Uber Likely to Dodge “Existential Threat” Posed by Driver Misclassification Lawsuit – Again

San Francisco, CA“How can you approve the settlement when the underlying contract is illegal?” Uber driver, S. Patrick Mendel’s question to the Northern District of California last spring rings with frustration. Judge Chen acknowledged as much: “This case did not resolve the ultimate question” for drivers who claim they were misclassified as independent contractors under provisions of California labor law. The result is unlikely to change following Mendel’s renewed, and probably last, round of objections to the Ninth Circuit in November.

But unresolved issues don’t heal themselves. How will it be possible to get to the ultimate question—a continuing scheme which cheats as many as 5.1 million U.S. Uber drivers of legally guaranteed wage protections?

The answer may be in litigation that treats the fundamental harm as an antitrust violation, an affront to free and fair markets, rather than abuse of workers. This is an idea to watch. Al Capone went to prison for income tax evasion, after all.
 

THE ‘FOREVER’ LAWSUIT

O’Connor v. Uber, the underlying class action lawsuit, was initially filed in 2013. By 2016 Uber had offered $100 million to settle with a class of drivers in Massachusetts and California that had grown to 385,000.That settlement was rejected by the District Court for the Northern District of California in 2018 as too low.

Thereafter, though, Uber won a ruling in Ninth Circuit that forced most drivers into individual arbitration and reduced the affected class of workers to about 13,600. The decision upholding the enforceability of Uber’s arbitration agreements was a big blow to drivers.

Uber’s latest settlement offer, of $20 million (roughly one-fifth of the initial offer) was approved by the Northern District of California in March. Mendel’s objections, which focus on the uncertainty drivers still face about the amount of individual recoveries and the award of attorneys’ fees, are realistically probably the end of the line for this lawsuit.
 

MISCLASSIFICATION ESSENTIAL TO UBER’S SUCCESS

But the fundamental issue -- the classification of drivers as independent contractors --remains stubbornly unresolved, and Uber has every reason to keep it that way.

Uber’s misclassification allows the company to avoid major costs. A recent California lawsuit, Diva Limousine v. Uber, argued that:
“Uber avoids an average of $9.07 an hour in expenses and benefits that it would have to pay drivers if it properly classified them as employees. That means that the average cost to Uber of a full-time driver after adjusting for the expenses and other benefits that Uber fails to pay is the equivalent of paying a W-2 employee is $7.48 per hour.”  

Another study estimates that the Uber driver “wage”—comparable to the wages (reported for employees on federal tax Form W-2) earned by regular W-2 employees—averages $9.21 an hour.” This, the study notes, is less than what 90 percent of workers earn. The Uber driver W-2 equivalent hourly wage falls below the mandated minimum wage in the majority of major Uber urban markets (13 of 20 major markets, which include 18 cities, a county, and a state).  Estimates vary, and the driver experience varies, but the picture that emerges is not rosy for Uber drivers.

Uber’s corporate picture is different. The Diva Complaint argued that: “From full-time drivers in California alone, Uber’s misclassification likely saves the company roughly $250 million each year. Uber’s total cost savings from misclassification in California may exceed $500 million each year.”
 

SHIELDED BY ARBITRATION AGREEMENTS

The situation persists in California largely because Uber generally requires drivers to agree to individually arbitrate any disputes that may arise with the company. Few can afford to do that; many have no idea what they have agreed to do; most walk away when they have a beef.

The Ninth Circuit in September 2018 found that it was required to uphold properly drafted arbitration agreements because of recent U.S. Supreme Court precedent in Epic Systems Corp. v. Lewis.

The issue in Epic Systems was whether an employer could require employees to submit to individual arbitration of wage-and-hour and other workplace condition claims—not only without an option to go to court, but without an option to pursue even private arbitration in common with other employees making the same claim. This was a condition to employment. These clauses arguably make it easier for employers to maintain unfair or unlawful employment structures and salary systems.

The Court decided that arbitration agreements providing for individualized proceedings must be enforced. The decision has been roundly criticized in the usual circles as yet another example of the Supreme Court’s conservative majority’s continued drive to narrow protection for employee rights.

The decision is likely to continue to affect California prevailing wage lawsuits where employers condition job offers on an employee’s agreement to submit to arbitration. It is not clear what the effect might be on the enforcement of Assembly Bill 5, which codifies the new strict test for employee status first articulated in Dynamex Operations West, Inc. v. Superior Court of Los Angeles.
 

DIVA LIMOUSINE V. UBER TOOK A NEW ROUTE

Intriguingly, Diva took a completely different approach that apparently avoided the arbitration agreement trap. The Complaint, which has now been voluntarily withdrawn with leave to re-file, framed the issue in terms of anti-competitive behavior.

It was brought, not by drivers who believed they were shortchanged, but by limousine companies who argued that Uber’s misclassification of drivers violated the California Unfair Practices Act and the California Unfair Competition Law. The argument is essentially that Uber prices its rides below its total average costs for the purpose of injuring competitors.

It’s an intriguing argument. It is too soon to say whether it has legs, but it may be worth watching for the future.