California Judges Ask Uber, Lyft Why They Should Keep Contractor Model

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Uber and Lyft apps on smartphone

Uber and Lyft told a California appeals court that their drivers should continue to be classified as independent contractors despite a strict law that took effect this year categorizing many workers as employees.

"Uber would have to completely reorganize to be like an employer," said Theodore Boutrous, an attorney with Gibson and Dunn in Los Angeles, who represented Uber at oral argument on Oct. 13.

"Hundreds of thousands of driver jobs would be eliminated," he added.

A trial court judge in San Francisco issued a preliminary injunction on Aug. 10 blocking Uber and Lyft from continuing to classify drivers as independent contractors under the state's employment laws. The ride-hailing giants had planned to stop operations in the Golden State, but the California Court of Appeal granted an emergency order halting the preliminary injunction just before it took effect. The appeals court is now reviewing the order.

Boutrous argued that the trial judge "imposed extraordinary and unprecedented relief" by ordering the ride-hailing companies to "completely alter" their long-standing business models.

San Francisco Deputy City Attorney Matthew Goldberg told the appeals court that a central purpose of employment laws is to ensure that people aren't working in substandard conditions. "You are not permitted to work for less than minimum wage, even if you want to."

Employees are entitled to minimum wage, overtime pay and other benefits that are not generally provided to independent contractors.

'Outside the Usual Course' of Business

Effective Jan. 1, California's AB 5 codified a three-pronged test, called the "ABC test," to determine whether a worker should be classified as an employee or independent contractor. All three of the following factors must be met for a worker to be considered an independent contractor:

  • The worker is free from the control and direction of the hiring entity in connection with the performance of the work, both under the contract for the performance of the work and in fact.
  • The worker performs tasks that are outside the usual course of the hiring entity's business.
  • The worker is customarily engaged in an independently established trade, occupation or business of the same nature as the work performed for the hiring entity.

The second prong of the ABC test is the most difficult to prove because many jobs are central to the hiring entity's purpose.

The statute "is intended to ensure that all workers who meet its criteria receive the basic rights and protections guaranteed to employees under California law," said California Superior Court Judge Ethan Schulman in the Aug. 10 order issuing the preliminary injunction.

Uber's and Lyft's drivers "do not perform work that is 'outside the usual course' of their businesses," Schulman found.

Connecting Drivers and Riders

Uber has consistently argued that it's a technology platform that allows drivers and riders to connect, Boutrous asserted, noting that the company made some changes to keep up with evolving independent-contractor laws.

Uber and Lyft representatives stress that most drivers want the flexibility that the current model provides.

Justice Tracie Brown asked Boutrous if he agreed that companies and drivers could still arrange flexible schedules and variable shifts, even if drivers are classified as employees under AB 5.

He agreed that AB 5 allows for some flexibility but said that the changes to Uber's business model would be "drastic."

Justice Stuart Pollak asked if the trial court's injunction could potentially apply to Lyft but not Uber.

"I do think that Uber is in a very different position than Lyft," Boutrous said. "Uber made changes to give drivers flexibility and independence to have their own businesses."

Although ride-hailing companies have similar business models, the details may vary. Uber does not interview drivers and is not a hiring entity, Boutrous argued. California drivers can work whenever they want and face no penalty for rejecting rides. Some drivers can also set their own prices, and customers can now select their favorite driver.

Lyft also asserted that its drivers are not employees and that the injunction was improperly applied to its California operations.

"We've spent hundreds of hours meeting with policymakers and labor leaders to craft an alternative proposal for drivers that includes a minimum earnings guarantee, mileage reimbursement, a health care subsidy, and occupational accident insurance," Lyft said.

Rohit Singla, an attorney with Munger, Tolles & Olson in San Francisco, represented Lyft at oral argument. He noted that California regulations prohibit ride-hailing companies from owning vehicles. "The court is saying our business is driving people around, but [California's Public Utilities Commission] says we can't own cars. How can that be our business?"

Drivers Incur 'Substantial' Expenses

In addition to being paid a minimum wage and overtime premiums, employees are entitled to many benefits under California law that aren't available to properly classified independent contractors. Paid sick leave, family and medical leave, unemployment, meal and rest breaks, and other benefits generally do not apply to independent contractors.

[Need help with legal questions? Check out the new SHRM LegalNetwork.]

California employees also must be reimbursed for reasonable business expenses. Specifically, California law requires an employer to reimburse an employee for "all necessary expenditures or losses incurred by the employee" in carrying out job duties or employer directives.

"Drivers incur substantial expenses when they work," Goldberg told the appeals court during oral argument. Drivers pay for gas, vehicle repairs and maintenance, and other expenses.

"Just looking at that, it impacts every single driver on every single shift," Goldberg said. He argued that money is "being stolen from drivers by virtue of the misclassification."

On the Ballot

While the appeals court is considering whether to uphold the preliminary injunction, Uber and Lyft are working on another way to maintain their independent-contractor business model in the Golden State.

California voters will weigh in on Proposition 22 on Election Day, which asks whether drivers for app-based delivery and ride-hailing services should continue to be classified as independent contractors. If voters agree that drivers should remain independent, the ballot measure would ensure app-based drivers receive certain wages and benefits that aren't typically available to contractors, and ride-hailing companies would have to develop anti-discrimination and other policies for drivers.

"Ultimately, we believe this issue will be decided by California voters," said Lyft spokesperson Julie Wood.

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