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Competitor lawsuit: Uber's contractor model is unfair competition

Using contract labor to perform core business functions is still controversial, even as companies like Uber, Grubhub and Amazon take advantage of this "gig economy" business model. Traditionally, employers have been required to provide at least some benefits, such as workers' compensation, unemployment insurance and payroll tax payments. Contractors receive none of these and are not protected by some labor laws.

There has been litigation around the country to determine whether it is legal to use contract workers instead of employees to handle primary business operations. It has centered around whether the workers can legally be considered contractors under the federal Fair Labor Standards Act. So far, several trial-level courts have ruled that these workers can indeed be considered independent contractors, not employees, under the FLSA.

Now, a new theory has been brought forward to challenge how Uber and others do business. Diva Limousine, an Uber competitor, has filed suit claiming that the ride-share giant's reliance on independent contractors gives it an unfair competitive advantage.

The case was brought in federal court but under California law, so the outcome won't directly affect Florida. Moreover, the California Supreme Court recently ruled that the state's labor laws define "employee" more broadly than the federal FLSA (which is what we use in Florida). That matters because Diva Limousine is alleging that Uber's use of contractors to perform core business functions is unlawful.

Assuming that the gig economy business model is in fact unlawful in California, Diva's argument is that Uber flouts the law to save money in unpaid benefits, and this allows Uber to offer predatory pricing that harms competition.

According to the lawsuit, Uber saves between $250 and $500 million annually by hiring contractors and thereby avoiding, for example:

  • Minimum wage and overtime requirements
  • Workers' compensation costs
  • Unemployment insurance costs
  • Reimbursement of workers for gas and expenses
  • Payment of half the workers' payroll taxes
  • Paying for employee health insurance and other voluntary benefits

Diva's customers routinely complain that fares haven't come down in response to Uber's low prices, and Diva has lost substantial business as a result.

"If they're pricing below everybody else because they're flouting the law, that's not something that free markets are supposed to reward," commented Diva's co-counsel.

If Diva's lawsuit is successful, competitors who hire employees rather than contractors are certain to take notice. Since the legality of this gig economy practice under the FLSA is still largely up in the air, we could soon see similar lawsuits in Florida.

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