A recent ruling by the California Labor Commissioner’s Office could change the way that popular ride-sharing services such as Uber operate. The Seattle Times noted the decision that classified one of Uber’s drivers as an employee “may turn out to be an even bigger roadblock to the company’s business than regulatory changes because it could change Uber’s cost structure, requiring it to offer health insurance and other benefits, as well as paying salaries.”

What does this mean to those who love the low-cost, innovative, and job creating service? Most likely, if courts uphold the decision, higher costs and possibly less opportunity for those who want to work for themselves.

In early June the commissioner’s office ordered Uber to reimburse Barbara Berwick, a driver using its service, roughly $4,000 in expenses for tolls and mileage, ruling that she was an employee, and not an independent contractor, as Uber maintained.

Independent Contractor vs. Employee

Workers can fall into several categories, but the two most common are independent contractor and employee.

Independent contractors are essentially small business owners. They generally determine their own hours, provide their own equipment, have specific expertise, and have control over their working environment. Like other small business owners, their “salary” is really the profits they earn from their work for clients. Think a homeowner hiring a plumber to fix a toilet, or someone coming weekly to mow the lawn. The plumber and lawn mower are not the homeowner’s employees.

Clients of independent contractors pay a fee to the contractor as they would for any service. The client is not responsible for taxes, health insurance, or the myriad state and federal labor laws applying to employees. Unless stipulated in the contract, clients are not responsible for reimbursing the contractor’s expenses.

Employees, on the other hand, have much less flexibility. They truly work at the behest of someone else. The employer usually determines the hours of the employee, provides work-related equipment and dictates how the employee performs the job. Employers must comply with all labor laws, may reimburse expenses, pay half the Social Security and Medicare taxes of employees, and because of Obamacare, most must provide medical insurance.

In this type of arrangement both the employer and the employee have much less freedom than they would as a client or an independent contractor.

Uber’s contract

Uber’s contract allows drivers to “accept, reject, and select among the requests received via the service.” The drivers have “no obligation” to accept any request and have no set or required hours. In other words, drivers can work as much or as little as they want. The only parameter Uber sets for the amount of work is that it may suspend its account with a driver who has been inactive for 180 days, though the driver can reapply in person or via email.

For passenger safety and to maintain the loyalty of the users, Uber does set some standards. It requires drivers to maintain their own equipment (cars). Uber also sets standard pricing for drivers so that users know how much their trips will cost. Uber collects payments from the user and then pays the drivers. All of this occurs after the driver voluntarily chooses to use the app to pick up a user.

Uber vs. Berwick

Berwick, who according to The New York Times “has a history of being litigious,” has filed at least 20 lawsuits in the last 25 years, including one in which she sued “an employee of a pizza parlor for $500 in damages for leaving restaurant menus on her gate.” Berwick sued Uber for back wages, the repayment of expenses, and damages for her time as a driver during 2014, claiming she was an employee.

Uber asserts it is simply a platform (mobile app) to allow two parties to arrange transportation — commonly called “ride-booking” or “ride-sharing.” Uber connects drivers with “users” requesting transportation. Since Uber does not control the hours worked by the drivers nor does it provide equipment, it is generally outside the definition of an employer. Uber maintains that drivers are independent contractors and not employees.

Berwick is no stranger to entrepreneurship. In the late 1980s she started a phone sex company called Berwick Enterprises, which she later expanded into money management and apparently ride-sharing. Uber honored a request by Berwick to pay all the money she earned as a driver to that company.

The arrangement between Uber and Berwick Enterprises helps illustrate that Uber’s model is a service for other companies and not an employer of employees.

Looking at it another way, Berwick could have signed up her money management company for advertising in a magazine whose goal was to connect its readers with quality financial advisors. If the magazine had strict quality controls for advertisers and required standard pricing to keep the loyalty of its discerning readers, then Berwick might have claimed to be an employee of the magazine she was advertising in.

When put in this context, though, it is clear that the arrangement would be for advertising for Berwick’s company, and that she would not be an employee of the magazine.

The situation between Berwick and Uber is not much different. It is providing a service that allows drivers, as independent contractors or small business owners, to find clients in need of transportation. The relationship fosters competition and as many regular Uber users may attest, this competition results in high quality service at competitive rates.

For drivers using Uber’s service, it results in more freedom and opportunity.

For now, the California ruling affects only one driver. But if courts uphold and apply it to the company as a whole, Uber’s business model may fundamentally change, losing the flexibility and innovations that have made it great.

(Editor’s note: A version of this article appeared on the Illinois Policy Institute Blog.)

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