Software Platform Business Models adapting to Canadian Employment Law: UBER Big Legal Challenges?

Nov 03, 2015

By Pamela Krauss, Lawyer

In this month’s blog I have decided to write a bit of an academic piece rather than report on current legal cases or principles. The topic has been inspired by my fascination with watching our legal system react to new business models appearing in this internet based world.  Specifically I am curious about the litany of legal issues raised in respect of what I call the Software Platform Business Model Companies (“SPBMs”) - this may not be the most used nomenclature, the phrase Platform as a Service may be suitable as well.  But to be clear what I am referring to is the Ubers of the world; companies that have developed software programs to connect service providers and customers with the power of marketing and branding behind it.  Simple enough right? But it seems simple model can equal UBER big legal challenges.

You may be aware that on June 3, 2015 the California Labor Commission ruled that an Uber driver is an employee, not a contractor and ordered that Uber pay the driver $4,152.20 in business expenses for the 2 months that she worked.  See Uber v. Berwick.    Uber has a contractor based business model and purports that it is simply a matchmaker between rider and driver rather than a transportation service.  The Commission stated that it understood Uber’s business objective is to be a neutral technological platform, designed to simply enable drivers and passengers to transact the business of transportation, but found that Uber exercised far too much control over everyday details of a driver’s job for them to be considered independent contractors.   

So perhaps Uber has created legal problems by calling its driver’s independent contractors and the passengers their customers?  But it seems to me the problem with the Uber situation is also that the particular industry is broken. Uber’s legal battles are not solely a result of how the drivers are characterized for employment law purposes.  It seems that even if the characterization of Uber drivers was not an issue, competitors and the municipalities in which it operates would still raise controversy over regulatory law, excise taxation, licensing and insurance of the drivers.  It is successful competition that is being attacked rather than the actual business model perhaps. 

So let’s apply the model to a different industry that is not as monopolized and heavily regulated and where entrepreneurialism is abundant.  For instance what if music teachers or personal trainers that were involved in their profession for years signed up to use SPBM’s services to target new students and customers and grow its client base.  In this example what if the guitar teacher or personal trainer purchases the SPBM’s services to help connect it with students and customers to provide lessons or work outs in the homes of the end user.  And the SPBM also provides online transaction support for fee collection.  Does it seem fair that these entrepreneurs are suddenly employees or independent contractors of the SPBM?  It seems more likely they are customers of the SPBM does it not?

It has been reported that entrepreneurialism is on the rise in Canada.  CBC News in May 2015 reported that Canada is second only to the U.S. in levels of entrepreneurial activity according to the Centre for Innovation Studies in Calgary, beating most G7 countries and much of the developed world.  See Entrepreneurship in Canada ranks 2nd in world, report says.   The desire to free oneself from employment and have the flexibility, challenges and rewards of self-employment may in part be driving this increase.  It is difficult to draw any hard conclusions.

But let’s face it, operating a small business and handling all business needs such as marketing and software development is difficult or potentially impossible for individuals as it is too costly and too time consuming.  But what if entrepreneurs could hire the services of a SPBM to provide them with these services to grow their business?  Wait, perhaps they already can?

I see the introduction of SPBMs to be a great tool for Canadian entrepreneurs.  But is the tsunami of legal problems Uber has run into when entering the Canadian market indication that there is no hope for SPBMs in our current system?  I would say not necessarily because perhaps we are not approaching the reality of what these companies are doing correctly.  If the business model is properly viewed as servicing the service provider does that change things?  In other words if the Uber drivers are truly the customers of Uber not the passengers, what does that mean?  Does this make it clear the service provider is not an independent contractor nor an employee? Notably the California Labor Commission in its decision against Uber, briefly discussed above, did not explore whether the Uber drivers were in fact customers of Uber.  It is unclear if Uber has considered whether its customers are in fact the drivers.

From an employment law perspective it seems to me that identifying the service provider as a customer of the SPBM makes a lot of sense.  The service provider is not an independent contractor but a customer paying for business support.  The service provider is an entrepreneur without the assets to develop state of the art software and marketing plans that SPBMs are selling.  The SPBM fills the business gap for small entrepreneurs.  To determine if this would in fact be an appropriate characterization of a SPMB’s business though a thorough assessment of the particulars of how the business is run would need to be completed by skilled legal counsel.

In providing legal advice to companies on how to structure their relationships with individuals they rely upon in running their businesses, it all comes down to properly seeing the relationship for what it actually is and modeling the company culture and legal documents to reflect that reality.  In Canada perhaps a SPMB’s business is best described as a “platform as a service” business supporting entrepreneurs of a certain industry.    The services offered by the SPBM could be defined to include online payment services, booking services, branding services and marketing services perhaps.  If this makes sense to a SPBM then I would suggest that it not only ensure the legal documents it has are in place to capture the reality of its relationships, but it should also immediately use language and phrases in its corporate culture that are consistent with its chosen business structure. 

In conclusion, to succeed in Canada it may be best for SPBMs to rethink the packaging of their products and seek strategic advice from an employment lawyer such as myself, Melanie Reist or Holly Gomes of Morrison Reist.  At Morrison Reist our experience and expertise can help SPBMs navigate the legal system and reduce the risk of having individuals who are not seen as employees in their business model deemed to be employees by our legal system.

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