Uber transports a mind-boggling 93 million active users each year. The backbone of this success is the fleet of 3.9 million independent contractors that drive for the company. Each one of these drivers must sign Uber’s Software License and Online Services Agreement.
The Agreement offers an interesting example of how to treat freelance workers in a contract. On the one hand, there are some missing elements that leave the company open to legal disputes. On the other hand, it includes essential clauses and language that all companies should consider if they want to protect themselves and act in good faith. Keep reading to learn how you can draft a contract that keeps your clients out of the courtroom and in good standing with their contract workers.
Questions in this Episode:
- Is Uber a software company or a transportation company?
- What defines the relationship between the drivers and Uber?
- When can unilateral modification lead to problems?
- How does severability advantage Uber?
- Who decides the true legal status of an independent contractor?
Is Uber Just a Software Company?
This Software License and Online Services Agreement is the agreement that potential Uber drivers sign when they apply to work with Uber. Typically, applicants apply online through the Uber app and are given this agreement or a similar version and must agree to the terms before being allowed to pick up fares.
And while the document is clear about some of the terms and conditions, some fundamental questions linger. For example, the agreement refers to drivers as independent contractors, but what is an independent contractor in this context? And how independent are the drivers from Uber’s control?
In 2022, it seems everyone does some work as an independent contract, so understanding and clearly defining the term is essential in contract drafting.
And what type of company is Uber? Is it a transportation company, a ride-share company, or a software company?
Are Uber Drivers Independent Transportation Companies?
Most people think of Uber as an alternative taxi service with millions of drivers working for them. But Uber uses artful language in the agreement to frame itself as a software company and characterize its drivers as independent contractors and transportation companies. This will likely come as a surprise to most passengers and probably many drivers.
The introductory part of the agreement refers to the drivers as “Transportation Company” or “You,” and Uber is the “Vendor.”
And Uber clearly states that Uber “does not provide transportation services” and is not a “transportation carrier.”
The driver agrees that they, the driver, are” an independent company in the business or providing transportation” and an “independent contractor.”
But contract drafters should be careful not to create contracts that put form over substance. However Uber describes itself or the drivers, legal tests will eventually determine whether the drivers are employees or independent contracts. Virtually everyone refers to them as “Uber drivers.”
The Relationship between Uber and the Driver
In every contract, it is important to establish the relationship between the parties. In Section 7, the agreement states the relationship between Uber and the drivers is “solely that of independent contracting parties.” This is standard language in many independent contractor agreements.
But what is the effect of stating this explicitly?
There is some legal effect because the courts will look at this language if there is an issue over whether someone was or was not an independent contractor. But like in the introductory clause, the courts are always looking for substance over form.
So Uber can say they are a software company, but if the courts determine they are a ride-sharing company or a taxi service company, then that’s what they are.
And if the drivers are actually employees instead of independent contracts, then the courts will also handle that accordingly.
But one key issue that Uber failed to put in the agreement was to discuss when and how an independent contractor is responsible for their own taxes.
Typically, independent contractors receive 1099s from the entities they contracted with, showing the income paid and that no taxes were withheld. A good independent contractor agreement will spell out that the independent contractor is responsible for their own taxes and that the contracting entity will not withhold any state or federal taxes on their behalf.
This agreement is lax on other independent contractor details. In Section 3.5, the agreement states that the “transportation company,” namely the driver, agrees to obey all applicable laws, including tax laws. But it does not explain what that means for the driver.
And the average Uber driver probably doesn’t understand what it means to be an independent contractor or how the additional self-employment taxes work. Many of the drivers may have never filed taxes that included a Form 1099.
As a contract drafter, it is helpful to spell out essential details like these. And the driver will be happier when they are not caught off guard by a large tax bill. Even if the language doesn’t change Uber’s legal obligations, it is good for business.
Unilateral Modification
And Uber further controls the agreement with their one-sided modification section giving them the option to modify the contract unilaterally. So while the driver has no input into the agreement, Uber can change the terms of the agreement any time they want.
As a contract drafter representing a company like Uber, this may seem like a handy clause.
But the issue is, what does your client specifically want to do with the modification clause because unilateral modification clauses with no consideration are not always enforceable.
For example, if you unilaterally change how someone is compensated, that generally won’t be enforceable.
The other issue is that Uber does not spell out how they will share the information with the other party when Uber modifies the contract.
From a drafting perspective, find out what your client is trying to achieve with this clause. Then think about how to draft the language, so it does not violate the covenant of good faith and fair dealing. If you are drafting with that thought in mind, the language should be acceptable. But always exercise caution with a unilateral modification clause.
Don't think you can just slap a unilateral modification term into a contract and then you can do whatever you want. - Sara Burns #ContractTeardown Click To Tweet
Severability Clauses are Crucial
But even if some of Uber’s terms are stricken by a court, the rest of the contract remains enforceable. Severability clauses are great clauses that should be in all contracts, not just an independent contractor agreement.
These clauses save the rest of the contract should the court strike down one or more sections.
For example, what if the court tells Uber that it can’t just unilaterally modify the contract. Because of the severability clause, the unilateral modification clause would be invalid, but the rest of the contract would stay intact.
This clause has worked to Uber’s advantage. As some courts have ruled unfavorable against Uber on employment status and arbitration issues, the remaining portions of those contracts remained intact and enforceable.
Arbitration and the Hidden Opt-Out Clause
Uber has a substantial and well-drafted arbitration section that takes up three pages of this ten-page contract.
But the interesting and unusual feature of this arbitration clause is the opt-out provision. Large corporations highly favor arbitration clauses when they have a large number of contracts. And here, Uber has millions of drivers and millions of agreements.
But some courts disfavor mandatory arbitration clauses as unfair. So, Uber has positioned itself from future court claims of unfairness by stating that arbitration is not mandatory and the driver has the right to opt out.
While they have the right, they are unlikely to know it or act on it in time.
The driver has to notice, read and understand the opt-out provision buried in the 3-page Arbitration Section at 14.3 viii. And it is unlikely the driver will see the clause because this contract is written like a software license agreement where users typically scan the agreement and press the accept button on the bottom.
This is different from traditional contracts, where the issues are negotiated between several iterations until both parties accept the terms. Here, the arbitration terms, like all the other contract provisions, are set in stone in a take-it-or-leave-it version. The driver has no power to negotiate or change any of the terms.
And if they do manage to notice and understand the arbitration opt-out terms, they have a limited time to act. To make the opt-out effective, the driver must send a written notice and have it postmarked within 30days of accepting the contract. Otherwise, the opt-out is not effective.
And realistically, how many of the millions of Ubers drives will read this ten-page contract, notice the opt-out clause and exercise it in time? Not many, and that is an advantage for Uber.
This is a formidable clause, not just in its level of detail, but it’s a challenge for a driver who doesn’t want to arbitrate but didn’t manage to opt-out in time.
The Future of the Independent Contract Agreement
Uber’s business model relies on millions of drivers performing in strict accordance with a one-sided and controlling agreement. Without these drivers, their business model simply does not work.
And with most companies, if your business depends on having a particular type of work done on a regular and regulated basis, you probably will not hire independent contractors. You will hire employees.
So the question is, are the drivers independent contractors?
More than 20 states have the ABC test to determine if a company misclassifies workers as independent contractors. This three-part test (A, B, and C) establishes a presumption that the worker is an employee unless the employer establishes the three factors, namely:
- (A) The work is done without the direction and control of the employer.
- (B) The work is performed outside the usual course of the employer’s business.
- (C) The work is done by someone who has their own, independent business or trade doing that kind of work.
So this test looks at what the drivers actually do and who is in control, and not the defined terms of an agreement.
While appropriate courts will ultimately answer this question, Uber’s agreement appears to give it unilateral control over the relationship.
For example, the agreement says that Uber will monitor all the driver’s reviews, and if they fall below a certain level, they will be terminated. While companies have the right to terminate poorly performing independent contracts, is that the case here or is Uber controlling the driver’s work?
And how many drivers are actually transportation companies versus just being a driver? And is Uber just a software company where driving passengers is outside their usual course of business?
But today, and especially after the pandemic, the use of independent contracts continues to rise, and more and more of these types of contracts will need to be drafted and reviewed.
As a contract drafter, it is essential to help your client recognize the issues associated with independent contractor agreements and draft the best agreement for them in their industry and circumstances.
Show Notes
Attorney Sara Burns tears down the Uber driver’s terms of service, which defines its drivers as freelance transportation companies. She tells attorneys what they can learn when drafting similar agreements, offering invaluable advice for keeping clients out of court and in good standing with their independent contractors.
THE CONTRACT: SOFTWARE LICENSE AND ONLINE SERVICES AGREEMENT
THE GUEST: Sara Burns practices law in Boston, Massachusetts. Attorney Burns regularly negotiates agreements and advises clients on their plain meaning. Through this experience, Attorney Burns gained a keen understanding of the use and meaning of boilerplate contract clauses.
Beyond negotiating agreements Attorney Burns regularly addresses contract issues in litigation, including liability waivers and enrollment agreements. In these cases, Attorney Burns often assesses the strengths of these contracts and, when necessary, challenges them in court.
THE HOST: Mike Whelan is the author of Lawyer Forward: Finding Your Place in the Future of Law and host of the Lawyer Forward community. Learn more about his work for attorneys at www.lawyerforward.com.
If you are interested in being a guest on Contract Teardown, please email us at community@lawinsider.com.
Interview Transcript
Mike Whelan Sara Burns, welcome to The Contract Teardown Show. How are you today?
Sara Burns I’m great, Mike. How are you?
Mike Whelan Pretty good. We’re getting into some nerdiness, as we often do. I’m going to share this document with you all watching. This is a software license and online services agreement dealing with Uber and the transportation company. We’ll talk about what that means. Exactly. But before we do, Sara, what is this document? When are we going to run into this kind of thing?
Sara Burns Well, this is a document between Uber and its drivers. People will run into this or something very similar to this if they download the Uber app and decide they want to be a driver, these are the terms a driver would have to agree to before they could start picking up fares.
Mike Whelan And there’s a lot of fun stuff about independent contractors in this document. Now, obviously, in 2022 and everybody is working virtually, the independent contractor space has exploded. So there’s a bunch of interesting issues in here that if you’re using independent contractors, you better pay attention to. So we’ll dig into that. But before we do, Sarah, tell us about you. What’s your background? How do you come to documents like this in your work?
Sara Burns Sure. I am an attorney practicing here in Boston, Massachusetts. I do some work related to contracts, most often drafting settlement agreements. I’ve also litigated some cases involving contracts when drafters made some horrific mistakes, and then it ended up going to court and in front of a jury. So that’s how I approach things when I think of what’s in a contract.
Mike Whelan Awesome. Well, we’re going to dig into this one. And again, I think it’s really illustrative of this sort of tangle: a) with what the heck Uber is as a company; and b) what the heck an independent contractor is. It’s an interesting context. So let’s start with the beginning. The introduction, as I mentioned, it’s got this. This is between Uber and Transportation Company or you, which I think is a funny framing of who we’re talking to. But it’s got some definitions in here of how Uber sees itself as well. Talk to us about this introduction and what you see about the relationship just starting off, how it starts to introduce what we’re doing here in this document.
Sara Burns Sure. So Uber frames itself as a software company, which most people, especially those who take an Uber or drive for Uber, maybe don’t think of Uber as that. They think of it as sort of an alternative taxi service. And it also frames the drivers as, as you said, independent transportation companies, which well, I don’t know about you, but if I jump into an Uber, I don’t think of the person driving as an independent company. I think of it—that person as someone who’s downloaded the app and is about to give me a ride.
Mike Whelan We literally call them the Uber driver. We don’t call them transportation company driver. We call them the Uber driver. Yeah, I was reading a book. I think it was The Fuzzy and The Techie that talked about this issue of—in a positive way–it was like, Hey, Uber is not a taxi company, it’s a software company. But to your point, legally not as clear. So let’s dig into that. In Section 7, jumping down, it talks about the relationship between the driver and the company. It says, “the relationship between the parties is solely that of an independent—of independent contracting parties.” You see this a lot in the independent contractor agreements. What’s the effect of stating it this explicitly? And as it goes into Section 7.
Sara Burns It has some legal effect. Courts will look at this if there’s ever an issue of whether someone was actually an independent contractor. But just like in the introduction here, it’s always going to be looking to the substance over the for—form—excuse me—so Uber can say they’re a software company, but if they’re actually a ride sharing company or taxi service company, that’s what they are. If their employee—excuse me, if their drivers are actually employees and not independent contractors, courts will handle that accordingly. From a drafting perspective, if you have someone you’re entering a contract with who is actually an independent contractor, it’s very important to specify that. The other thing that you should do, which Uber didn’t do here, is discuss when and how that independent contractor is responsible for taxes. And so what I mean by that is most independent contractors receive 1099s by the entity they’ve contracted with. That entity—so here, Uber—isn’t withholding any taxes. A good contract for independent contractors is going to specify that. In this contract, if you jump back up to section three point five, Uber mentions a little bit, you know, the transportation company agrees to obey laws, including taxes, but it doesn’t really spell out what that would mean for a driver. And when you have an average Uber driver who maybe doesn’t know too much about what it means to be an independent contractor, maybe has never filed taxes using a 1099 and understands how the additional self-employment taxes work, it’s really important to spell that out. Even if that doesn’t change Uber’s legal obligations, it will keep drivers happy because later on they won’t be caught off guard. It’s good for business.
Mike Whelan Yeah, it seems like I mean, as a drafting activity, it seems smart to say, Hey, you’re an independent contractor, if nothing else, just to, you know, signal your intentions. And hopefully that starts a conversation. But to your point, a court is going to look at this and dig a little deeper and see what the relative party is—or power is of the parties. So speaking of, I’m going to jump down to 12 to the modifications. And when you look at what Section 12 does, it really seems to set up somebody’s in power and somebody is not. Talk to us about the modifications section.
Sara Burns Sure. So this modification section is what’s called the option to unilaterally modify the contract. What that means is Uber has said we can change our—the terms of this agreement any time we want. If you’re a drafter and you represent a company like Uber, it may seem like a handy clause to have. The issue, though, becomes: what does your client actually want to do with that modification agreement? Because that won’t always be enforceable. When we think of contracts and we think of modifications and, you know, if you’re an attorney, you think back to law school or the bar, you learn that you can’t modify a contract without consideration. Generally, that’s true. A unilateral modification clause like this oftentimes is enforceable, but it depends what’s being changed. If you’re changing how someone’s compensated unilaterally, probably won’t be enforceable. The other issue to think about that Uber didn’t spell out here is, if there is a modification, how are you going to share that information with the other party? When are you going to share that information with the other party? From a drafting perspective, what you want to do is ask your client what they want to achieve and then always think about, okay, if my client did that and we had this clause, would it violate the covenant of good faith and fair dealing? You know, if you’re following that, you should be good. But always exercise caution. Don’t think you can just slap a unilateral modification term into a contract and then you can do whatever you want.
Mike Whelan Yeah, jumping into 14.1, we had talked about this in advance. There’s a severability clause sort of snuck into section 14.1 under governing law, talk to us about 14.1. and this issue of severability in contract drafting.
Sara Burns Sure. So severability clauses are great. They should be in any contract, not just an independent contractor agreement. What it does is it means that if a court were to say, you know, this particular clause—and since we were just talking about modifications, we’ll use that—if a court said, no, no, Uber, you can’t modify contracts unilaterally, it leaves the rest of the contract intact. And so that’s invaluable for drafters. It’s one sentence and it saves you a bunch of headache if a portion of your contract is later struck and this actually has played to Uber’s advantage, because as Uber issues about employment status and arbitration, which I know we’ll get to, get litigated in court, courts have ruled unfavorably to Uber on certain points, but have still enforced the remainder of the contract. And so that’s why a modification clause really is critical.
Mike Whelan Yeah. Speaking of arbitration, you can tell when it’s a modern independent contractor agreement because there’s a lot about arbitration in this case. 14.3 is the arbitration section and it is three pages out of a ten-paged document. It seems like something they care about. Meanwhile, Uber has explicitly stated their strategy legally was just to go break things and then go through litigation, try to clean things up afterwards. But here we are working really hard to make it so we don’t actually have to go to court. What do you think about 14.3 in the arbitration section?
Sara Burns It’s a well-drafted arbitration agreement. If you are drafting something where your client is interested in arbitrating issues over going to court, look at this document. The thing that it does really well that’s really interesting is it has an opt-out provision for the arbitration agreement. And what I mean by that is this whole document appears as a user agreement, just like some software license would where you scroll to the bottom and you click “accept.” You know, that’s different from a lot of traditional contract negotiations where drafts go back and forth, both parties review it, propose changes and ultimately agree. Here, the arbitration agreement, all the other provisions we’ve talked about today are set in stone in advance. But what the arbitration provision has is it has an opt-out clause that essentially tells drivers if you don’t want to arbitrate within 30 days of pushing that button at the bottom, send us a letter to this address stating as such and you won’t be forced into arbitration. And so it really covers Uber from later on, having a court say, well, that was unfair. You shouldn’t have done that to drivers to just make them all arbitrate like that. It covers Uber. And also, you know, if a driver isn’t carefully reading this contract, they may not even realize they can opt out. If a driver is carefully reading and, you know, they get busy, they don’t get the letter in the mail, suddenly they can no longer opt out. So it’s a really strong clause, not just in its level of detail, but it’s sort of a challenge for a driver who doesn’t want to arbitrate. If they didn’t manage to opt out, you know, how are they going to manage to file something in court and get in front of a judge and jury? You know, the answer is they’re probably not going to be able to do that.
Mike Whelan Yeah. If long wins, this one wins. They definitely do a really good job of going through every detail. I’ve seen—we’ve talked about contracts in the past where the, you know, they mention in blocks at the beginning the arbitration clause, Hey, look down to the bottom. And so I think maybe to revisit that contract we had talked about previously, maybe in the very beginning, I would say, Hey, bro, look at the bottom, don’t, don’t miss this. But thinking big picture, it almost seems like Uber wants people to miss this. Uber has said that they want to litigate these big questions, but also they’re trying to hide the litigation. Here’s the thing that’s interesting to me as we think big picture, I was reading the book called The Quickstart Problem by Andrew Chen and he was a driver recruiter, like over the big recruiting efforts for drivers at Uber. And he very explicitly says, We were trying to get every minute of these people’s lives. And so thinking about the economy and where we’re going, an independent contractor agreement is like me and you, frankly, like you come in, you’ve got your own company, you get your own firm, you come in and you do a quick job. We have a temporary agreement that executes on a specific thing. You do that thing, high five, see you later. Uber very explicitly tried to get people’s entire lives when they saw that that people were prob—if they were turning off the app for a short time, they were probably also driving for Lyft. And so they tried to kill that. They created incentive programs to make it so people would only take Uber drives all day. This, you know, they’re trying to look an awful lot like employees. If you are advising a company, how do you advise them to say, Yes, if independent contractor was what you thought it was, that’d be a really cool option. But instead—since independent contractors are something totally agreement—instead of that, have an employee or do a joint venture agreement or do a true, you know, really build around independent contractors. How do you advise clients through those decisions about where to get their labor force?
Sara Burns Well with Uber, they have a business model that doesn’t work if they don’t have these independent contractor drivers. And we’ll just take the phrase independent contractor out of the equation and we’ll just say, drivers. If they don’t have drivers, their model doesn’t work. Well, are they actually independent contractors then? And so if you’re a business where your model depends on having a certain type of work done and done regularly, you’re probably not able to hire independent contractors. A lot of states use something called the ABC Test to determine if someone’s an employee, and part of that test is looking at, you know, what work does that company actually do? Is that person essential or like you and I here today, you know, is someone just coming in briefly to do one, one small thing for the hiring company and then that’s it, you know, and is someone an independent professional? And then also, too, where’s the control? You know, in this agreement, it explicitly says that Uber will monitor what your reviews are. And if you drop before—below a certain level of rating, Uber will terminate you. You know, is that Uber controlling the work of the driver? You know, I mean, you could argue yes, and you could argue no. Because if someone, an independent contractor, is doing a poor job, then certainly, you know, the person who it contracted with them may terminate them. But to me that looks a lot like control over the manner of work.
Mike Whelan Yeah, I think in 2022 we have a lot of companies who are scrambling to figure out, How do I get a workforce in this madness, right? Like I’m excited because I don’t have to have an office and have a bunch of people there. But to your point, that transition is not as simple as it sounds. You might want to look at other options for filling that labor force. Well, I appreciate you bringing this up and bringing it to us. I know that you’ve done some other work with us that I want you to to point out, because it’s sort of exciting. We’ll talk about your Ebook. But for people who want to connect with you, make sure that you give us that information for how to reach out to. So tell us about your Ebook and how people can get in touch with you.
Sara Burns Yeah, so last month an Ebook came out for Law Insider called “Beyond Boilerplate.” I wrote it sort of with these boilerplate clauses in mind, and the focus is helping contract drafters understand what these basic clauses are, how they work, and why they’re important. If someone wants to get in touch with me, I’m shy on social media, but you can reach out to me in my professional email, which is s-a-r-a at s-e-b-u-r-n-s-l-a-w dot com.
Mike Whelan You’re not shy on social media, you’re wise on social media. Well, we’ll have links to all that information, including the Ebook over at Law Inside dot come slash resources and in the details below this video as well as the contract. So make sure that you look there. And if you want to be a guest on The Contract Teardown Show, just email us. We are at community at law insider dot com. We’d love to have you. In the meantime, we will see you next time. Sara, thank you and have an excellent day.
Sara Burns Thanks, Mike.