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Uber, Lyft Ordered To Classify Drivers As Employees, But Election Day In California Could Be More Important

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Uber, Lyft Ordered To Classify Drivers As Employees, But Election Day In California Could Be More Important

The question of whether Uber Technologies, Inc. (NYSE: UBER) and Lyft Inc. (NYSE: LYFT) will fall under the jurisdiction of California's AB5 rule on independent contractors received significant clarity Thursday, less than two weeks before the state's voters will have their say on the rule.

The Court of Appeal for California's first district ruled Thursday that a preliminary injunction requiring Uber and Lyft to adhere to AB5 and reclassify their drivers as employees under the terms of that law will go into effect in approximately 30 days. 

The injunction was first handed down in August in one of the first court actions connected to a lawsuit the state filed in June against the two ride-sharing services. That suit, brought by the state of California, sought to compel Uber and Lyft to adhere to AB5. Uber and Lyft asked for a stay on the injunction; that was granted Aug. 20 for 60 days. It has now expired, and the court ruled Thursday that it would not be extended. 

There is a possibility all of this could become moot in just a few weeks. On the Election Day ballot in the Golden State is Proposition 22, sponsored by Uber and Lyft. If passed, the ballot initiative — according to the election information site Ballotpedia — would define app-based drivers as independent contractors, overruling an interpretation of AB5 that would define them as employees. 

(If you want to track the outcome after the polls close, a yes vote would support the initiative's definition of independent contractors rather than that of AB5.)

News reports have said that the spending by all parties in the fight, including Uber, Lyft and DoorDash, exceeds $200 million. A late September poll showed "yes" leading "no" 39% to 36% but with a significant number of voters undecided. 

What is more pressing is what Uber and Lyft will do now that the injunction ordering them to comply with AB5 will be in effect. The decision this week does not end the case against Uber and Lyft filed in June. Rather, it requires them to abide by the injunction that forced the two companies to define their drivers as employees.

While the 74-page decision focused much of its discussion on the legal history of allowing injunctions while litigation plays itself out, there also is consideration by the court of Uber's and Lyft's arguments that it should not fall under AB5. 

"Uber and Lyft each take the position that the drivers do not provide services to them and are not their employees but instead are independent business people who pay for the use of their platforms to find opportunities to earn money," the court wrote in explaining the ride-sharing services' definition. "Its business, its assets, is not providing rides, but (quoting Lyft's definition) ‘operating the software tools and a platform that connects riders and drivers.'" 

But the court, in the section of its decision where it considers whether Uber and Lyft are likely to prevail in the litigation, said it was rejecting the argument that Uber and Lyft have not been established as "hiring entities." 

Drivers, the court said, "perform services for (Uber and Lyft) in the usual course of the defendants' businesses." And that business "depend(s) on riders paying for rides. The drivers provide the services necessary for defendants' business to prosper, riders pay for those services using defendants' app and defendants then remit the drivers' share to them, either through a bank account in the case of Uber or a payment processing service in the case of Lyft," the court wrote.

Given that, the court found that it is likely that Uber and Lyft will be found to come under the B prong of the ABC test of AB5, which defines an employee as a worker who performs a task that is part of the essential nature of the company's business. The example used by the court is that a plumber fixing a leak at a business is not an employee of that business, but an independent cake decorator hired by a baker to fix up a cake might certainly be one under AB5.

The court also rejected the companies' argument that they and the drivers might suffer "grave harm." California argues — correctly, according to the court — "that a party suffers no grave or irreparable harm by being prohibited from violating the law."

As the companies prepare to reclassify their drivers as employees, they are also pinning their hopes on the ballot initiative. Earlier this week, Uber's CEO Dara Khosrowshahi said during a Wall Street Journal conference that if the initiative fails, "we will do our best to operate in California," the WSJ reported. "Where in California we will operate is a question mark, and the size and scale of business will be a big question mark."

Referring to earlier statements that Uber would hire only a small portion of its current 200,000 drivers in California if it was operating under AB5, he said that is not a "made-up estimate." Khosrowshahi also said the price for a consumer if Uber went to an employee model would rise between 25% and 100%.

The ballot initiative would not simply leave Uber and Lyft free to operate largely as they want. There are numerous provisions in the proposal that would require governance of the payments between Uber and Lyft and drivers; health care subsidies for drivers who average a certain amount of time driving each week; and a definition of "engaged time," which would be classified as the "time between accepting a service request and completing the request."

Looming behind the ballot initiative and the ongoing court case filed by California is the preliminary injunction that is keeping AB5 out of the trucking sector. Lower courts have ruled that AB5 is in conflict with some provisions of the Federal Aviation Administration Authorization Act, also known as F4A. 

But the state of California has appealed the injunction in the case brought by the California Trucking Association. A hearing held on it several weeks ago was viewed by some observers as to be more sympathetic to the arguments of the state, raising the prospect that the injunction might be overturned. If that were the case, AB5 could begin to govern the relationship between trucking companies and the now-independent drivers they now employ to move freight.

More articles by John Kingston

CTA makes its case to keep injunctions against AB5 in California

Labor Department tackles employee classification; AB% may not be affected

Drilling Deep: Sticking a stake into the heart of California's AB5 so far

 

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