Uber driver is an employee not contractor, says California

Uber could face the possibility of having to drastically change its business model in California. The state's labor commission has ruled that one of the ride-hailing service's drivers is an employee, rather than an independent contractor.

The California Labor Commission made the ruling in March, but it's only becoming public now after Uber filed an appeal on Tuesday. In its ruling, the commission ordered the company to pay former Uber driver Barbara Ann Berwick $4,152.20 in expenses and other costs for the time period she drove for Uber.

Uber's current classification of drivers as contractors means the company is not responsible for all sorts of costs, including Social Security, health insurance, paid sick days, gas, car maintenance and much more. If all drivers are eventually deemed employees, Uber will have to pay for all of this, as well as manage a workforce of more than one million.

Founded in 2009, Uber provides a mobile app that lets passengers hail a ride from their smartphone. The company began operations in San Francisco and is now the world's largest ride-hailing service, operating in more than 250 cities in 57 countries.

Uber is also the second-highest-valued venture-backed company in the world with a valuation of $41.2 billion. Much of this valuation, however, is based on Uber's ability to be profitable by running its ride-hailing platform. If the company has to pay for its drivers' expenses, profits could diminish or costs could be transferred to passengers.

"These costs can be allocated across all parties involved in the work arrangement, from the employer to the worker to the consumer," said Gene Zaino, CEO of MBO Partners, a management services company for independent professionals. "For Uber, it does not mean that its business model is invalid. It just needs a good system to allocate these costs accordingly, apply a surcharge to passengers and remit the taxes. It certainly is a change, but these are all solvable issues."

Berwick drove for Uber from July 2014 to September 2014 and filed her initial claim with the Labor Commission that same September. After studying Uber's role in managing Berwick -- providing her with a smartphone and requiring background checks -- the commission decided she should be classified as an employee rather than independent contractor.

"Defendants hold themselves out as nothing more than a neutral technological platform, designed simply to enable drivers and passengers to transact the business of transportation," the commission wrote in its ruling. "The reality, however, is that Defendants are involved in every aspect of the operation."

Uber is appealing the ruling because it says Berwick's flexible schedule and ability to drive as much or as little as she wanted proved she was an independent contractor.

"It's important to remember that the number one reason drivers choose to use Uber is because they have complete flexibility and control," an Uber spokeswoman said. "The majority of them can and do choose to earn their living from multiple sources, including other ride sharing companies."

Uber also said this decision is based on a case involving only one driver.

Despite the ruling effecting only one driver, the decision could set precedent for an upcoming class action suit in California. Labor lawyer Shannon Liss-Riordan is suing Uber on behalf of drivers and their classification as contractors. Liss-Riordan is arguing drivers should be classified as employees and that Uber should help shoulder their costs. Two federal judges in San Francisco ruled in March that the case will go to court.

Other states are also grappling with the employee vs. independent contractor issue. Various labor departments and commissions in Georgia, Pennsylvania, Colorado, Texas and Illinois have decided that Uber drivers are independent contractors. However, a state agency in Florida ruled last month that drivers should be classified as employees.

The California Labor Commission didn't immediately respond to request for comment.

Update, June 18 at 12:35 p.m. PT: Adds comment from MBO Partners CEO Gene Zaino.