California Appeals Court Judge Temporarily “Lyfts” Injunction on Ride-Hail Apps

September 17, 2020

Picture this potentially familiar scenario: you’re at your neighborhood bar in California and you realize that you’ve probably had one too many drinks to drive home. You’re looking down at your phone thinking, “Who should I call to come pick me up?” Well, depending on upcoming oral arguments in the California Court of Appeals, the answer may not include Uber or Lyft. 

On August 10, 2020, San Francisco Superior Court Judge Ethan Schulman issued an order effectively requiring ride-sharing apps, namely Uber and Lyft, to reclassify drivers working through their platforms as employees rather than their previous status as independent contractors. This ruling stems from California Attorney General Xavier Becerra, moving on behalf of the People of California, for a preliminary injunction enjoining Uber and Lyft from classifying their drivers as independent contractors. The People argued this misclassification is in violation of Assembly Bill. 5, commonly referred to as A.B. 5, which took effect on January 1, 2020.

However, this tension between companies and their drivers’ employment classifications did not begin a few months ago. In fact, A.B. 5 codified the “ABC test” which was used two years ago in determining whether delivery drivers were employees or independent contractors in the landmark case, Dynamex Operations West, Inc. v. Superior Court. The “ABC test,” is now incorporated into California Labor Code § 2750.3. Under § 2750.3(a)(1), “[A] person providing labor or services for remuneration shall be considered an employee rather than an independent contractor, unless the hiring entity demonstrates that all of the following conditions are satisfied:

  • (A) 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,
  • (B) The person performs work that is outside the usual course of the hiring entity’s business, and
  • (C) 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 other words, unless a hiring entity can demonstrate that all three of the conditions or “prongs” are satisfied, their “worker” in question is to be considered an employee.  In Judge Schulman’s order, he stressed that part (B) of the “ABC test” was the main point of issue and that Uber and Lyft could not “possibly satisfy” this prong.

Not surprisingly, Uber and Lyft appealed this injunction arguing that A.B. 5 does not apply to them either because they are not “hiring entities” within the meaning of the legislation or because their businesses fall within one or more of the statutory exceptions. Gig companies like Uber and Lyft have long dodged state and local laws by maintaining that its main business isn’t driving people around – instead, these companies argue they are a “technology platform” merely bringing drivers and riders together. Yet, critics are skeptical of this argument focusing on how much control and direction Uber and Lyft assert over the performance of their drivers, which illustrates more of an employee status rather than an independent contractor. For example, Uber sets drivers’ payment rates and the portion of commission they take out. Uber also sets drivers’ performance targets (driver’s rating, how many rides the drivers accept, and how many times they can cancel a ride), suggests a schedule (i.e. you can earn more money driving during “surge” hours), and ultimately controls the routes drivers take to get from A to B.

After Uber and Lyft both threatened to shut down their services in California to comply with Judge Schulman’s injunction, an appeals court judge granted Uber and Lyft’s emergency stay – but, this won’t last for long.

After Uber and Lyft both threatened to shut down their services in California to comply with Judge Schulman’s injunction, an appeals court judge granted Uber and Lyft’s emergency stay – but, this won’t last for long. Companies have until early September to outline their plans about how they will make drivers employees if they lose the appeal. Uber’s CEO has spoken out concerning how this might look: “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 . . . will not be able to earn. The prices are going to go up [especially in smaller cities].” However, Uber and Lyft also have a “plan B” in case they lose the appeal. “Plan B” consists of doing everything in their power to get “Proposition 22” to pass in California.   

Uber and Lyft have put millions of dollars behind Proposition 22 which will be on the November ballot. Essentially, it is a measure that would exempt ride-sharing apps from A.B. 5 and, instead, adopt novel labor and wage requirements specific to the gig economy and app-based drivers. Judge Schulman disparaged their initiatives stating: “If, as the People contend, Defendants are currently violating state law, it is no answer to say that they should be given a pass to continue doing so to see if they can muster their considerable financial resources to persuade the voters to change the law in their favor.” Less colorfully, Judge Schulman asserts the passage of the proposition would still leave the companies liable for their past violations.

To ride-sharing apps like Uber and Lyft, however, it is a middle-ground solution that will provide their drivers with alternative protective rights while keeping the flexibility and integrity of their platform. Since they believe the flexibility piece of their operations is what’s most at stake, Uber and Lyft have argued that it is in the benefit of their drivers to either keep their current business model or adopt Proposition 22. A recent survey was used to determine how Uber and Lyft drivers felt about employee versus independent contractor status in the wake of COVID-19. It turned out that prior to COVID-19, 81% of drivers expressed that they wanted to remain independent contractors as opposed to 71% after COVID-19. Many drivers have expressed fear that they will lose flexibility and receive lower pay if they are deemed employees, however, this is uncertain. 

Many are now wondering what exactly Uber and Lyft would look like if they had to follow suit and classify their drivers as employees. Other states, like New York, have considered ride-hail drivers as employees since 2016, and have recently demanded Uber and Lyft to pay unemployment compensation in the wake of COVID-19. One suspects that while there are many pros to employee status for ride-hail drivers, there are also many cons. While pros consist of a set minimum wage, unemployment insurance, and social security benefits, cons seem to show that there will be fewer drivers allowed on the streets, and there will be highly-controlled windows for them to drive.

While Uber and Lyft are avidly fighting to avoid finally following A.B. 5, it doesn’t seem favorable that they will succeed. Depending on the election and how Proposition 22 plays out, it very well could be the end of Uber and Lyft as we know it. However, it is not to say that Uber and Lyft will not try to reform their platform, or figure out a loophole to, yet again, evade paying what one estimates a cumulative $800 million dollar increase between the two companies in reclassification costs.

September 17, 2020 | Anna C. Comer