California regulators say that Uber drivers are employees of the company, not contractors, which could entitle them to benefits like health care and worker's compensation. The company has appealed the ruling. (Andrew Harrer/Bloomberg)

California's Labor Commission has ruled that an Uber driver was an employee, not a contractor, a potentially costly precedent for the ride-sharing company.

Uber unsuccessfully argued to the commission that drivers on its ride-hailing smartphone platform aren't employees, because it doesn't set their hours or force them to pick up riders.

The commission ruled that Uber was more than a passive platform connecting drivers and riders. Instead, the commission said in its ruling, Uber is “involved in every aspect of the operation,” vetting drivers, setting standards and establishing non-negotiable rates. The company can also kick drivers off the service if customers give them a low rating.

The ruling, which was issued June 3, did not become public until Uber moved to appeal the decision this week.

Uber said in a statement that it believed the ruling’s scope was limited to Barbara Berwick, the San Francisco woman who filed the case.

"It’s important to remember that the number one reason drivers choose to use Uber is because they have complete flexibility and control," the company said in a statement. "The majority of them can and do choose to earn their living from multiple sources, including other ride sharing companies.”

But the ruling could set a broad precedent if it is upheld, said Richard Reibstein, a lawyer at Pepper Hamilton who focuses on independent contracting.

That could be problematic for Uber and other companies in the burgeoning sharing economy. California is the ride-hailing app’s home market, and according to a report it released earlier this year, it has the most drivers in Los Angeles and San Francisco. Nationwide, more than 160,000 drivers picked up at least four riders a month, the data showed.

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For Uber, the implications of counting its drivers as employees rather than contractors are substantial. It would suddenly have to pay for employees' health care benefits, worker’s compensation and payroll taxes, and be on the hook for costs like gas and car maintenance.

Currently, Uber drivers take an 80 percent cut of fares, but they cover their own costs and pay their own taxes. The California ruling requires Uber to reimburse Berwick, who drove for Uber for a few months last year, for about $4,000 worth of mileage and tolls.

Berwick said she started driving for Uber in 2014 as a way to meet people but stopped a few months later when she started having issues with pay. She filed her case against the company because it “maintained absolute control” over its drivers, Berwick said in an interview.

It occurred to her that her case might raise bigger questions, but mostly, Berwick said, she just wanted her money back.

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The California ruling wasn’t the first time Uber’s argument that its drivers are not employees has been challenged.

Florida’s unemployment agency also ruled earlier this year that drivers are employees, and federal judges in San Francisco ordered jury trials in a pair of cases against Uber and Lyft that wrestle with the employment question, marking potential skepticism of Uber's independent contractor argument.

The employment issue is the latest legal question to loom over Uber, which last year reached a valuation of $41 billion – higher than legacy transportation companies like Delta and American Airlines.

The company’s model of average people as paid drivers has raised the ire of taxi drivers and regulators around the world. It’s faced regulatory troubles in most markets it entered, and has been banned outright in places as small as Auburn, Alabama, and as big as Dehli, India.