services, something as fundamental as the status of Uber’s workers as “employees” or “independent contractors” should not still be up for debate. Uber’s reluctance to properly define their workers as either has directly resulted in their maltreatment, robbing them of proper employment benefits. Through a closer analysis of the Fair Labor Standards Act (1938) and the Employee or Independent Contractor Classification Under the Fair Labor Standards Act (2024) passed by the Department of Labor, it is clear that Uber’s workers are not economically independent enough from Uber to be considered independent contractors. Thus, Uber’s workers should be provided with the essential employee benefits granted under the Fair Labor Standards Act, such as paid sick leave and health insurance.  

In 1938, Congress enacted the Fair Labor Standards Act (“FLSA”). Since then, the FLSA has regulated employment relationships within the United States, creating federal standards for employment benefits and conditions. Simply put, the FLSA has four main provisions: a federal minimum wage, overtime pay, employer recordkeeping, and child labor restrictions. Within these four categories, state law preempts the FLSA, as many states have enacted laws that provide a higher minimum wage or greater insurance coverage. However, the crux of Uber’s issue with the FLSA lies within its worker classification regulations. For a worker to receive the aforementioned FLSA benefits, they must be considered an employee. This designation can be determined through the FLSA’s economic reality test.

The economic reality test has six prongs. To determine if a worker is an employee or an independent contractor, these factors must be evaluated: (1) the worker’s opportunity for profit or loss based on their managerial skill; (2) the level of investment made by the worker and the employer; (3) the permanence of the working relationship; (4) the nature and degree of control; (5) whether the work performed is integral to the employer’s business; (6) the amount of skill and initiative required on the part of the worker. In January 2024, the Department of Labor released its final ruling on the distinction between employee and independent contractor, codifying the use of the economic reality test.

To properly apply this to Uber, the nature of the company’s business model must first be evaluated. Nationally, Uber designates its drivers as independent contractors and itself as a technology company that connects drivers with riders. Drivers sign up for the app, use their personal vehicles, choose how many rides they want to take in a day, and have total control over their working hours. Uber simply provides a platform to connect drivers and riders. Yet, by analyzing each prong of the economic reality test in relation to Uber, it becomes clear that they play a greater role in their drivers’ work than it may seem at face value.

Firstly, Uber’s workers do not have any specialized opportunity for profit or loss based on their “managerial skills,” as Uber maintains control over fare prices and takes 25 percent of the profit from a ride. While Uber drivers can accept more rides to make money, their earnings are largely controlled by Uber and its policies.

Secondly, while Uber drivers use their own vehicles for rides, that is the only extent to which they invest in their work besides their time. The rest of the work is left to Uber, which connects the drivers with riders. 

Thirdly, Uber’s employment model permits workers to drive for Uber full-time, establishing the permanence of the working relationship. Even if all Uber drivers choose to drive for Uber only on a part-time basis, the possibility of full-time work must be acknowledged and duly protected.

Fourthly, Uber maintains significant control over its drivers. The company controls fare prices, monitors driver performance, specifies work conditions by incentivizing working at certain times in certain areas, and deactivates drivers who do not accept a certain percentage of ride requests.

Fifthly, and chiefly, Uber is a ride-sharing company. While technology makes up a large part of its function as a business, the work of its drivers is integral to the business’s purpose. Without its drivers, Uber serves no purpose. The corporation has largely escaped regulation by comporting itself as a technology company, yet the relationship between Uber and its workers reveals Uber’s true status as a ride-sharing company.

Finally, Uber’s workers lack specialized skills. Uber merely requires a valid driver’s license and access to a vehicle that meets its standards. Providing work that pertains to a specialized skill is characteristic of an independent contractor, and the lack thereof further indicates that their drivers should be considered employees.

Many state legislatures have called on Uber to reclassify their drivers as employees to afford them the benefits provided under the FLSA. In states with large metropolitan areas, where the minimum wage is more than double the national average of $7.25, Uber faces the possibility of great financial loss as the company already struggles to maintain profitability. This is largely why Uber fights to maintain independent contractor status for its workers.

In California and Massachusetts, Uber has faced its most aggressive legal battles and made large concessions to state legislatures. In June 2024, in California, Uber failed to overturn Assembly Bill No. 5 (“AB5”), a 2020 bill that created the ABC test to delineate independent contractors from employees. The ABC test cites a worker’s (A) freedom from the control and direction of their employer, (B) ability to perform work that is outside of the usual course of the company’s business, and (C) customary engagement in an independently established trade, occupation, or business as the key factors for employee designation. As ride-hailing drivers were not on the list of workers exempted from the provisions of AB5, they became “employees” under California law after the bill passed. The AB5 bill inspired the Department of Labor’s final ruling and is understood to be the most stringent standard for worker classification nationwide.

As a response to AB5’s passage, Uber successfully lobbied for passing Proposition 22 (“Prop. 22”) in 2020, a ballot initiative that designates ride-hailing drivers in California as independent contractors and puts Uber above the provisions of AB5. Prop. 22 is the single most expensive ballot initiative in United States history, costing the company, alongside four other firms, $200 million. While Uber has continued to fight against AB5, Prop. 22 has been largely unchallenged, creating a legal safety net for the company.

In March 2023, the U.S. 9th Circuit Court of Appeals allowed Uber to raise a constitutional challenge to AB5, following its rejection of the same challenge in 2021. However, when the case was brought to the Circuit Court in June 2024, Uber failed to prove that AB5 unfairly targeted transportation gig workers. The legislature went as far as to cite transportation and delivery companies as “the most significant perpetrators” of worker misclassification, unraveling years of Uber’s fight against AB5.

In May 2024, oral arguments for the case challenging Prop. 22’s constitutionality were heard for the first time by the California Supreme Court. In Castellanos v. State of California (2024), a coalition of gig workers, represented by four main workers, argued that Prop. 22 conflicts with the State Legislature’s power to enforce a system for worker compensation. California’s Supreme Court upheld Prop. 22 on July 25, 2024. With the workers’ coalition now forced to find a new way to challenge the legality of Prop. 22, independent contractor status has been maintained for Uber’s drivers. However, it is more than likely that future legal battles will ensue.

While the case in California happens to be one of the more nuanced challenges to Uber’s worker misclassification, it is hardly the only ongoing state challenge. In Massachusetts, Uber and Lyft began to campaign for a similar ballot initiative to Prop. 22 after former Attorney General Maura Healey announced a lawsuit against Uber and Lyft in 2020 that would force them to classify their workers as employees under Massachusetts Wage and Hour Laws, which utilizes a similar ABC test to California. However, in June 2024, this multi-year litigation was resolved in a historic settlement, in which Uber and Lyft were forced to pay their drivers a minimum wage of $32.50 per hour alongside other employment benefits. While the settlement avoids the perennial question of whether or not Uber’s drivers are employees or independent contractors, in Massachusetts, Attorney General Andrea Campbell’s settlement created a new loophole to guarantee Uber drivers’ employment benefits despite an undefined work status. In an interview after the settlement finished, A.G. Campbell stated that “a win in court might have given drivers restitution for pay they were owed in the past, but a successful ballot initiative would have wiped out its impact going forward,” clarifying the state’s choice to sidestep the employee classification question.

In comparing how these two states—California and Massachusetts—have approached the analysis of the FLSA and the economic reality test, it is evident how the federal regulations in place are insufficient in addressing the overarching need for greater protections for Uber drivers. While both states argue the necessity of Uber reclassifying its workers as employees and granting them employee benefits, neither has been able to shake the company from its use of the independent contractor moniker. Massachusetts has undoubtedly gotten closer to prompting Uber to properly pay its employees, but California has seemingly moved further away from achieving proper remuneration for drivers. Analyzing these two cases reveals how necessary federal intervention is and how important it will become as more states grapple with determining the status of Uber’s workers.

Yet, beyond the legal fallacy that Uber has created for itself, it is important to acknowledge the ethos of Uber’s employment model: flexibility. For many drivers, driving for Uber serves as a supplement to another part- or full-time job, and many find the “independent contractor” status necessary for workers to feel free from a strict employee-employer relationship with Uber. Even so, as a matter of law, allowing Uber to continue operating within a legal gray area indicates the federal government’s failure to prevent the maltreatment of gig workers and properly uphold the Fair Labor Standards Act.

The repercussions of the federal government’s neglect reach beyond just Uber’s drivers and the ridesharing industry, influencing other nascent industries that are similarly reliant on technology. The employment model championed by Uber will undoubtedly be further exploited, as it is easy for Uber to hide behind the veil of their technological innovation to prevent proper regulation from reaching them. If proper employee designation is given to Uber’s drivers, that will stand as the first step to achieving greater protections for other gig workers.

Edited by Yunah Kwon