Uber and Lyft Can Keep Contractor Model in California for Now

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Lyft and Uber logos on car

A California appeals court order will allow Uber and Lyft to continue their operations in the state under their current independent-contractor model while a legal battle continues over their drivers' employment classification.

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. However, the judge delayed enforcement for 10 days so the companies would have time to appeal the order.

The ride-hailing giants had planned to stop operations in the Golden State at the end of the day on Aug. 20, but a state appeals court granted an emergency order halting the preliminary injunction just before it took effect. The appeals court will now review the trial court's order and hear oral arguments in the case on Oct. 13.

"We are glad that the court of appeals recognized the important questions raised in this case, and that access to these critical services won't be cut off while we continue to advocate for drivers' ability to work with the freedom they want," Uber said.

State Officials Challenge Driver Classification

California Attorney General Xavier Becerra and other state leaders sued Uber and Lyft seeking millions of dollars in back pay for drivers who were allegedly misclassified. The lawsuit was brought under a state law that took effect Jan. 1 that allows businesses to classify workers as independent contractors only if they meet stringent requirements under a three-part test.

If the ride-hailing drivers are ultimately deemed employees under California law, they will be entitled to minimum wage, overtime pay and other benefits that are not generally provided to independent contractors.

"While this fight still has a long way to go, we're pushing ahead to make sure the people of California get the workplace protections they deserve," Becerra said.

The battle may be ongoing, but the trial judge's ruling sends a strong message to gig-economy businesses, said Katherine Catlos, an attorney with Kaufman Dolowich & Voluck in San Francisco. She noted that some app-based companies view themselves as technology platform providers rather than transportation services.

Uber and Lyft officials argue that drivers enjoy the flexibility of creating their own schedules and working as independent contractors. Particularly during the coronavirus crisis, some people are turning to app-based platforms to earn income after losing their job.

The 'ABC Test'

Effective Jan. 1, AB 5 codified a 2018 California Supreme Court decision that created a three-pronged test, called the "ABC test," to determine whether a worker should be classified as an employee or independent contractor.

The test used prior to the ABC test was a multifactor analysis that primarily focused on who exerted control over the work. But under the ABC test, all three of the following factors must be met for a worker to be properly classified as 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.

AB 5 applies to all provisions of the California Labor Code and Unemployment Insurance Code unless another definition of "employee" is provided. 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 his Aug. 10 order granting the preliminary injunction.

"In granting the state of California's request for a preliminary injunction enjoining Uber and Lyft from classifying their drivers as independent contractors, this trial court decision decisively reaffirmed the primacy of the so-called ABC test in determining how workers are classified," said Jesse Jauregui, an attorney with Alston & Bird in Los Angeles.

Although the order was halted, the state appeals court could ultimately uphold the decision. Employers should be aware that they need to monitor their independent-contractor roles and decide whether they need to be reclassified to employee roles, Catlos said.

Employers should note that there are exceptions to AB 5 for various categories of workers. "HR professionals should consult with their in house and outside counsel to determine if any of those exceptions apply to any of their employees or service providers," Jauregui suggested.

Voters to Weigh In

Uber and Lyft plan to proceed with their appeal of the preliminary injunction. "While we won't have to suspend operations … we do need to continue fighting for independence plus benefits for drivers," said Lyft spokeswoman Julie Wood.

The companies will also be focused on the November election and their efforts to secure the passage of Proposition 22, which seeks to define app-based ride-hailing  and delivery drivers as independent contractors, Jauregui noted.

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

Uber, Lyft and several grocery and food delivery services secured enough signatures to get the gig-worker classification issue on the ballot the November. Specifically, California voters will get to decide on Election Day whether drivers for app-based delivery and ride-hailing services continue to be classified as independent contractors. App-based drivers will be defined on the ballot as workers who either:

  • Provide delivery services on an on-demand basis through a business's online-enabled application or platform.
  • Use a personal vehicle to provide prearranged transportation services for compensation through a business's online-enabled application or platform.

The ballot measure would also ensure app-based drivers receive certain benefits, including:

  • Minimum net earnings of 120 percent of the state's or locality's minimum wage and 30 cents per mile.
  • Healthcare subsidies.
  • Occupational accident insurance.
  • Accidental death insurance.

Under the measure, companies would have to develop anti-discrimination and sexual harassment policies, and drivers would be limited to working 12 hours during a 24-hour period.

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

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