Uber, Lyft drivers: employees... at least until November

On Monday, in an action initiated by the state of California and joined by the cities of Los Angeles, San Diego and San Francisco, San Francisco Superior Court Judge Ethan Schulman issued an injunction requiring app-based ride share companies Uber and Lyft to reclassify its entire California workforce as employees within the next 10 days. People v. Uber Technologies Inc. et al., CGC-20-584402 (S.F. County Sup. Ct., filed May 5, 2020).

Assembly Bill 5, the controversial bill that become law in January of this year, was always going to cause a massive disruption in the gig economy. What was unclear was how soon that day would come. Uber, Lyft and others were preparing for this fight by funding a $100 million-dollar ad campaign that is just gearing up to flood the airwaves with a pro-Proposition 22 message. The initiative on the Nov. 3 ballot is titled "California Proposition 22, App-Based Drivers as Contractors and Labor Policies Initiative" which, if enacted by the voters, will invalidate large swaths of AB 5 and put into law a version of the bill that exempts most if not all app-based independent contractors from being classified as employees.

The success of Prop. 22 is certainly possible as there is no seriously funded opposition that will be running ads against the pro-Prop. 22 onslaught. However, this court decision should reorient the debate as to the proper classification of workers in the modern-day economy.

As the court pointed out in its decision, AB 5 sought to codify (with some changes and carveouts as the legislative process required) the April 2018 decision from the California Supreme Court in Dynamex Operations West, Inc v. Superior Court. Uber and Lyft sought to delay this present litigation until the election and further until the 9th U.S. Circuit Court of Appeals ruled on its constitutional challenge. The court rejected both of these requests.

Central to the court's reasoning was the standard for issuing a sweeping order of this magnitude. The court weighed two factors: (1) the likelihood of the state prevailing on the merits; and (2) the relative interim harm to the parties. However, where a government actor is seeking to enforce a statute which provides for said relief, the standards are relaxed. In fact, the standard becomes so low that the injunction should issue "unless the Defendant shows that it would suffer grave or irreparable harm from the issuance of the preliminary injunction." Even then, the injunction could still issue.

The core of Uber and Lyft's arguments have been they do not employ anyone as they are just a technology platform matching a consumer with a driver. The court clearly found that they employ drivers. As the court explained, these arguments "cannot be squared with the undisputed reality that they hire and contract with drivers."

On the issue of prevailing on the merits, the question is "are they properly classified as independent contractors?" AB 5 lays out a three-part test (the ABC test), that defendants must satisfy all three prongs of to establish that the independent contractors are not employees. The three factors are (a) control, (b) performs work outside the usual course of the hiring entity's business, and (c) engaged in an independent trade, occupation or business from the hiring entity. The court found prong B could not be satisfied by defendants and, therefore, the state was likely to prevail on the merits. The court wholly rejected the argument that the defendants are "multi-sided platforms" rather than transportation companies. "To state the obvious, drivers are central, not tangential to Uber and Lyft's entire ride-hailing business," the court concluded.

Turning to the harm, the state demonstrated that significant public harm would be created by allowing the defendants to continue to violate the statute. The state can be prejudiced by lost revenue including lost payroll taxes, workers' compensation premiums, unemployment and disability insurance. Employees are also suffering harm by not being paid overtime, being denied meal and rest breaks, and being forced to drive long distances without compensation (return trips). Interestingly, the court also pointed out that there are ripple effects in the economy for law abiding business that ostensibly give Uber and Lyft an unfair advantage by violating the law.

While the court acknowledged that Uber and Lyft may incur costs to reclassify its employees, it reasoned that these are the types of costs that all employers incur to properly comply with California Labor Code and other statutes. The fact that Uber and Lyft have flaunted this noncompliance for over two years since Dynamex, and seven months since the enactment of AB 5, should not give them a license to claim prejudice.

The court's tone shifted at this point calling out Uber and Lyft's arrogance. The court quoted a federal district court on another ride-hailing matter for the idea that wealthy corporations cannot be immune from the policy choices of the legislature. The court concluded by criticizing their failure to act: "if the injunction the People seek will have far reaching effects, they have only been exacerbated by Defendant's prolonged and brazen refusal to comply with California law. Defendants may not evade legislative mandates merely because their business are so large that they affect the lives of many thousands of people."

The court stayed the injunction for 10 days to allow appellate review of the decision. I suspect this will be summarily denied.

If so, by August 20,, every Uber and Lyft driver will need to be reclassified and directly employed by the companies in question. This will be a huge victory for AB 5 and the livelihood of workers. It may call into question the business model of Uber and Lyft, but this is in part because the business model was based upon eliminating the bargaining power of the workers who were performing the service. Uber and Lyft usurped the taxicab model by reducing fares at the expense of drivers.

The net effect will be to embolden the "No on 22" campaign and allow Uber and Lyft's drivers to experience life as employees -- at least until the election. While all eyes are on the presidential race and the fight for the U.S. Senate, the Prop. 22 fight will be something to watch here at home to see how the voters of California react to a wealthy corporation's "brazen refusal to comply with California law." I think many might not take too kindly to such contravention of the law, but the pro-Prop. 22 shock and awe ad campaign might be effective. Only time will tell. 