An Uber Disruption: California Judge Grants Preliminary Injunction Requiring Uber and Lyft to Stop Classifying Drivers as Independent Contractors

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An Uber Disruption: California Judge Grants Preliminary Injunction Requiring Uber and Lyft to Stop Classifying Drivers as Independent Contractors

8/14/20

On Monday, a California Judge granted a preliminary injunction ordering that the popular ride-hailing companies, Uber and Lyft, stop classifying their drivers as independent contractors during the pendency of their litigation against the state of California.

Importantly, the ruling by Judge Ethan Schulman of the San Francisco Superior Court does not automatically convert California’s Uber and Lyft drivers into employees. Rather, it sets up what is expected to be a lengthy appeal process arising from California’s ongoing enforcement of its controversial new law, Assembly Bill No. 5. This decision, however, poses an existential threat to the so-called “gig economy” business model, which relies on a fleet of app-based, on demand, independent contractors who set their own hours, but are not entitled to many of the benefits and protections of California’s labor and employment laws.

The ruling is stayed until August 20th to allow for Uber and Lyft to appeal. On Thursday, Judge Schulman denied both companies’ request to extend the stay beyond August 20th, forcing Uber and Lyft to seek a stay from the appellate court.

California’s Controversial A.B. 5

In September 2019, the California Legislature passed, and Governor Gavin Newsom signed into law, Assembly Bill No. 5 (“A.B. 5”). A.B. 5, which took effect on January 1, 2020, codified the so-called “ABC test” adopted by the California Supreme Court in its 2018 landmark decision, Dynamex Operations West, Inc. v. Superior Court.[2] Under the ABC test, any person providing labor or services for compensation is presumed to be an employee, rather than an independent contractor, unless the “hiring entity” demonstrates that all three of the following conditions are satisfied:[3]

The person 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 person performs work that is outside the usual course of the hiring entity’s business.
The person is customarily engaged in an independently established trade, occupation, or business of the same nature as that involved in the work performed.

In response, three tech companies—Uber, Lyft, and Doordash—filed Proposition 22,[4] a California ballot initiative on the November 2020 ballot that, if enacted, would classify certain app-based drivers as independent contractors and essentially override A.B. 5. Additionally, just two days before its enactment, Uber and Postmates, Inc. filed a lawsuit[5] in federal court against the State of California asserting that A.B. 5 unconstitutionally “targets” gig economy companies and treats them differently from similarly situated groups. In February 2020, a federal district court denied Uber and Postmates’ request for a preliminary injunction that would have prevented the state of California from enforcing A.B. 5 against the two tech companies. An appeal to this ruling is pending in the Ninth Circuit Court of Appeal.

The State of California v. Uber and Lyft

In May, California Attorney General Xavier Becerra joined forces with the City Attorneys of San Francisco, Los Angeles and San Diego to file a lawsuit against Uber and Lyft, asserting the two ride-hailing companies misclassified their drivers as independent contractors in violation of California’s A.B. 5. Then, in June, the State moved for a preliminary injunction enjoining Uber and Lyft from classifying their drivers as independent contractors.

In a 34-page decision, Judge Schulman granted the State’s preliminary injunction, and made three important determinations, which could have major ramifications on the gig economy. First, the court found that Uber and Lyft are indeed “hiring entities” within the meaning of A.B. 5. Second, the court found that Uber and Lyft are in the “transportation business,” as opposed to self-proclaimed “technology companies.” Finally, the court found that the potential adverse effects of reclassifying Uber and Lyft’s drivers, even given the COVID-19 pandemic, did not outweigh the “substantial public harm” that would result to drivers, competing businesses and the general public if the preliminary injunction were not granted.

Employer Takeaway

If upheld, this ruling could have serious implications on the “gig economy.” If these drivers are classified as “employees,” companies like Uber and Lyft would be required to substantially change their business practices and provide their drivers certain benefits employees are entitled to under California law, such as minimum wage, overtime pay, workers’ compensation, unemployment insurance, paid sick leave, and paid family leave.

Companies with a large workforce of independent contractors should be put on notice that this ruling is yet another example of what appears to be California’s increased efforts to enforce A.B. 5 and reclassify the state’s independent contractors as employees. In February, the San Diego City Attorney’s office obtained a similar preliminary injunction against the grocery-delivery platform, Instacart.[6] In June, San Francisco’s District Attorney’s office filed a lawsuit[7] against the takeout delivery platform, DoorDash, Inc., alleging the company is misclassifying its delivery drivers as independent contractors in violation of A.B. 5, and similarly seeks a preliminary injunction to stop the alleged misclassification. And just last week, the California Labor Commissioner’s Office filed a pair of lawsuits in Alameda County Superior Court, which allege Uber and Lyft committed systemic wage theft by misclassifying drivers as independent contractors.

If you have questions or would like more information, please contact Josue Aparicio at japaricio@fmglaw.com.

[1] Josue Aparicio is an Attorney with Freeman, Mathis & Gary who specializes in worker misclassification claims under California law. (https://www.fmglaw.com/attorney_bio.php?id=408)

[2] Dynamex Operations West, Inc. v. Superior Court (2018) 4 Cal.5th 903.

[3] Lab. Code § 2750.3(a)(1)

[4] Proposition 22, the Protect App-Based Drivers and Services Act, would provide that app-based rideshare and delivery drivers are independent contractors and not employees or agents with respect to their relationship with a network company if certain conditions are met. (Qualified Statewide Ballot Measures, Cal. Secretary of State, https://www.sos.ca.gov/elections/ballot-measures/qualified-ballot-measures/).

[5] Olson v. California (C.D. Cal. Feb. 10, 2020) No. CV 19-10956-DMG, appeal filed, No. 20-55267 (March 11, 2020)

[6] The People of the State of California v. Mablebear, Inc., San Diego Superior Court, Case No. 37-2019-00048731

[7] The People of the State of California v. DoorDash, Inc., San Francisco Superior Court, Case No. CGC-20-584789 (filed June 16, 2020).

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