Uber, Lyft face crucial courtroom test over driver benefits

SAN FRANCISCO Smartphone-enabled car services Uber and Lyft head to court this week to resolve a critical question for Silicon Valley's sharing economy: whether their drivers are independent contractors or employees.

The two privately held companies face separate lawsuits seeking class action status in San Francisco federal court, brought on behalf of drivers who contend they are employees and entitled to reimbursement for expenses including gas and vehicle maintenance. The drivers currently pay those costs themselves.

If the judges rule against Uber and Lyft, it could significantly raise their costs beyond the lawsuits and force the companies to pay social security, workers' compensation, and unemployment insurance. Employees would also gain the right to organize.

    "If you're subject to the same rules as everyone else, investors might start asking "'Are you still this hot company?' The answer may be no," said Dean Baker, co-director of the Center for Economic and Public Policy Research in Washington.

Uber has raised more than $4 billion from prominent venture capital firms such as Benchmark and Google Ventures, valuing the company at $40 billion and making it the most valuable U.S. startup. Lyft has raised $331 million from Andreessen Horowitz, Founders Fund and other investors.

Rulings in the cases would technically apply only to drivers in California, plaintiff attorney Shannon Liss-Riordan said. But defining who is, or is not, an employee is a burning legal issue for an increasing number of companies that depend upon a flexible work force.

The outcomes of the Uber and Lyft cases could affect the valuations for other startups that rely on large networks of individuals to provide rides, clean houses and the like, said James McQuivey, a principal analyst at Forrester. Such companies include errand service TaskRabbit, grocery-delivery service Instacart, cleaning service Homejoy, and many others.

Multiple judges have ruled that exotic dancers are employees and entitled to unpaid wages. And the 9th U.S. Circuit Court of Appeals in San Francisco, in a case that the Uber and Lyft drivers repeatedly cite as precedent, recently ruled FedEx Corp's drivers are employees. That case is still ongoing.

Lyft's hearing is scheduled for Thursday, and Uber's hearing is set for Friday. Both cases are still in early stages, and the drivers have not yet specified how much money they are seeking in damages. Spokeswomen for Uber and Lyft declined to comment.

Uber has launched in 161 American cities and Lyft in more than 60, often overcoming opposition from traditional taxi companies and local politicians. Uber and Lyft describe themselves as technology platforms that connect drivers with passengers.

Elie Gurfinkel, a lead plaintiff in the Uber case, said in an interview that he spent about $150 to $200 per week last year on gas, $45 per week on car washes, $100 per month for synthetic oil changes, plus insurance and other expenses while driving his 2013 Dodge Dart at least 60 hours a week in San Diego.

By that math, the annual expenses for which he might seek reimbursement would exceed $10,000.

"I couldn't survive on what they were paying us," Gurfinkel said, adding that he recently began a different full-time job and now drives a maximum of 10 hours a week.

More than 160,000 U.S. drivers actively used the Uber platform by the end of 2014, but over half of them worked less than 15 hours a week, according to data released by the company this month. 

Drivers argue that Uber and Lyft can hire and fire them, require them to accept a certain percentage of rides, and to pass background checks. "It would be impossible for Uber to operate its business without the drivers," plaintiff lawyers wrote.

The Boston law firm representing Uber and Lyft drivers, Lichten & Liss-Riordan, won a 2009 decision that Massachusetts exotic dancers were employees because the club could set their shifts, and fire them. Judges in New York and Nevada followed that reasoning last year.

Uber and Lyft counter that drivers control their own schedules, are not assigned a territory, and are not supplied with any equipment apart from an iPhone and a sign.

Uber "provides a service to drivers and receives a fee for that service in return," the company wrote in a court filing.

(Editing by Amy Stevens and Tiffany Wu)