Uber heads to court over how it classifies its drivers

Uber is heading into one of the biggest court battles it's seen to date.

US District Judge Edward Chen is slated to decide on Thursday whether to grant class action status on a lawsuit in which three drivers are suing Uber for reportedly misclassifying them as independent contractors rather than employees. Chen's decision could have a huge impact on Uber's business model and also create a ripple effect throughout the entire on-demand economy.

Uber, which is a ride-hailing service that pairs passengers with drivers via a smartphone app, is one of the world's most valuable startups. Since the company launched in 2009, it's grown to operate in more than 250 cities in 58 countries. Uber is also one of the highest-valued venture-backed companies in the world with a valuation of more than $50 billion by some estimates.

Uber's current classification of drivers as contractors means it's not responsible for all sorts of costs, including Social Security, health insurance, paid sick days and overtime. Drivers also supply and maintain their own cars, so Uber doesn't pay for gas, repairs and other related expenses.

If Chen decides to grant class status in this case, Uber will have to contend with more than 160,000 Uber drivers in California, rather than just the three drivers listed on the complaint now. That means if Uber loses the case, it would have to pay damages to all of those drivers.

"If Uber's motion succeeds, it could potentially save the company hundreds of millions of dollars," said Roberto Cruz, the legal and compliance counsel for workforce management company ICon Professional Services. "The costs associated with its defense would shrink from defending against 160,000 Uber drivers to defending against just the three named plaintiffs."

"If Uber loses its motion, the next question becomes whether or not to settle and for what amount," Cruz added. "The difference in having to pay out a handful of named plaintiffs as employees versus having to pay hundreds of thousands of drivers as employees would be astronomical."

The lawsuit was originally filed on behalf of the three drivers in 2013 by attorney Shannon Liss-Riordan. Over the past couple of years, Uber has tried to get the case thrown out. It filed a motion to dismiss the suit, which was denied in March, and last month it filed a 52-page motion to limit the case to just the three drivers.

In last month's motion, Uber said the three drivers don't adequately represent most drivers and therefore the case shouldn't have class action status. The company argued that it's created several different service agreements and contracts for drivers, therefore it's difficult to lump all drivers into the same class. The motion also included statements from 400 drivers that said they'd prefer to be classified as contractors, rather than employees.

"The fact that Uber provided statements from several hundred drivers who expressed support for the company is not surprising, nor is it relevant," the drivers' lawyer, Liss-Riordan, said at the time. "More than a thousand drivers have contacted our firm who are very unhappy with how Uber has treated them and they feel taken advantage of."

Much of Uber's valuation is based on its ability to be profitable by running its ride-hailing platform. If the company is ultimately required to classify all of its drivers as employees, it will have to re-work its business model. Not only will Uber have to pay worker costs, such as overtime and health insurance, it will also have to manage a workforce of more than 1 million drivers worldwide. Uber didn't return a request for comment.

Several big players have weighed in on the employee-versus-independent contractor debate over the past couple of months. In July, democratic presidential candidate Hillary Clinton questioned whether the on-demand economy does enough to protect workers; and in June, the California Labor Commission revealed that in a March ruling it deemed former Uber driver Barbara Ann Berwick an employee, not a contractor.

In the wake of this battle, several on-demand companies appear to be re-thinking the independent contractor classification. The grocery-delivery startup Instacart said in June that it's switching hundreds of its personal shoppers from contract workers to part-time employees. And house-cleaning startup Homejoy announced in July that it was permanently shutting down after being sued over the classification of its workers. Several similar lawsuits have also popped up against other on-demand companies, including Homejoy, Postmates, Handy, Shyp and Washio.

"I believe the curated model approach that so many companies followed due to Uber's success will now come under question," said Jeff Tennery, CEO and co-founder of on-demand job site Moonlighting. "Too many of them followed Uber down this rabbit hole and won't make it out."

However, Tennery added, "this ruling will not sound the death knell for the sharing economy. Uber has the financial wherewithal and leadership ability to adjust their model and overcome the human resource expense."