The Courts Will Decide the Fate of Uber and the Gig Economy. For Better or Worse.

It's impossible to miss all of the news coverage this week related to Uber.  New York City Mayor Bill de Blasio is supporting legislation that will cap new-hire licenses for Uber drivers.  Nearly all of the presidential candidates are also chiming in with their view of whether Uber represents a model example of entrepreneurship or an example of how deregulation leads to wage stagnation hurting middle-class workers.

At the heart of the debate are these two fundamentally transformative questions:  Are the people who work for Uber employees or independent contractors?  Does Uber, the company, simply put a tool out there and act as a middle-man, or do drivers functionally work for them?

The relevant statistic:  according to the New York Times, over 160,000 Americans depend on Uber for at least part of their livelihood.  The company directly employs fewer than 4,000 of them.

This is the culmination of a phenomenon known as "the gig economy".  As more individuals have moved toward freelancing, contracting, or temping work, the result has been an existential shift in the nature of employment itself.  1099s are becoming nearly as common as W2s.

The argument in favor of the gig economy is that it fosters entrepreneurship and innovation.  It circumvents entrenched interests and monopolistic arrangements, like that of the medallion taxis in New York City.  It offers more opportunities for people to make money, while reducing the role of regulations and bureaucracy that might act as a roadblock.

On the other hand, the argument against the gig economy is that it leads to income stagnation and economic insecurity for the middle-class.  Re-classifying workers as independent contractors, critics argue, is simply a way for companies to avoid offering workers the protections and benefits they are entitled to under the law, such as abiding by the minimum wage and offering workers compensation for injuries suffered on the job. 

The legal classification between employees and independent contractors is, and ought to be, determined by the courts.  The key question  that courts must answer is "whether a worker is economically dependent on the employer or in business for him or herself".  The courts typically use a six-part test revolving around the following types of questions:

1. Is the work being performed an integral part of the employer's business?
2. How much control does the employer exert over workers?
3. Is the relationship between the two parties permanent or open-ended?

Where do things currently stand?  Thus far, the conflict is being resolved primarily at the state and local level.  Just last month, the California Labor Commission ruled that an Uber driver was, indeed, an employee deserving of a variety of workplace protections and was not, as the company maintained, and independent contractor.  And, of course, New York City will decide the fate of de Blasio's proposed caps this week.

However, the larger point here is that the implications of the gig economy go far beyond Uber.  For example, in 2009, the Labor Department sued Cascom for misclassifying workers as independent contractors, and a judge ruled against the company in 2011, awarding nearly $1.5 million in back wages and damages to roughly 250 workers.  In another example, just last month, FedEx agreed to pay $228 million to settle a class-action lawsuit brought by truck drivers who also challenged their classification as independent contractors.

How "employee" will be defined in the gig economy will have major ramifications for every business model in the years to come - from WalMart carpet installers, to New Media and citizen journalists, to Amazon affiliates, to even the most popular everyday Facebook or Twitter users posting revenue-generating content on social media sites.

In this new frontier, the hope is that, however the courts ultimately decide, they decide soon.  Some detailed guidelines would be immensely helpful.