Independence and cooperation sound somewhat like opposites, but they are actually closely intertwined in the sharing economy. Through cooperative production, cooperative marketing, cooperative ownership of equipment, and cooperative purchasing of supplies and services, many small-scale and independent enterprises can access economies of scale usually only harnessed by big businesses. For example, now that 30 U.S. states have adopted cottage food laws, 1 allowing for sale of certain homemade food items, tens of thousands of people are likely to operate small enterprises to bake bread, dry fruit, make jam, and so on. Each cottage food producer will likely benefit from connections to other cottage food producers – to purchase sugar and flour in bulk, to share farmers’ market stands, to sell products under the same label, to share advertising, and so on. This kind of cooperation makes independent micro-entrepreneurship economically viable. When multiple independent entrepreneurs come together and form a producer, marketing, and/or purchasing cooperative, the relationship between the entrepreneurs and the cooperative is usually one of independent contractors. In the cottage bread baker example, each bread baker has his/her own home business. After joining a cooperative, a baker may agree to sell a certain amount of bread to the cooperative each week, and may also purchase ingredients through the cooperative. It is possible, however, that such a relationship could creep into a grey area and move more toward an employment relationship. This all depends on the agreement between the cooperative and the baker, and on the circumstances of the baker’s work.
The Test of Who is an Independent Contractor
The test for who is an independent contractor has been articulated by many courts. One Supreme Court opinion helpfully summed them up as follows (for the sake of brevity, we have omitted the court’s many helpful footnotes, and, for the sake of readability, we have added numbers):
“In determining whether a hired party is an employee under the general common law of agency, we consider:
1) the hiring party’s right to control the manner and means by which the product is accomplished.
Among the other factors relevant to this inquiry are:
2) the skill required;
3) the source of the instrumentalities and tools;
4) the location of the work;
5) the duration of the relationship between the parties;
6) whether the hiring party has the right to assign additional projects to the hired party;
7) the extent of the hired party’s discretion over when and how long to work;
8) the method of payment;
9) the hired party’s role in hiring and paying assistants;
10) whether the work is part of the regular business of the hiring party;
11) whether the hiring party is in business;
12) the provision of employee benefits; and
13) the tax treatment of the hired party.
[…] No one of these factors is determinative.” 2
Weighing the factors named above, a court would likely find that bread bakers are not employees of a cooperative through which they sell their breads; this is so long as the bakers work in their own homes, use their own appliances, hire their own assistants, set their own hours, decide on the manner in which they bake, and have the freedom to sell bread elsewhere. However, if an autocratic manager or board of the cooperative began to exert more control over each baker, the relationship might change. If the cooperative dictates how much each baker must produce, sets specifications for ingredients, and fixes prices on the breads of all bakers, and if one manager has the power to hire and fire bakers, this could potentially be ruled to be an employment relationship. This was essentially the outcome of the Supreme Court’s 1961 ruling in Goldberg v. Whitaker House Cooperative, Inc., 3 where 200 home-based clothing manufacturers (primarily women engaged in knitting and embroidery) joined a cooperative and sold clothing items to the cooperative. The Court determined that an employment relationship existed, due to the level of control the cooperative had over each member’s work (dictating design, order size, timing, payment, and other terms of work). 4 The ruling likely dealt a hard blow to the 200 women in the cooperative, since it would not have been legal for them to work as employees either, given the strict regulations on employment of people doing industrial home-based work. 5 They would have had to begin working outside of the home. Three Justices dissented in the Whitaker House Cooperative case, arguing that the women were truly independent in the way that they worked. The dissent argued that:
“each member worked for herself —in her own home when and as she chose—toward the production of knitted articles which she marketed through her cooperative, receiving immediately ‘an advance’ thereon, and ultimately—after payment of her portion of the cooperative’s ‘expenses’ and setting up its ‘necessary depreciation [and capital] reserves’—the balance of the proceeds of sale would ‘be distributed [to her] according to the percentage of work [she] submitted to the Cooperative for sale.’ Like the two courts below, I fail to see in this any element of employment by the cooperative of its members.” 6
Given the strong dissent in Whitaker House Cooperative, it’s likely that the cooperative fell very close to a grey area and could have avoided the ruling by altering the relationship between the manufacturers and the cooperative in a way that met more of the criteria for determination of an independent contractor relationship. 7 Note also that the cooperative could have argued that all member were partners, though to have succeeded with this, the coop may have needed a different legal entity and a much more collective and participatory management structure.
Examples and Issues
Independent Contractors and Nonprofit Fiscal Sponsorship
In the same way that many independent entrepreneurs form cooperatives to leverage economies of scale, many separate nonprofit projects often come together under the umbrella of a single nonprofit corporation, in a model known as fiscal sponsorship. 8 By operating under a single umbrella, each project is free from the burden of managing its own accounting, tax reporting, tax exemption, and other administrative matters. It’s important to learn how to navigate the difference between independent contractors and employers in this realm as well. In many cases, the coordinators of a project may be sufficiently independent in the operation of the project and an employment relationship may be avoided. However, if a project grows to involve multiple people working under the control of the project coordinator or nonprofit, an employment relationship may exist.
Are Uber and Lyft Drivers Independent Contractors or Employees?
Uber and Lyft consider their drivers to be independent contractors. However, recent lawsuits against transportation network companies Uber and Lyft have brought up the question of whether drivers are actually employees of the companies. Here is some information about those cases and links to court filings:
- Case number: CGC 13 533103, filed July 23, 2013
- Track case progress here
- Summary: Claire Farhbach, a bystander, was injured when Uber driver Djamol Gafurov crashed into another car, causing a fire hydrant to dislodge from the sidewalk and strike Farhbach, causing serious injury. Extensive storefront property damage also occurred as a result of the crash. Gufurov is classified by Uber as a partner driver — small taxi companies that use the Uber application to access its network of customers. According to Uber’s partner agreement with its drivers, “Uber and/or its licensors shall not be liable for any loss, damage or injury which may be incurred” by a driver. Gufurov had liability insurance which covers up to $750,000 in damages, however it does not cover excess damages of the sort that occurred. In California, Uber and similar transportation service companies are required to provide $1 million in commercial liability insurance that is in effect in the periods of time while drivers are “providing TNC services.”
The question is: With whom does liability lie? With the driver (Gafurov), the other driver in the crash (Ziad Sleiman), with SF Limo Car Service Corporation (the company for which Gafurov drove), with Uber (the application Gafurov was using at the time of the accident), or some combination of these? The outcome partially turns on the question of whether the driver is an employee of Uber. Determining whether someone is an employee or independent contractor is complicated, and requires asking several key questions, including those that are outlined in the test, above. In order to answer this question, some have drawn helpful parallels with cases involving independent contractor delivery services, franchises, and their parent companies. Similarly, if a taxi causes injury, the victim is likely to prevail in a suit against the driver and the cab company, even if the taxi company considers the driver to be an independent contractor, so long as the plaintiff is successful in showing that the independent contractor arrangement is a weak one which looks more like an employment situation.
The California Public Utilities Commission (CPUC) released a draft ruling which created a new category, “Transportation Network Companies” (TNCs), to describe and regulate ride service companies like Uber and Lyft. This category is different from other carriers, taking into consideration the various ways in which these services are distinct from traditional common carriers. According to the CPUC, TNCs “provide prearranged transportation services for compensation using an online-enabled application or platform (such as smart phone apps) to connect drivers using their personal vehicles with passengers.” As Janelle Orsi explains, these regulations put TNCs in a tricky situation. On one hand, the ruling on TNCs has freed these companies from burdensome regulations on traditional taxi and shuttle services. Yet, on the other hand, in order to comply with the regulations, the companies must exercise more control over drivers, including requiring special licenses, training, and background checks. The more control the companies exercise over drivers, the more it looks like the drivers are employees — a sort of catch-22 for the companies.
- Case number: 14-0576 C, filed June 26, 2014
- Summary: Class action lawsuit on behalf of all Uber drivers who have worked in Massachusetts, for violations of the Independent Contractor Law, Mass. Gen. L. c. 149 S 148B, the Tips Law, Mass. Gen, L. c. 149 S 152A, as well as tortious interference with the contractual and/or advantageous relations and unjust enrichment.
DOUGLAS O’CONNOR, ET AL. V. UBER TECHNOLOGIES, INC., ET AL.
- Case number: 4:2013cv03826, filed August 16, 2013
- Track case progress here.
- Summary: Class action suit including assertions of tortious interference with contractual and/or advantageous relationship, unjust enrichment, breach of contract, and violations of various California statutes. Plaintiffs allege that Uber’s conduct harms drivers in two primary ways. First, Uber wrongfully deprives drivers of the full amount of the gratuity that Uber advertises as being included in the cost of its car service. Second, Uber’s advertising creates the misconception that patrons do not need to leave additional gratuity because it is already included in the cost of the service, which, in turn, causes Uber drivers to lose gratuities they would have otherwise received.
- Case number: CGC 14 536979, filed January 27, 2014
- Summary: Wrongful death of Sofia Liu Kuang, 6 year old girl struck by Uber driver. Parents filed suit against both Uber and driver in San Francisco state court. Girl’s mother and brother were also seriously hurt. Uber said Jan. 1 that the driver was “a partner of Uber” who wasn’t providing services on the Uber system during the time of the accident, arguing that they are not liable for his actions.
Other Resources on or for Independent Contractors
- The Freelancers Union: Freelancers Union promotes the interests of independent workers through advocacy, education, and services.
- See the Sustainable Economies Law Center’s website for a table of states that have adopted cottage food laws (www.theselc.org). ↩
- Community for Creative Non-Violence v. Reid, 490 U.S. 730, 751-752 (1989). ↩
- Goldberg v. Whitaker House Cooperative, Inc., 366 U.S. 28 (1961). ↩
- Goldberg v. Whitaker House Cooperative, Inc., 366 U.S. 28, 33 (1961). ↩
- As a general rule, it’s not legal, without a special license, to employ people to engage in manufacturing activities in their homes. See 29 C.F.R. 530.1 – 530.12, and Section 211(d) of the Fair Labor Standards Act. ↩
- Goldberg v. Whitaker House Cooperative, Inc., 366 U.S. 28, 34 (1961), dissent. ↩
- For a similar case looking at this issue, see Brock v. Superior Care, Inc., 840 F. 2d 1054 (2nd Cir. 1988). ↩
- See the handout from “Fiscal Sponsorship,” presented by Gregory L. Colvin, Esq. at the Western Conference on Tax Exempt Organizations, November 17, 2006, San Francisco, available at http://www.fiscalsponsorship.com/images/WCTEO_Gregory-Colvin.pdf ↩