• Insights

Gig economy: California Appellate Court affirms Uber and Lyft must reclassify California drivers as employees

United States
30.10.20
3
Written by
FordHarrison LLP, nationwide U.S. law firm with a singular focus on HR law.
Uber and Lyft will be required to reclassify drivers and riders previously considered independent contractors as employees following a ruling from a California appeal court affirming the preliminary injunction that imposed this obligation on 10 August 2020.

On 22 October 2020, a California appellate court affirmed a preliminary injunction requiring Uber and Lyft to reclassify California drivers from independent contractors to employees and to comply with the California Labor Code, the Unemployment Insurance Code, and the Industrial Welfare Commission wage orders, as requested by California State Attorney General Xavier Becerra and the City Attorneys of Los Angeles, San Francisco, and San Diego. A further discussion of that original 10 August 2020 San Francisco Superior Court’s original 33-page decision can be found here.

 

Summary of the Order

The appellate court unanimously sided with the Superior Court in holding that the State and city governments are ultimately likely to succeed on the merits in arguing that Uber’s and Lyft’s drivers are employees, not independent contractors, under the rigorous ABC test set forth under California Assembly Bill 5 (‘AB 5’).

AB 5, which took effect at the beginning of 2020, codified the test to determine whether a worker can be classified as an independent contractor set forth under the California Supreme Court case Dynamex Operations West, Inc. v. Superior Court of Los Angeles (2018) 4 Cal.5th 903, which presumes workers are employees unless an employer can establish three factors:

(A) that 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;

(B) that the worker performs work that is outside the usual course of the hiring entity’s business; and

(C) that the worker is customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed.

Click here for a full discussion of Dynamex.

Because Dynamex was issued over two years ago, the Court reasoned that companies like Uber and Lyft, who utilise independent contractors as a significant portion of their workforce, have had significant time to contemplate how they can proceed with reclassifying workers as employees. Therefore, the Court reasoned that requiring Uber and Lyft to comply with the preliminary injunction would not result in irreparable harm. On the contrary, the court specifically affirmed the trial court’s reasoning that:

‘rectifying the various forms of irreparable harm shown by the People more strongly serves the public interest than protecting Uber, Lyft, their shareholders, and all of those who have come to rely on the advantages on online ride-sharing delivered by a business model that does not provide employment benefits to drivers.’

Therefore, the Court required Uber and Lyft to comply with the San Francisco Superior Court’s preliminary injunction order beginning 30 days after the Court issues its forthcoming remittitur of the appeal.

 

Likely impact and Proposition 22

Although the legislature has recently enacted exemptions for certain types of workers, including certain writers, musicians and artists, as well as individuals providing certain ‘professional services,’ from the AB 5 test (see here), this most recent decision signifies that under the current ABC test, Uber’s and Lyft’s drivers are unlikely to be able to remain as independent contractors, in the absence of subsequent intervention from the legislature or the passage of Proposition 22 on California’s ballot initiative this November (see here for details of Proposition 22).

However, employers should keep in mind that even the passage of Proposition 22 is unlikely to provide their specific businesses with exemptions from AB 5, as it is intended to apply specifically to ride-hailing companies so that their drivers can be classified as independent contractors in exchange for increased worker protections such as guarantees in minimum earnings, expense reimbursements, healthcare subsidies and insurance coverage for on the-job injuries.

Furthermore, this decision signifies that a government enforcement action brought by the state and local governments of California will be able to seek compliance with AB 5 through the use of preliminary injunctions even at the early stages of a lawsuit, while the case is ongoing.

If a preliminary injunction is granted, employers could find themselves having to provide workers, on very short notice, all benefits commonly associated with non-exempt employees in California, including minimum and overtime wages, meal and rest period premiums, reimbursements for business expenses, sick leave, workers’ compensation coverage, unemployment insurance, paid family and sick leave, and wage replacement programs like disability insurance. Employers could also find themselves having to pay taxes and penalties on very short notice.

Additionally, even if Proposition 22 or any other legislative exemptions pass in the near future, their effects are unlikely to be retroactive. Therefore, entities who use independent contractors may continue to be exposed to legal liability through government enforcement mechanisms and/or class and representative Private Attorneys General Act (‘PAGA’) actions.

Businesses utilising independent contractors are advised to continue to track legal developments and consult with experienced labour and employment counsel to evaluate the continuing viability of this classification for their specific business.

Authors
Jamin Xu
FordHarrison LLP
Jack Schaedel
FordHarrison LLP