Yesterday, the lawyers representing drivers who have sued Uber in California commenced another lawsuit on behalf of drivers alleging that the company misclassified them as independent contractors instead of employees. This lawsuit, though, is not against the company itself; rather, it is against Travis Kalanick, the former CEO and a current Board member, and Garrett Camp, the Chairman of the Board of Uber Technologies, Inc.

It also appears that this new lawsuit may well be an attempt by the drivers to avoid the arbitration provisions in the independent contractor agreements that most Uber drivers have signed with Uber – much the same way that Gretchen Carlson sought to avoid the arbitration provisions in her employment agreement with Fox News when she decided to only sue Roger Ailes personally. Undoubtedly, Kalanick and Camp will likely argue that they are covered by the Uber arbitration clause, and it will be up to a court (or an arbitrator) to decide that issue.

The case is James v. Kalanick, No. BC666055 (Super. Ct. Los Angeles County, CA, June 22, 2017), and is assigned to Judge Maren E. Nelson.

The California Law in Question – Does It Apply?

The law under which the individual defendants are being sued is the California Independent Contractor Law, enacted in 2011.  (Cal. Labor Code § 226.8)  It prohibits “willful misclassification” of employees as independent contractors.  That law contains a provision that not only imposes liability on companies who are found to have “willfully” misclassified workers as ICs, but also imposes “joint and several liability” on persons who knowingly advise an employer misclassify such individuals to avoid employee status.  (Cal. Labor Code § 2753)  However, that law exempts from liability anyone “who provides advice to his or her employer.” It is likely, therefore, that the former CEO will argue that he is exempt from joint liability, and the current Chairman of the Board will likely make the same argument in his role as a Board member, even if Uber was not technically his “employer.”

The law is unclear as to whether “advisors” can be jointly liable with a business they “advise” unless the company is also sued, and in this latest lawsuit the company was not sued.

The California Independent Contractor Law requires “willful” misclassification, which is defined to mean “avoiding employee status for an individual by voluntarily and knowingly misclassifying that individual as an independent contractor.” That is a higher standard than that imposed by the laws under which Uber has currently been sued and may be quite challenging for the plaintiffs to prove.

Whether or not this case is litigated on the merits – in court or in front of an arbitrator –both individual defendants would likely argue that neither engaged in any misclassification and especially not “willful” misclassification. Indeed, the issue of whether Uber drivers are employees or independent contractors is one where the courts have concluded that there are cogent factual arguments in favor of independent contractor status while at the same time there are facts in favor of employee status. That is the reason why a federal district court denied summary judgment in another case involving the company, finding that there were material issues of fact that had to be decided by a jury.  Essentially, this may be one of those types of IC misclassification cases in the “gray” area, although lawyers for both sides would presumably contend that the facts overwhelmingly favor their respective positions.

Takeaways for Other Businesses Using Independent Contractors in California and Elsewhere

Companies that find themselves in the “gray” area, and there are tens of thousands of such companies around the country, may wish to evaluate their current degree of IC compliance and then take steps to considerably enhance their level of compliance.

Some companies have chosen to accomplish this through a process such as IC Diagnostics,™ which offers alternatives to businesses that wish to minimize their exposure to independent contractor misclassification liability. One such alternative is restructuring, re-documenting, and re-implementing a company’s IC relationships in a manner that elevates a business’s level of compliance, consistent with the underlying business model, in a customized and sustainable manner. This is typically the preferred methodology chosen, as it can often be accomplished with little or no additional operating costs.

Companies whose IC compliance is already at a high level can also benefit considerably by some restructuring, re-documentation and/or re-implementation of their IC relationships. The IC legal landscape has been for many years and remains in flux.  Structures and agreements that once seemed safe may contain legal cracks that need repair.  Take, for example, FedEx, a company with top in-house and outside counsel.  Its independent contractor agreement, which may at one time have been regarded as state-of-the-art, was recently found by two federal appellate courts to have created an employee relationship with its Ground Division drivers, instead of the IC relationship for which it was intended to establish.

Other alternatives may include reclassification (either voluntarily or through a governmental program or arrangement) or redistribution through the use of a knowledgeable fee-based workforce management firm. These alternatives, though, can involve a considerable cost – and they are not risk-free if not accomplished in an effective manner.

Another way in which such companies in the “gray” area (as well as those already at a high level of IC compliance) can seek to minimize the likelihood of class action lawsuits is with a state-of-the-art arbitration clause with class action waiver, drafted in a manner that avoids the legal issues presently under review by the U.S. Supreme Court.

Written by Richard Reibstein