Consumer Fraud

Fair Labor Standards Act: How open-source businesses like Uber are challenging employee classifications

This Is The Third Installment in : Fair Labor Series

the fraud list fair labor edition1 370x210 Fair Labor Standards Act:  How open source businesses like Uber are challenging employee classificationsDespite laws enacted by the Fair Labor Standards Act (FLSA) to help protect the livelihood of our nation’s workforce, there are still grey areas actively manipulated by employers to curve employee costs related to basic minimum wage and overtime pay. By intentionally classifying workers as independent contractors instead of employees – even when the job duties seem to clearly entitle workers to employee status – employers can get around paying certain wages and benefits. This is known as “employee misclassification,” and it’s becoming an FLSA crisis in the U.S.

The issue developed in recent years when employers began turning to other businesses, such as subcontractors, temporary agencies and labor brokers, to handle certain aspects of the company. This fissuring of the traditional employment relationship changed the face of the modern American workforce and employers began realizing the benefits of paying less for payroll costs through third-party services. As a result, many employers are now attempting to illegally classify their employees as independent contractors to get around FLSA laws and shortchange employees of their employment rights.

Employee misclassification occurs fairly regularly in a wide variety of industries across the U.S. and has a detrimental effect on American families. Employee classification also affects the federal and state government through its impact on tax revenues. When employees are misclassified, lower tax revenues are generated, which trickles down to hurt state unemployment insurance, workers’ compensation funds and even the economy as a whole.

In 2014 alone, investigations performed by the U.S. Labor Department’s Wage and Hour Division (WHD), with help from the IRS, uncovered more than $79 million in back wages owed to more than 109,000 employees in industries including day care, food service, hospitality, temporary labor and janitorial services.

Certain business models are built around the grey areas provided by the FLSA’s employee classification policies, such as popular ride-hailing service Uber. In order to avoid paying benefits and overtime-related expenses by treating its drivers as actual Uber employees, Uber’s business model has opted to classify the drivers as “independent contractors,” despite the company’s crucial dependence on the drivers. In defense of this model, Uber has long stated that it only operates as a software company in charge of handling the logistics behind matching drivers with riders.

Nevertheless, one Uber driver, Barbara Ann Berwick, fought for her right to be recognized as an Uber employee before the California Labor Commission, resulting in a shocking twist of events when Berwick won her case. Berwick was awarded $4,152.20 in employee expenditures, such as mileage reimbursements, toll charges and even interest. Shannon Liss-Riordan, the attorney currently working on a class action FLSA lawsuit against Uber on behalf of its disgruntled drivers, believes the company’s success is determined by its drivers:

“Uber’s obviously been wildly successful because it developed a concept that caught on,” Liss-Riordan said. “But that gives it no excuse to ignore labor laws that have been put into place over decades that protect workers’ rights. Uber is a $50 billion company, it says. And the idea that it somehow can’t afford to pay for what employers are required to pay for is just a little bit beyond belief.”

Another prime example of open defiance against the FLSA’s employee classification laws can be found in California. Court documents filed by a group of Southern California port trucking companies accused of fraudulently misclassifying their regular drivers as independent contractors demonstrate how these companies and thousands of others like them are attempting to step beyond the reach of employee protection laws and tax obligations. According to the San Diego Free Press, the documents, filed in U.S. District Court for the Central District of California by six port trucking companies, essentially argue “that whether or not they are misclassifying drivers, there is nothing the State of California can do about it.”

Despite how unbelievable that stance may seem, the vast majority of Southern California’s 12,000 port truck drivers are improperly classified as independent contractors. Simply misclassifying truck drivers as independent contractors can provide the company with multiple benefits from lower pay, lower truck costs, lower taxes, and no obligation to pay overtime and premiums on health, workers comp, disability, and other insurance. Meanwhile, the truck drivers themselves are forced to assume these costs, which often leaves them earning just a few cents per hour on a 60-hour or longer work week.

For more information on employee misclassification and the provisions of the FLSA, visit the Department of Labor’s Wage and Hour Division website at

Next Week:

Each Thursday we will examine a topic of employment law. This is a complex area of law that covers federal and state statues, as well as administrative issues and judicial precedents. Next week, our topic will be Wage and Hour Law – When should you be compensated as “on the clock?”. To be informed of the latest post in this series, follow us on Facebook, Twitter and Google+ by searching for #TheFraudList.

Righting Injustice
Department of Labor
Beasley Allen