Uber and Lyft face “day of reckoning”

On Aug. 10, San Francisco Superior Court Judge Ethan Schulman issued an order effectively requiring ride-sharing apps Uber and Lyft to reclassify drivers working through those platforms as employees. Judge Schulman rejected the companies’ attempts to delay a ruling on the merits, which could indefinitely postpone “their day of reckoning.”

If the order survives appeals and is not substantially nullified by a pending ballot measure, it will affect how – even whether – Uber and Lyft continue to operate in California.

California Attorney General Xavier Becerra, joined by the City Attorneys of San Diego, Los Angeles, and San Francisco, brought the action on behalf of the People of California, alleging that AB 5, the state’s worker classification law, requires the drivers to be classified as employees rather than, as now, independent contractors.

AB 5 codified the ABC test adopted by the California Supreme Court in its landmark 2018 Dynamex ruling. Under that test, workers are presumed to be employees unless the hiring entity can show: (A) the worker performs relatively free of the hiring entity’s control; and (B) the work performed is outside the “usual course” of the hiring entity’s business; and (C) the worker is regularly engaged in an independent trade, occupation, or business of the same nature as the work done for the hiring entity.

This AB 5 dispute, like many others, focused on whether the companies could pass part B of the test. Judge Schulman said there was “an overwhelming likelihood” the companies would be unable to do so, entitling the People to a preliminary injunction.

“It’s this simple: Defendants’ drivers do not perform work that is ‘outside the usual course’ of their businesses. Defendants’ insistence that their businesses are ‘multi-sided platforms’ rather than transportation companies . . . flies in the face of economic reality and common sense. And it is irreconcilable with the Supreme Court’s directive in Dynamex that California’s employee classification standard should be interpreted and applied broadly to include all persons who can reasonably be viewed as working in the hiring entity’s business. To state the obvious, drivers are central, not tangential, to Uber and Lyft’s entire ride-hailing business.”

The companies are behind Proposition 22 on the November ballot, a measure that would exempt ride-sharing apps from AB 5 and give alternative rights to app-based drivers. Judge Schulman belittled the argument that the pendency of the measure warranted suspending the lawsuit. “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.” Anyway, said the judge, passage of the proposition would still leave the companies liable for their past violations.

Judge Schulman recognized the difficulty the companies would have in revamping their business model. But the all-time low in ridership caused by the pandemic made this perhaps “the best time (or the least worst time) for Defendants to change their business practices to conform to California law without causing widespread adverse effects on their drivers.”

The reason the companies are fighting so hard is found in an Aug. 21 Union-Tribune story: “Converting drivers to employees would add significant costs for Uber and Lyft. In 2019, Barclays analysts estimated that reclassifying workers could cost Uber and Lyft an additional $3,625 per driver in California. That’s enough to hike Uber’s annual costs by more than $500 million and Lyft’s by $290 million, analysts said at the time.” As Judge Schulman wrote, these extra costs result from “a panoply of basic protections to which employees are entitled under California law, including minimum wage, workers compensation, unemployment insurance, paid sick leave, and paid family leave.”

The Court of Appeal granted the companies’ request to suspend Judge Schulman’s order until resolution of their appeal. But the Court of Appeal set conditions, including a requirement that the companies agree to accelerated consideration of the appeal. In addition, each company’s CEO will have to submit a sworn statement by Sept. 4 confirming that it has a plan to comply with AB 5 no more than 30 days after the appeal is over if the Court of Appeal upholds Judge Schulman’s order and Proposition 22 loses.

Oral argument on the appeal is set for Oct. 13. Given the stakes, it would not be surprising if the appellate court issued its ruling before the election. Regardless of what happens in the courthouse and at the ballot box, the relationship between Uber and Lyft and the drivers who use the platforms is about to change.

Dan Eaton is a partner with the San Diego law firm of Seltzer Caplan McMahon Vitek where his practice focuses on defending and advising employers. He also is an instructor at the San Diego State University Fowler College of Business where he teaches classes in business ethics and employment law. He may be reached at eaton@scmv.com. His Twitter handle is @DanEatonlaw