Uber is a well-known example of a company operating in the on-demand economy. Hundreds of on-demand companies provide services such as grocery shopping, household cleaning, concierge services, and delivery of household items. The on-demand economy (also referred to as a platform, gig, or sharing economy) is generally characterized by the use of technology to deliver goods and services to users "on demand." Demand is satisfied using websites and apps that connect users with transportation, accommodations, food delivery, and more.

Workers who deliver the goods and services are often independent contractors who can accept or reject work opportunities (or gigs) based on their own schedule and availability. Uber's platform connects people who need rides with drivers who are willing to pick up and drop off those individuals in the drivers' own cars. Independent contractors are a major component of the on-demand economy because companies like Uber rely almost exclusively on contractors to deliver the services customers request.

Simply referring to a worker as an independent contractor, even in a written agreement, does not prevent legal challenges to that classification by workers, the Department of Labor (DOL), the Internal Revenue Service (IRS), or state and local authorities. In addition, the DOL and its state counterparts have made independent contractor misclassification a top enforcement priority. Misclassification audits, investigations, and lawsuits are increasingly common and can result in steep costs and penalties.

In the past year, Uber has faced legal challenges to its classification of drivers as independent contractors. In particular, O'Connor v. Uber Technologies, Inc., pending in the US District Court for the Northern District of California, was recently certified as a collective action. Uber has appealed the decision. ( (N.D. Cal. Dec. 9, 2015).)

Like most on-demand companies, Uber's business model is based on it being an intermediary between drivers and customers, not an employer. However, Uber's control over the workplace has been the subject of legal challenges to its classification of them as independent contractors. For example, Uber sets driver pay without negotiation or input from drivers, requires on-boarding training, and monitors driver performance through a star rating system and other customer feedback through the Uber app. Uber also has the right to discharge drivers without cause. (See O'Connor v. Uber Techs., Inc., , at *16-20 (N.D. Cal. Sept. 1, 2015).)

While it can be advantageous for both parties, independent contractor classification involves exposure to liability in several areas, including potential liability for years of unpaid overtime pay, taxes, and employee benefits. The following resources provide guidance to companies that engage independent contractors:

For more information about wage and hour laws generally, see:

In O'Connor, the court certified a subclass of Uber drivers who signed any one of three versions of Uber's contracts. Uber argued that those drivers should be excluded from the class action because of an arbitration clause that was part of the contract. The court concluded, however, that the arbitration agreements were unenforceable.

The arbitration agreements included a blanket waiver of claims under California's Private Attorney General Act (PAGA). This waiver is unlawful and unenforceable as a violation of public policy under state and federal precedent (Sakkab v. Luxottica Retail N. Am., Inc., 803 F.3d 425 (9th Cir. 2015); Iskanian v. CLS Transp. Los Angeles, LLC, 59 Cal. 4th 348, 360 (Cal. Sup. Ct. 2014)).

In addition, the PAGA waiver could not be severed from the arbitration agreement without undermining the entire arbitration provision itself. The court concluded that the illegal portion could not be separated from the legal portion because the blanket waiver was an integral part of Uber's goal of requiring individual arbitration of all claims.

Finally, the agreement's opt-out provision did not convert the PAGA waiver from mandatory to voluntary. The court explained that a PAGA waiver cannot be considered knowing and voluntary until after a dispute arises.

Because the unenforceable PAGA waiver could not be severed from the arbitration agreement, and the opt-out provision could not preserve it, the arbitration agreement as a whole was unenforceable on public policy grounds.

(O'Connor, , at *6-15.)

As Uber discovered, enforceable arbitration agreements are often critical to limiting class size. The following resources provide guidance on understanding the Federal Arbitration Act (FAA), compelling arbitration in federal court, and more:

The O'Connor court has certified plaintiffs' expense reimbursement claim (for vehicle and cell phone expenses) and tips claim (for the full amount of customer tips) as a class action under FRCP 23 (, at *2). With a putative class size of approximately 160,000 drivers, the case is now significantly more complex (and costly).

Certification of a class or collective action is a critical point in litigation. Certification can mean a more valuable claim for settlement purposes, significantly expanded discovery, more complex case management, class member notice considerations, and greater cost to litigants. The following resources provide guidance on class and collective action certification:

For more information on wage and hour litigation generally, see: