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California Labor Commission Rules Uber Drivers Are Employees

A recent ruling by the California Labor Commission found that an Uber driver is an employee, not independent contractor, as the company argues. The order requires Uber to pay the driver $4,000 in expenses. Uber plans to appeal the decision, but if it stands, it could potentially destroy the popular ridesharing company's business model and others like it.

As Matthew Feeney explains:

The California Labor Commission ruling states that Uber is “involved in every aspect of the operation.” It is true that Uber provides a technology and that it carries out background checks on drivers. But Uber does not provide vehicles or set any hours or for its rideshare drivers. In fact, according to research on Uber wages conducted by Princeton economist Alan Krueger and Uber’s Jonathan Hall, only 38 percent of Uber drivers rely on Uber as their sole source of income.

Regulators and lawmakers ought to realize that Uber drivers, who are often driving for Uber part-time while using their own vehicles on their own schedule, shouldn’t be treated the same as traditional workers.

At issue here is an outdated regulatory system. As the California Labor Commission states on its website, "There is no set definition of the term 'independent contractor' and as such, one must look to the interpretations of the courts and enforcement agencies to decide if in a particular situation a worker is an employee or independent contractor."

Basically, bureaucrats get to determine on a whim who is an employee or independent contractor instead of letting private individuals contract voluntarily.

Instead of trying to fit a square peg in a round hole, and classify Uber in the same way as traditional businesses, this should provide California an opportunity to update its employment law. It is unlikely that will happen, so below are costs that Uber would incur if the order stands and most Uber drivers become employees.

For example, at the federal level an employer pays 0.6 percent in federal unemployment tax, 6.2 percent in social security tax, and 1.45 percent in medicare tax. California state employer payroll taxes include 3.4 percent unemployment insurance and 0.1 percent in employment training tax. On top of that, the Los Angeles Times reports, "In California, for example, the company would have to reimburse employees for gas, tolls and insurance."

This would devastate Uber's business model and many other businesses that use technology to connect independent contractors with jobs and desired services to consumers at the click of a button.

An article in The Economist considers this "on-demand economy" something that will "reshape the nature of companies and the structure of careers."

Well, only if government gets out of the way of this innovation. And it should because, although Uber and other like services shift certain costs to workers, it also gives them something extremely valuable to today's workforce--flexibility and an enhanced ability to achieve work-life balance.

A major reason the on-demand economy appeals to workers is because of the flexibility to choose their own hours. A EY survey shows workers' top priority is flexibility and they would forgo higher pay or promotion to gain flexibility. Flexibility is highly sought after because people today value achieving work-life balance over getting ahead.

When flexibility is such a top priority to the U.S. workforce, it is bad public policy to unleash its regulatory Leviathan on on-demand companies that provide what workers and consumers are seeking.

Instead of staying out of the way of new businesses like Uber that create well paying, flexible jobs, government, at all levels, is making it more difficult for them to operate. The end result of government intervention: less innovation, fewer jobs, and lower quality of service.