CA appeals court upholds ruling that Uber and Lyft must classify drivers as employees

Uber and Lyft must classify their drivers as employees, an appellate court ruled yesterday evening. However, the decision will be stayed for 30 days after the court issues the remittitur, which has not happened yet. That means depending on how ballot measure Proposition 22 goes, this case may not end up being the deciding factor in how Lyft and Uber classify their drivers in California.

Throughout the case, Uber and Lyft have argued that reclassifying their drivers as employees would cause irreparable harm to the companies. In the ruling today, the judge said neither company would suffer any “grave or irreparable harm by being prohibited from violating the law” and that their respective financial burdens “do not rise to the level of irreparable harm.”

Additionally, there is nothing in the preliminary injunction, according to the judge, that would prevent Uber and Lyft from offering flexibility and independence to their drivers. Lastly, the judge said Uber and Lyft have had plenty of time to transition their drivers from independent contractors to employees, given that the key case in passing AB 5, the gig worker bill that spurred this lawsuit, was decided in 2018.

“This ruling makes it more urgent than ever for voters to stand with drivers and vote yes on Prop. 22,” Lyft spokesperson Julie Wood said in a statement to TechCrunch.

Prop 22 is a ballot measure in California that seeks to keep rideshare drivers and delivery workers classified as independent contractors. The measure, if passed, would make drivers and delivery workers for said companies exempt from a new state law that classifies them as W-2 employees. If passed, app-based transportation and delivery workers would be entitled to things like minimum compensation and healthcare subsidies based on engaged driving time.

Meanwhile, Lyft says it’s exploring all of its legal options, which may include appealing to the California Supreme Court. Uber, similarly, is considering its appeal options.

“Today’s ruling means that if the voters don’t say Yes on Proposition 22, rideshare drivers will be prevented from continuing to work as independent contractors, putting hundreds of thousands of Californians out of work and likely shutting down ridesharing throughout much of the state,” an Uber spokesperson told TechCrunch. “We’re considering our appeal options, but the stakes couldn’t be higher for drivers—72% of whom support Prop 22—and for the California economy, where millions of people are jobless and another 158,000 just sought unemployment support this week.”

The judge’s decision comes after California Superior Court Judge Ethan Schulman granted a preliminary injunction in August to force Uber and Lyft to reclassify its drivers as employees. Uber and Lyft appealed the decision, but the appeals court has now affirmed the decision from the lower court.

The lawsuit was brought forth by California Attorney General Xavier Becerra, along with city attorneys from Los Angeles, San Diego and San Francisco in May. They argued Uber and Lyft gain an unfair and unlawful competitive advantage by misclassifying workers as independent contractors. Then, in June, the plaintiffs filed a preliminary injunction seeking the court to force Uber and Lyft to reclassify their drivers. In August, Judge Schulman granted it.

“While this legal victory today is directed at two companies, this fight is far broader,” Gig Workers Rising said in a statement. “This is about the future of work in this country. This is about securing good jobs with real benefits for generations to come. If Uber and Lyft are successful in passing Prop. 22 and undo the will of the people, they will inspire countless other corporations to adapt their business models and misclassify workers in order to further enrich the wealthy few at the expense of their workforce.”

Lyft is suspending rideshare operations in California

Lyft has decided to suspend its ridesharing operations in California beginning tonight at 11:59 pm PT.

“We don’t want to suspend operations,” Lyft wrote in a blog post. “We are going to keep up the fight for a benefits model that works for all drivers and our riders. 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, without the negative consequences.”

This month, both Uber and Lyft argued in court that they should be able to continue classifying their drivers as independent contractors. A judge disagreed, and granted a preliminary injunction to force both companies to reclassify their drivers as employees beginning Friday. In response, both Uber and Lyft said they would be forced to temporarily pause operations in California.

Yesterday, Uber CEO Dara Khosrowshahi said on a podcast that the company can’t simply hire all 50,000 of its drivers overnight.

“All of our model, everything that we have built is based on this platform that brings earners and brings people who want transportation or delivery together,” he said on a Vox Media podcast yesterday. “You can’t flip that stuff overnight. It’ll take time, and we will figure out a way to be in California. We want to be in California. But if the court case comes in, then we’ll have to shut down, and we’ve got the best engineers in the world figuring out how we can rebuild this thing. If we do have to go to employment model, what’s going to happen is that we will then have to underwrite driver productivity. There will be far fewer drivers employed, so my guess is 70-80% of users who use Uber for flexibility, they drove 5 to 10 hours, etc., they will not be able to earn. The prices are going to go up. They’re going to go up less in city centers. So I think SF prices will go up by 20%. Smaller cities prices will go way up.”

What Uber is proposing with Prop 22 is essentially a third way of classifying gig workers, but co-founder of Gig Workers Collective Vanessa Bain says a third way “is bullshit,” she said on the same Vox Media podcast yesterday.

“It’s categorically less than what we’re entitled to under current law,” she said.

TechCrunch has reached out to Uber to see if the company has made a decision yet regarding California. We’ll update this story when we hear back.

Below is a timeline of what’s led to this moment.

January 1, 2020: Assembly Bill 5 becomes law. The bill, first introduced in December 2018, codified the ruling established in Dynamex Operations West, Inc. v Superior Court of Los Angeles. In that case, the court applied the ABC test and decided Dynamex wrongfully classified its workers as independent contractors. According to the ABC test, in order for a hiring entity to legally classify a worker as an independent contractor, it must prove (A) the worker is free from the control and direction of the hiring entity, (B) performs work outside the scope of the entity’s business and (C) is regularly engaged in an “independently established trade, occupation, or business of the same nature as the work performed.”

May 2020California Attorney General Xavier Becerra, along with city attorneys from Los Angeles, San Diego and San Francisco, filed a lawsuit asserting Uber and Lyft gain an unfair and unlawful competitive advantage by misclassifying workers as independent contractors.

The suit argues Uber and Lyft are depriving workers the right to minimum wage, overtime, access to paid sick leave, disability insurance and unemployment insurance. The lawsuit, filed in the Superior Court of San Francisco, seeks $2,500 in penalties for each violation, possibly per driver, under the California Unfair Competition Law, and another $2,500 for violations against senior citizens or people with disabilities.

June 2020: Becerra and others file a motion for a preliminary injunction seeking to force Uber and Lyft to immediately classify their drivers as employees.

August 6, 2020: California Superior Court Judge Ethan P. Schulman hears arguments pertaining to the preliminary injunction. At the hearing, Uber and Lyft maintained that an injunction would require them to restructure their businesses in such a material way that it would prevent them from being able to employ many drivers on either a full-time or part-time basis. Uber and Lyft’s argument, effectively, is that classifying drivers as employees would result in job loss.

“The proposed injunction would cause irreparable injury to Lyft and Uber, and would actually cause massive harm to drivers and harm to riders,” Rohit Singla, counsel for Lyft, said at the hearing.

For example, Lyft estimates it would cost hundreds of millions of dollars simply to process the I-9 forms, which verify employment eligibility. It doesn’t cost anything to file that form, but it would require Uber and Lyft to further invest in their human resources and payroll processes.

August 9, 2020: Judge Schulman grants the preliminary injunction, which goes into effect on August 20, 2020.

“The Court is under no illusion that implementation of its injunction will be costly,” Judge Schulman wrote in the order. “There can be no question that in order for Defendants to comply with A.B. 5, they will have to change the nature of their business practices in significant ways, such as by hiring human resources staff to hire and manage their driver workforces.”

Meanwhile, Uber and Lyft made clear their respective plans to file emergency appeals.

August 12, 2020: Uber CEO Dara Khosrowshahi says Uber will have to temporarily shut down in California if the court doesn’t overturn the preliminary injunction. Lyft says it, too, will be forced to temporarily cease operations in California.

August 13, 2020: Judge Schulman denies Uber and Lyft’s appeal. Uber says it plans to file another appeal, while Lyft says it will seek a further stay from the state’s appellate court.

August 14, 2020: Lyft files a request for an immediate stay in California’s appeals court.

August 17, 2020: Uber files an emergency stay request in California’s appeals court.

August 19, 2020: San Diego and San Jose mayors call for the Court of Appeal to grant Uber and Lyft’s motions and stay the injunction.

Looking ahead

November 2020: Californians will vote on Prop 22, a ballot measure majorly funded by Uber, Lyft and DoorDash. Prop 22 aims to keep gig workers classified as independent contractors. The measure, if passed, would make drivers and delivery workers for said companies exempt from a new state law that classifies them as W-2 employees.

The ballot measure looks to implement an earnings guarantee of at least 120% of minimum wage while on the job, 30 cents per mile for expenses, a healthcare stipend, occupational accident insurance for on-the-job injuries, protection against discrimination and sexual harassment and automobile accident and liability insurance.

Developing…

Uber and Postmates claim gig worker bill AB-5 is unconstitutional in new lawsuit

Postmates and Uber have filed a complaint in California federal district court, alleging that a bill limiting how companies can label workers as independent contractors is unconstitutional. The complaint, which includes two gig workers as co-plaintiffs, was filed in U.S. District Court on Monday, days before Assembly Bill 5 (AB-5) is due to go into effect on Jan. 1. It asks for a preliminary injunction against AB-5 while the lawsuit is under consideration.

The complaint argues that AB-5 violates several clauses in the U.S. and California constitutions, including equal protection because of how it classifies gig workers for ride-sharing and on-demand delivery companies compared to the exemptions it grants to workers who do “substantively identical work” in more than twenty other industries.

AB-5 was authored by Assemblywoman Lorena Gonzalez, a Democrat representing the 80th Assembly District in southern California and signed into law in September by Governor Gavin Newsom. It is intended to uphold the ruling in Dynamex Operations West Inc. v Superior Court of Los Angeles, a landmark 2018 decision by the California Supreme Court about how employees and independent contractors should be classified, and ensure that gig economy workers are entitled to benefits like minimum wage, health insurance and workers’ compensation.

But the suit’s opponents, which includes tech companies whose business models rely on the gig economy, as well as groups of gig workers and freelance journalists, argue that it restricts their work opportunities and ability to earn money.

In addition to Uber and Postmates, the complaints’ plaintiffs also include Lydia Olson and Miguel Perez, drivers for on-demand companies. In a post on Postmates’ blog, Perez wrote that he joined the suit because AB5 “is threatening the freedom and flexibility I have relied on in recent years to support my family.”

A statement from Postmates said “AB5 is a blunt instrument, which is why lawmakers exempted 24 industries, seemingly at random, from its requirements.”

The company added that does not want to be exempted from AB-5 or reverse the Dynamex standard, but “call for industry and labor talks with the California legislature to modernize a robust safety net designed specifically for the needs of on-demand workers, that establishes a new portable benefits model, creates earnings guarantees higher than minimum age, and gives all workers both the strong voice they need and flexibility they demand—a framework not currently contemplated under state and federal law.”

As proof that AB-5 violates the equal protection clause, the complaint argues that “the vast majority of the statute is a list of exemptions that carve out of the statutory scope dozens of occupations, including direct salespeople, travel agents, grant writers, construction truck drivers, commercial fisherman, and many more. There is no rhyme or reason to these nonsensical exemptions, and some are so ill-defined or entirely undefined that it is impossible to discern what they include or exclude.”

The complaint also alleges that AB-5 violates due process by preventing people from choosing to work for gig companies, and the contracts clause because mandating companies like Uber and Postmates to reclassify contractors as employees will either invalidate or substantially change their existing contracts.

In statement about the lawsuit, Gonzalez said “the one clear thing we know about Uber is they will do anything to try to exempt themselves from state regulations that make us all safer and their driver employees self-sufficient. In the meantime, Uber chief executives will continue to become billionaires while too many of their drivers are forced to sleep in their cars.”

The lawsuit follows several efforts to stop or limit AB-5. In October, a group of drivers for Lyft, Uber and DoorDash announced they had submitted a California ballet initiative for the November 2020 ballot in response to AB-5. The measure which received substantial financial support from those companies, seeks to enable drivers and couriers can continue to be independent contractors while guaranteeing benefits like a minimum wage, expenses, healthcare and insurances.

Earlier this month, several organizations representing freelancer writers filed a lawsuit in federal court in Los Angeles alleging AB5 places unconstitutional restrictions on free speech, the day after Vox Media announced it will cut hundreds of freelance positions in California as it prepares for the bill.