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Employment Law

Uber and Lyft – Rideshare Companies or Technology Companies?

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In August, Uber and Lyft received a favorable employment law ruling from an appeals court that ruled to extend a stay on an order requiring them to reclassify their drivers as employees. The legal battle, however, is far from over.

The case was brought by California’s attorney general and city attorneys from San Francisco, Los Angeles and San Diego who allege that Uber and Lyft violated the state’s new labor law, Assembly Bill 5 (AB5), by misclassifying rideshare drivers as contractors.

Certain provisions contained in AB5 installed a three-pronged test for whether a worker should be considered independent or considered an employee. To be considered independent, workers must: (1) be “free from the control and direction of the hiring entity,” (2) do work “outside the usual course of the hiring entity’s business,” and (3) be “customarily engaged in an independently established trade, occupation, or business of the same nature as that involved in the work performed.”

Uber and Lyft have not only argued that that their drivers meet the criteria to be independent contractors, but have also have asserted that the law didn’t apply to them because they are technology companies, not transportation companies, and that drivers are not a core part of their business.

Prior to the stay, the trial court granted the state a preliminary injunction that would require Uber and Lyft to reclassify their drivers as employees beginning Aug. 21. The companies argued that they would have to temporarily shut down in California in order to rework their businesses to comply with the injunction and rehire workers as employees, further stating that they would likely have to slash the number of workers they could employ once they returned, create more rigid work schedules for drivers and raise prices for riders. According to California officials, nothing in AB5 requires Uber and Lyft to eliminate flexible work for drivers, but the companies argue that it would be logistically implausible to do otherwise.

As of now, Uber and Lyft plan to remain operating under the same system that they have historically used while they continue to litigate in court. Even if and Uber and Lyft do not prevail in their court battle, they may have a second bite at the apple through Proposition 22, which will appear on the California ballot in November. Uber and Lyft have each contributed $30 million in funding to promote Prop 22, which would exempt their companies from compliance with AB5. In other words, if Prop 22 passes, it could render any adverse rulings meaningless as Prop 22 carves out obligations of app-based rideshare and food delivery services required under AB5.

U.S. Department of Labor Proposes Rule to Clarify Employee and Independent Contractor Status Under the Fair Labor Standards Act

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On September 22, 2020, the U.S. Department of Labor (DOL) announced a proposed rule clarifying the definition of employee under the Fair Labor Standards Act (FLSA) as it relates to independent contractors.

“The Department’s proposal aims to bring clarity and consistency to the determination of who’s an independent contractor under the Fair Labor Standards Act,” said Secretary of Labor Eugene Scalia. “Once finalized, it will make it easier to identify employees covered by the Act, while respecting the decision other workers make to pursue the freedom and entrepreneurialism associated with being an independent contractor.” 

The DOL’s proposed rule, however, has been sharply criticized as being a more employer friendly interpretation of employee status under the Fair Labor Standards Act than the DOL applied during the Obama administration.

The Department’s proposed rule would:

  • Adopt an “economic reality” test to determine a worker’s status as an FLSA employee or an independent contractor. The test considers whether a worker is in business for himself or herself (independent contractor) or is economically dependent on a putative employer for work (employee);
  • Identify and explain two “core factors,” specifically the nature and degree of the worker’s control over the work, and the worker’s opportunity for profit or loss based on initiative and/or investment. These factors help determine if a worker is economically dependent on someone else’s business or is in business for himself or herself;
  • Identify three other factors that may serve as additional guideposts in the analysis: the amount of skill required for the work; the degree of permanence of the working relationship between the worker and the potential employer; and whether the work is part of an integrated unit of production; and
  • Advise that the actual practice is more relevant than what may be contractually or theoretically possible in determining whether a worker is an employee or an independent contractor.

The agency proposed giving greater weight to two factors as determinative of status: (1) the nature and degree of the employer’s control over the work and (2) the worker’s opportunity for profit or loss based on personal initiative or investment. The proposed rule contemplates three additional “guideposts,” which would be useful in the analysis when the initial two factors are conflicting, according to a senior DOL official on a media call. The additional criteria are the amount of skill required in the work, the degree of permanence in the work relationship, and whether the work is part of an integrated unit of production.

This Notice of Proposed Rulemaking (NPRM) is available for review and public comment for 30 days after it is published in the Federal Register, which is significantly shorter than the more typical 60 or 90 day period for the public to weigh-in, indicating  that the administration is fast-tracking the rule change. 

A senior DOL official on the press call acknowledged that federal judges may opt not to give deference to this rule, once finalized, adding, “We do believe that the way we have articulated it is going to be highly persuasive to courts and to businesses and to individuals who want to be independent contractors across the country.”

Unions and Democrats generally favor the contrary approach of expanding employee status, contending that workers are often misclassified as independent contractors, which allows companies to dictate workers’ economic conditions while denying them benefits and basic workplace protections. 

Employees Working Remotely May Be Entitled to Overtime

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overtime during COVID-19

Employees working remotely may be entitled to overtime. When state and local governments began issuing stay-at-home orders in response to the COVID-19 pandemic, many employees suddenly found themselves working from home. This change in practice has increased the likelihood that employees will be working overtime. In many instances, employees working remotely will have access to technology or be taking on new responsibilities that they didn’t have when they worked primarily from their offices.

Basic overtime regulations

The federal Fair Labor Standards Act (FLSA) governs overtime pay and record keeping for part-time and full-time workers in the private and public sectors. The FLSA divides employees into two categories. Nonexempt employees are generally paid hourly and are entitled to overtime pay at one and one-half times their regular rate of pay beyond a 40-hour workweek. Employees are exempt from minimum wage and overtime pay requirements if they work in certain executive, administrative, professional and outside sales positions. Exempt employees are generally salaried and not entitled to overtime pay. However, they must be paid the same amount per pay period, regardless of how many hours they work. That is, they must be paid the same even if they work more or less than 40 hours.

“Off the Clock” work may result in overtime

Recent guidance from the Department of Labor notes that employers may encourage or require employees to work from home to control the spread of COVID-19. Employers, however, are not required to have telework programs in place. Working remotely does not change the federal wage-and-hour laws; they apply the same to employees working from home. And the same overtime laws still apply to employees working from home.

With large numbers of nonexempt employees working remotely, employers may have difficulty monitoring the number of hours the employees are actually working. And many employers may be unable to use the same compliance measures they used in the workplace to monitor the hours worked by their employees. Without such measures, it’s easy to see how employees could end up working longer than a normal eight-hour workday. Typical off-the-clock tasks such as reading and responding to emails, text messages and phone calls or conducting “a few minutes of research” can add up over the course of a week and lead to a claim for unpaid overtime wages.

While working from home may cut down on the time employees lose to commuting, it may also increase the chances that employees working remotely feel compelled to work overtime. As such, any employers should take reasonable steps to ensure that its nonexempt workers are being paid overtime for each hour its remote workers are performing, including any “off-the-clock” work performed on mobile phones or tablets.

Additional Employees Are Eligible for Overtime in 2020

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As of September 24, 2019, an estimated 1.2 million employees will be eligible for overtime in 2020. This came about with an increase in the “white collar” exemption by the U.S. Department of Labor. It supports the mandate for overtime pay included in the Fair Labor Standards Act. It becomes effective January 1, 2020.

Which employees are eligible for overtime in 2020?

The FLSA requires that most employees in the United States be paid at least the federal minimum wage for all hours worked and overtime pay at not less than time and one-half the regular rate of pay for all hours worked over 40 hours in a workweek.

However, Section 13(a)(1) of the FLSA provides an exemption from both minimum wage and overtime pay for employees employed as bona fide executive, administrative, professional and outside sales employees. Section 13(a)(1) and Section 13(a)(17) also exempt certain computer employees. These exemptions are often called the “white-collar” or “EAP” exemptions. To qualify for exemption, employees generally must meet certain tests regarding their job duties and be paid on a salary basis at not less than $684 per week. Job titles do not determine exempt status. In order for an exemption to apply, an employee’s specific job duties and salary must meet all the requirements of the Department’s regulations.

Once implemented, the minimum annual salary threshold for the “white-collar” exemption will be $35,568, increasing eligibility for an additional 1.2 million more workers. Currently the threshold for the exemption applied to white collar workers making at least $23,000 annually.

The result will be that employees making less than $35,568 (as opposed to only $23,000), even if salaried, will be entitled to overtime pay.   The adjustment by the Department of Labor is aimed at increasing overall compensation in the work force by increasing the number of workers eligible for overtime pay and also increasing the minimum salary required for employers to take advantage of the “white collar” exception.   

What employees are exempt from overtime pay?

Employers must reevaluate employees, currently exempt, who are earning an annual salary under or slightly over the new threshold. To be given a “white-collar” exemption, there are tests. 

Executive exemption

The employee’s primary duty must be managing the enterprise or a department or subdivision of the enterprise. The employee must customarily and regularly direct the work of at least two employees and have the authority to hire or fire workers (or the employee’s suggestions and recommendations as to hiring, firing or changing the status of other employees must be given particular weight).

Administrative exemption

The employee’s primary duty must be office or non-manual work that is directly related to the management or general business operations of the employer or the employer’s customers. The employee’s primary duty also must include the exercise of discretion and independent judgment with respect to matters of significance.

Professional exemption

The employee’s primary duty must be work requiring advanced knowledge in a field of science or learning that is customarily acquired by prolonged, specialized, intellectual instruction and study.

Training needed for employers and employees

Employees in the pay gap between the current pay threshold of $23,000 and the new limit of $35,538 may not be tracking their work time. Under the new plan, all work time and overtime must be tracked. For employers, this may mean training for affected employees on time-keeping procedures.

Both employers and employees need awareness training on other features of the plan. Employers may count up to 10% of annual non-discretionary bonuses, incentives, and commissions toward an employee’s salary – sometimes bumping them above the $35,538 threshold and disqualifying them from overtime.

Employers may restructure by increasing the salary of some and reclassifying others to nonexempt. They may also create ways to limit overtime hours – especially for the newly nonexempt employees who are not familiar with tracking hours.

This will take some time for both sides to adapt to the new rules, but awareness of the rules and how they apply to your particular situation, will go a long way toward a smoother transition and less frustration. The timing of the new rule gives everyone three months to adjust and be ready for the new year.

In 2016, the Department of Labor under the Obama Administration previously set an even higher minimum salary requirement to qualify for one of the white collar exemptions.  The $47,476.00 minimum requirement established by the Obama Department of Labor would have protected even more workers (an estimated 4.2 million) by dramatically increasing the number of workers eligible for overtime pay and significantly increasing the minimum salary required for white collar exemptions from the overtime pay requirement.  

However, a US District Court ruling stopped implementation of the 2016 rule before it became final.   During the pendency of the appeal, the Department of Labor under the Trump administration decided to dismiss the appeal previously initiated by the Obama Department of Labor – thus ending final implementation of the even higher salary threshold.

Nevertheless, the current Department of Labor has made the current rule change to the $35,538 threshold which is an improvement under the previous number established in 2004. Overall, this is good news for both “white collar” exempt employees as well as employees who work over 40 hours as they can be assured they will be more fairly paid for time worked.

Contractor or Employee? California Legislature Decides.

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Is your Uber driver a contractor or employee? What about the person delivering your favorite meal through DoorDash? California legislators passed a bill, called AB 5, on September 11 requiring employers that utilize contract workers to perform ‘gig’ type work, to change the status from contractor to employee. Governor Gavin Newsom has not signed the bill, though it is expected he will after current negotiations are resolved. Primarily this includes ride-hail drivers (like Uber and Lyft) and delivery couriers (like DoorDash) but could become more far-reaching. Other possible occupations include nail salon workers, janitors, construction workers, home repair, and telemarketers. Some exemptions* in California already exist.

Contractor or employee – ABC guidelines

There are ABC guidelines that establish the classification of an independent contractor. These workers would not be considered employees:

(A)  free from the control and direction of the hiring entity – in fact as well as by contract;

(B) the work performed by the person is outside the usual course of the hiring entity’s business; and

(C) the person hired is customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed. 

This definition of an independent contractor does not generally fit ride-hail and delivery drivers.

Worker benefits

Currently California contract workers do not receive employee benefits such as vacation time, paid sick days, overtime, and reimbursement of expenses. As employees, they would receive these plus the ability to unionize and eligibility for unemployment insurance and workers’ compensation. They would have the security they currently lack. 

Employer objections to AB 5

Some employers, such as Uber, have proposed similar benefits without the classification as employees. They stress the flexibility workers currently have that they may lose as employees. Some small, often family businesses such as vineyards, or auto shops, are fearful of the effect it could have on their businesses.

The larger companies, such as Uber, threaten that this law can lead to eliminating many drivers – especially those in low traffic areas that would not justify the benefits of an employee. They also suggest schedules might need to be initiated, ridding drivers of the flexibility they desire. Experts, however, say the bill does not require set shifts, with Uber and Lyft entitled to continue letting drivers make their own schedule decisions. In fact, it would be strategic to use incentives, such as bonuses, to ensure there are sufficient available drivers at certain times and in certain places.

Current status

  • In last minute ammendments, California legislators gave larger cities the right to sue if companies don’t comply.
  • Uber, Lyft, and DoorDash pledged $90 million to support a ballot initiative that exempts them from the new law.
  • Though most drivers support the bill, many oppose it from fear it will limit their flexible schedules.
  • In July and August, Uber and Lyft worked on an agreement between labor groups and the governor’s office to establish a new category between contractor and employee while giving a minimum wage and the right to organize. The negotiations disintegrated, but company officials are optimistic a deal can be negotiated after the bill is passed.

Beyond California

New York, Alaska, and Oregon – and almost half the states –  already determined ride-hailing drivers were employees under current state laws for specific purposes. However, these findings could be overturned by new state laws clearly identifying drivers as contractors. 

There are still hurdles to make this a law across the country. For now, California with AB 5 is setting the standard, and it will be an example to other states as they deal with this massive change in the current working environment of millions of workers in California alone.

When this bill becomes law, we anticipate a law that gives security, benefits, and confidence to all contract workers in California.

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Exemptions

Specific categories of workers:

Includes (i) individuals licensed by the Department of Insurance; (ii) real estate licensees; (iii) physicians, surgeons, dentists, podiatrists, psychologists and veterinarians licensed by the State; (iv) licensed lawyers, architects, engineers, private investigators and accountants; (v) securities broker-dealers and investment advisors and their agents/representatives registered with the SEC or FIRA or licensed by the State; (vi) direct salespersons who otherwise meet Unemployment Code conditions;  and (vii) certain commercial fishermen.

Six-part test for exemption in the fields of graphic design, marketing, writing, editing, freelance photography, and human resources:

  1. Maintain a separate business location (which can be their home);
  2. Have a business license in addition to any required professional licenses;
  3. Have the ability to set or negotiate their own rates;
  4. Set their own hours (other than project deadlines);
  5. Customarily engage in the same kind of work with another entity or holds themselves out to other potential customers for the same kind of work; and
  6. Customarily and regularly exercises discretion and independent judgment in the work.