Fortune: Fortune: It Won’t Kill Uber to Treat Drivers Like Employees

Earlier this week, California ruled that Uber drivers were in fact employees and not just contractors, setting off a debate over whether the decision could bring down the rise of the sharing economy.

Will treating workers as “employees” bring down the sharing economy, or just level the playing field? That’s the question being played out in the media after this week’s news that the California Labor Commission determined that an Uber worker was in fact an “employee”—and not an independent business, as Uber and other businesses in the on-demand economy have strenuously argued.

The California decision involves only one worker, and the ruling awards her just over $4,000. Uber has appealed. Nevertheless, the company has a choice to make here: spend millions or billions of its investors’ money fighting the inevitable while it racks up millions and billions in liability, or do the right thing now and invest that money in its services and its workforce.

In the California case, the commission examined the same state law that is at issue in a separate class-action lawsuit brought by Uber drivers. A federal judge is leaving it up to a jury to decide whether Uber drivers are indeed employees, and it’s likely that they will agree that they are .

The distinction between an employee versus a contractor is huge. Uber’s position is that its roughly 160,000 drivers are all in business for themselves. That means, in Uber’s view, they have no right to the protections of basic labor standards: Minimum wage? Not relevant. Overtime pay? Not applicable. Worker’s compensation, unemployment insurance, protection from discrimination, and the right to bargain with their employer? No, no, and no.

On the issue of self-employment, here is the key passage in Wednesday’s decision: “Plaintiff’s work was integral to Defendants’ business. Defendants are in business to provide transportation services to passengers. Plaintiff did the actual transporting of those passengers. Without drivers such as Plaintiff, Defendants’ business could not exist.”

It strains common sense that a person doing the business of her company would not be that company’s employee. It’s also a strained reading of the law, as other California courts have held in the context of pizza deliverers and port truck drivers, to name two highly relevant examples.

To this, Uber makes two arguments. It offers workers some degree of flexibility in their work hours. That may be true for Uber, but other workers have flexible and part-time hours, too. They are still employees. One answer to workers’ needs for flexibility is to be a decent employer and accommodate individual and family needs. Another solution is to enact paid sick and paid leave legislation, ascities and states are beginning to do.

Uber’s second argument is that it’s not in the business of transportation. Rather, it’s a technology platform. That argument was effectively debunked in the federal ruling, where the court explained, “Uber is no more a ‘technology company’ than Yellow Cab is a ‘technology company’ because it uses CB radios to dispatch taxi cabs, John Deere is a ‘technology company’ because it uses computers and robots to manufacture lawn mowers, or Domino Sugar is a ‘technology company’ because it uses modern irrigation techniques to grow its sugar cane.”

The big issue at stake for Uber, apart from meeting minimum labor standards, is that it might have to bear its own capital costs, like other businesses already do. Uber drivers shoulder all of the costs of their fictional “independent businesses”—car purchase, car maintenance, insurance, gas, tolls—but the fruits of their labor are siphoned off by their billionaire CEO and investors. In California, many of those costs will be rightfully borne by the company if workers prevail.

Will those costs sound the death knell for Uber and others in the on-demand economy? Not likely. These companies are growing at what even Uber’s CEO called “an alarming rate,” with Uber’s proposed $50 billion valuation leading the pack.

Surely, they can afford to direct a portion of their profits to their workers. Moreover, app-based and on-demand companies can and have treated workers as their employees. It’s nothing new, and it won’t break the business. The food preparation and delivery service,Munchery; the personal assistant companies Zirtual; andAlfred, the office-cleaning service Managed by Q, are reported to treat their workers as employees, not independent contractors.

Uber’s game plan so far seems to be one of delay. The California result, as well as a recent Florida decision, will likely inspire other Uber drivers, Taskrabbits and Homejoy helpers to come forward. They will file claims for workers’ compensation, unemployment compensation, minimum wages and overtime pay. State agencies will audit the companies and assess penalties. Workers will win in the vast majority of the cases. Uber and the others will appeal and appeal, until someone definitively calls “game over.”

While the agencies and courts are debating, Congress could step in. It could simply require companies in the on-demand economy to pay their 1099 employees minimum wage, pay into their Social Security accounts, and provide them other baseline rights and benefits that all workers should have but an increasing portion of the workforce now lacks.

Rebecca Smith is deputy director of the National Employment Law Project.

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Rebecca Smith

Director of Work Structures, National Employment Law Project

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