The ABCs of Worker Misclassification: Protecting The Labor Rights of App-Based Drivers

In November 2020, Californians voted to pass Proposition 22 (Prop 22), a ballot initiative to exclude ride-hail and food-delivery app-based workers from practically all employee rights under state law, including the right to a minimum wage, expenses reimbursement, and unemployment compensation. [1] The ballot initiative was largely a response to California Assembly Bill 5 (AB5), which required companies to extend employee classification to some gig workers who previously held independent contractor (IC) status. A coalition of app-based transportation and delivery companies led by Uber, Lyft, and DoorDash spent $224 million lobbying for Prop 22, in an effort to exempt their workers from the protections of AB5. [2] While a California judge found Prop 22 to be unconstitutional in 2021 on the basis that it infringes on the power explicitly granted to the California Legislature to regulate workers’ compensation, the proposition remains in effect awaiting the outcome of the appeal. [3]

The rise of the app-based gig economy has highlighted the need for stricter protections against worker misclassification. Specifically, app-based drivers are often subjected to misclassification as independent contractors under the ABC test, a multi-pronged test used by the U.S. Department of Labor and thirty-three states to determine whether a worker is an employee or an independent contractor. The ABC test bases classification on three main factors: absence of control over the worker, the business of the worker, and whether the worker is customarily engaged in an independent business. [4] Unless the facts or circumstances provide evidence of IC status by meeting all three criteria, the ABC test presumes a worker is an employee. As a result, profit-driven rideshare companies are incentivized to misclassify their workers as ICs in order to save as much as 30 percent of payroll expenses and related taxes that otherwise would have been paid for employees. [5] Analyzing the employer-worker relationship between drivers for the leading rideshare app Uber reveals how app-based gig workers fail to meet all the conditions of the ABC test and are consequently subject to misclassification.

The first prong of the ABC test, absence of control, exists if the worker is, in fact, free from the direction or control of the hiring organization by both contract or agreement. [6] The employer is not allowed to and may not direct the worker in how the work is to be performed. Briefly examining the role of drivers in Uber’s app-based rideshare business model shows that drivers do not meet this condition. Upon hiring, drivers for Uber must accept terms and conditions in order to work. These requirements include compliance with modes of checks, such as Uber’s customer feedback system, by which the company directs and controls the drivers’ work performance. Customer ratings, in particular, could be extremely detrimental to drivers’ success and overall earnings. A rating below 4.6 on a 5.0 scale places an Uber driver at a high risk of getting fired. [7] Furthermore, Uber’s controls have a direct effect on the ability of drivers to continue working or improve their performance. The extent to which app-based rideshare companies could exercise control over drivers became apparent during the COVID-19 pandemic when Uber regulated the use of masks by both riders and drivers. Uber imposed penalties on drivers who violated the company’s mask mandate, in some cases even removing access to their account. If Uber drivers truly met the first condition of the ABC test, Uber would not be able to impose penalties on drivers who did not follow the mandate, and the company would instead need to rely on drivers to independently and individually enforce mask mandates if they so choose. [8] Uber’s stringent enforcement of its former mask mandate serves to illustrate how app-based drivers are not free from the direction or control of their employer, as is required to lawfully attain IC status. 

App-based drivers have, in recent years, challenged the absence of control prong in court. In O’Connor v. Uber Technologies, Inc., current and former Uber drivers alleged that Uber violated various federal and state statutes by misclassifying drivers as independent contractors rather than employees. [9] Prior to this case, in Mohamed v. Uber Technologies, Inc., the Ninth Circuit had considered and reversed the District Court’s orders denying Uber’s motions to compel arbitration. [10] District Judge Edward M. Chen concluded that the plaintiffs are Uber’s presumptive employees since they perform services for the benefit of Uber. Dr. Rory Van Loo, an Associate Professor at the Boston University School of Law, stated in his annotation of the case that, Uber “exercises significant control over the amount of any revenue it earns: Uber sets the fares it charges riders unilaterally.” [11] Dr. Van Loo’s analysis demonstrates that Uber, as well as other app-based companies, function as more than intermediaries between riders and drivers. Courts have repeatedly recognized that app-based rideshare companies exercise control over their drivers, and thus cannot legally classify their drivers as ICs under the first prong of the ABC test.

Business of the worker, the second condition of the ABC test, examines whether an individual performs work that is unusual in regards to the employing organization’s business and premises. [12] Uber has attempted to present itself in the courts as a technology company rather than a ride-hail transportation company to further the narrative that app-based drivers are unusual in the scope of its business. In reality, however, Uber’s revenue is not created by how extensively its software is distributed but rather by the fulfillment of ride-hail services by its drivers. Rideshare services comprise a significant portion of Uber’s revenue: in 2021, Uber drivers generated $17.4 billion in revenue, out of which $7.5 billion was generated by mobility and $8.3 billion by delivery services. [13] Court rulings have supported the concept that drivers are an integral part of the operation and revenue generation of app-based rideshare companies. In JKH Enterprises v. Department of Industrial Relations, JKH filed a petition for a writ to overturn a stop work order from the Department of Industrial Relations on the basis that JKH had failed to procure workers' compensation insurance for its drivers, who the company had classified as ICs. The Court of Appeal of California in the Sixth District ruled that delivery drivers were employees of the courier service in the eyes of the law because “their work is the basis for [defendant's] business” and “the worker’s duties are an integral part of the operation.” [14] Indeed, in Yellow Cab Cooperative v. Workers’ Compensation Appeal Board, the Court of Appeal of California in the First District held that cab drivers provided a service to the cab company since “the enterprise could no more survive without [drivers] than it could without working cabs.” [15] Similarly, app-based rideshare companies such as Uber would not be able match its current financial performance if they lacked the drivers to use their softwares. App-based drivers do not perform work that is “unusual” under the premise of rideshare companies, since the companies themselves cannot operate without the workers fulfilling ride-hail services. Thus, app-based drivers do not satisfy the second prong of the ABC test and are thereby misclassified as ICs. 

The final condition of the ABC test requires workers to be customarily engaged in an independently established trade, business, or occupation. [16] Presently in multiple different professions, customarily independent contractors work on a per job basis, have their own business identity, and engage in business for profit on the open market. App-based drivers, in comparison, do not have their own independent business despite proponents of this stance citing the ability to shift between Uber and its competitors as a sufficient basis for the “entrepreneurial independence” of drivers. [17] In Razak v. Uber Technologies Inc., Uber initially received a legal victory in the Eastern District of Pennsylvania, which used the Fair Labors Standards Act to determine if drivers should be considered ICs or employees following Uber drivers seeking to recover unpaid wages. [18] The Court, analyzing the factors set forth in the Third Circuit’s decision in Donovan v. DialAmerica Marketing, Inc., found that the plaintiffs did not sufficiently demonstrate why they should be considered Uber employees. [19] A deciding factor in the decision was that UberBLACK drivers have to buy their own cars and can control the number of hours they can work. However, on appeal, the Third Circuit found that disputes of material facts existed specifically when reviewing the right to control. Razak highlights the interconnectedness of absence of control and being customarily engaged because leading an independent business is determined by the extent to which one can exercise control over the work performed. When combined with the third condition, the Court found that Uber exercises control over the drivers by placing a rating threshold and limiting a driver’s ability to work based on that threshold. App-based drivers do not meet the third condition of the ABC test because, although they are able to choose when and how much to work, these factors are controlled and limited by measures companies have in place, such as a strict rating system and base-level pay. 

The ABC test has failed to protect app-based drivers from unjust misclassification and stripping of their legal rights. There is mounting evidence and court precedents to indicate that app-based drivers do not meet the three prongs of the ABC test required for attaining IC classification. A remedy to the rampant misclassification of app-based gig workers is to  reform the labor law framework by taking into account the different types of gig workers. While a potential solution to prevent unjust exploitation of workers and preserve their legal rights, establishing a new employment classification category for app-based drivers would require adoption and stringent enforcement at the state level. The labor law framework must adopt substantial revisions to protect workers’ legal rights if it intends to keep pace with the rapidly-evolving gig economy and as technological innovation continues to shape the future of employment.

Edited by Shreya Shivakumar

Sources:

[1] Brian Chen and Laura Padin, “Prop 22 Was a Failure for California's App-Based Workers. Now, It's Also Unconstitutional,” National Employment Law Project, September 16, 2021, https://www.nelp.org/blog/prop-22-unconstitutional/.

[2] Chen and Padin, “Prop 22 Was a Failure.” 

[3] Order Granting Petition for Writ of Mandate at 2-4, Castellanos v. California, Case No. RG21088725 (Alameda Co. Sup. Ct. Aug. 20, 2021).

[4] “ABC Test,” in Wex, Legal Information Institute, Cornell Law School, article last modified June 2022, https://www.law.cornell.edu/wex/abc_test.

[5] “Independent Contractor Misclassification Imposes Huge Costs on Workers and Federal and State Treasuries,” National Employment Law Project, October 26, 2020, https://www.nelp.org/publication/independent-contractor-misclassification-imposes-huge-costs-workers-federal-state-treasuries-update-october-2020/. 

[6] Dynamex Operations West, Inc. v. Superior Court of Los Angeles County, 4 Cal. 5th 903, 232 Cal. Rptr. 3d 1, 416 P.3d 1 (2018).

[7] James Cook. “Uber's Internal Charts Show How Its Driver-Rating System Actually Works,” Business Insider, February 11, 2015. https://www.businessinsider.com/leaked-charts-show-how-ubers-driver-rating-system-works-2015-2. 

[8] Giles Turner and Jackie Davalos, “Uber, Lyft Scrap Mask Requirement for U.S. Riders, Drivers,” Bloomberg, April 19, 2022, https://www.bloomberg.com/news/articles/2022-04-19/uber-riders-drivers-no-longer-required-to-wear-masks-in-u-s-l25zl0vx. 

[9] O’ Connor v. Uber Technologies, Inc.,82 F. Supp. 3d 1133 (N.D. Cal. 2015).

[10] Mohamed v. Uber Techs., Inc., 109 F. Supp. 3d 1185 (N.D. Cal. 2015).

[11] Rory Van Loo, Annotations, O'CONNOR v. Uber Technologies Inc, 82 F. Supp. 3d 1133 (N.D. Cal. 2015), H2O Harvard, November 17, 2016. https://h2o.law.harvard.edu/collages/42126. 

[12] “Employee or Contractor? The Complete List of Worker Classification Tests by State,” WrapBook (blog), July 15, 2022,https://www.wrapbook.com/blog/worker-classification-tests-by-state. 

[13] Mansoor Iqbal. “Uber Revenue and Usage Statistics (2022).” Business of Apps, June 30, 2022. https://www.businessofapps.com/data/uber-statistics/.

[14] JKH Enterprises, Inc. v. Department of Industrial Relations, 142 Cal. App. 4th 1046 (Cal. Ct. App. 2006).

[15] Yellow Cab Cooperative v. Workers' Comp. App. Bd., 226 Cal. App. 3d 1288 (Cal. Ct. App. 1991).

[16] “Employee or Contractor?,” WrapBook (blog).

[17] Megan Cerullo, “Uber Drivers Are Independent Contractors, Not Employees, Says National Labor Relations Board,” CBS News, May 14, 2019, https://www.cbsnews.com/news/uber-drivers-are-independent-contractors-not-employees-says-national-labor-relations-board/.

[18] Brian A. Brown II, “Your Uber Driver is Here, But Their Benefits are Not: The ABC Test, Assembly Bill 5, and Regulating Gig Economy Employers,” Brooklyn Journal of Corporate, Financial & Commercial Law 15, no. 1 (2020): 192-93. https://brooklynworks.brooklaw.edu/bjcfcl/vol15/iss1/8. 

[19] Donovan v. Dialamerica Marketing, Inc., 757 F.2d 1376 (3d Cir. 1985).