Sharing-economy Business Models Challenged - Uber and Lyft

March 16, 2015

Written By Martin P.J. Kratz QC and Michael R. Whitt Q.C.

O'Connor et al v Uber Technologies Inc, US District Court, Northern District of California, 11 March 2015 C-13-3826 EMC, Judge Edward M. Chen Cotter et al v Lyft, Inc., US District Court, Northern District of California, 11 March 2015, 13-cv-04065-YC, Judge Vince Chhabria

"Sharing economy" business models are increasingly in the legal news, usually under attack or some form of scrutiny. This is not restricted to disputes between taxi regulators and Uber, nor between hotel regulators and AirBNB.

Each of Uber and Lyft have recently been targeted in proposed class action lawsuits brought by former drivers in California, who claim that the companies are employers and owe duties arising from employee protection legislation alleged to apply for the benefit of their drivers. In each case, motions by Uber and Lyft for summary dismissal have been denied, by two different judges on March 11, 2015. 

Uber and Lyft had each argued (among other things) that they had no employment relationship with the drivers, since the companies only provided a match-making service through novel software and network system by which persons wanting a ride could be matched with other persons having vehicles. In this characterization, the drivers supplied no services to the companies' benefit.

Both courts declined to characterize their business models this way, and each judge ruled that the essence of each company's business was to provide transportation services to passengers “ thus, the work-product of the drivers provided a service to Uber and Lyft, and not directly to third-party passengers. This meant that there is a presumption under California law that the Uber and Lyft drivers were employees and not independent contractors since they provided service to the benefit of the companies, and that the burden in the litigation then falls on Uber and Lyft to provide persuasive evidence otherwise. Each court held that, in each case, since there was a triable issue and since the result would be based upon facts, the question of mixed fact and law is raised, which now has to be sent to a jury, and that this precluded a summary dismissal of each case.

In both courts, but in a pointed manner in the Lyft judgement, the rulings make clear that the arrangement between sharing-economy business model operators and the people who actually do the work is not clearly or simply either an employment relationship (where the company exerts large degrees of control over the workers and the manner of doing the work), nor clearly an independent relationship (where the companies each retained a large degree of control over the quality of the performance of the work, including monitoring, ranking and using ratings to allocate work and terminate relations; and behavioural control based upon a contracted company ability to "terminate at will without cause").

In each of these reported cases, the analysis is not superficial but quite sophisticated, and it is very interesting to observe how the courts cut through arguments that old laws can't apply to new "sharing economy" business models by performing the analysis of the basics of the business results achieved and the actual business operations of the defendant companies. These are interlocutory or preliminary motions, so these cases will be worth watching and will be instructive, as more business is structured in decentralized, network mediated, "sharing" paradigms.