Uber and Lyft Safe For Now, But Court’s Ruling Makes It Clear Companies Are Losing Misclassification

Uber and Lyft may have been granted an emergency stay from a San Francisco Superior Court’s order granting a preliminary injunction that requires the companies to reclassify their drivers as direct employees rather than independent contractors, but California companies who utilize independent contractors would be well advised take warning from the court’s order. On May 5, 2020, the California Attorney and the city attorneys of San Francisco, Los Angeles, and San Diego filed a lawsuit against Uber and Lyft, attempting to force them to reclassify their drivers as direct employees, instead of independent contractors. (California v. Uber Technologies Inc. and Lyft Inc., S.F.S.C. Case No. CGC-20-584402.) On August 10, 2020, the judge in the case granted a preliminary injunction against Uber and Lyft, ordering them to re-classify their drivers. The court’s order concluded that the government will have an “overwhelming likelihood” of prevailing on their claim that Uber’s and Lyft’s classification of their drivers as independent contractors violates Assembly Bill 5 (“AB 5”), which took effect at the start of this year. Although the court stayed the injunction for 10 days to provide Uber and Lyft an opportunity to appeal, the decision will likely result in the filing of numerous new class and representative actions by private plaintiffs against businesses that engage independent contractors.

In addition to seeking a permanent injunction, the lawsuit seeks restitution from Uber and Lyft for unpaid minimum and overtime wages, meal and rest period premiums, unreimbursed business expenses, unpaid sick leave, workers’ compensation coverage, unemployment insurance, paid family and sick leave, wage replacement programs like disability insurance, and unpaid taxes. The enactment of AB 5 codified the now familiar “ABC test” from the California Supreme Court’s holding in Dynamex Operations West, Inc. v. Superior Court of Los Angeles (2018) 4 Cal.5th 903. The “ABC test” 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.

The court deferred ruling on Uber’s and Lyft’s motion to compel arbitration, because it deemed it unnecessary to rule on for the preliminary injunction and because it could not determine whether certain drivers may have opted out of their respective arbitration agreements. However, the court noted that Uber and Lyft failed to contest that the government’s request for injunctive relief and civil penalties would not be subject to arbitration.

Although Uber and Lyft will continue to appeal the court’s preliminary injunction, the court explicitly stated that “the likelihood that the People will prevail on their claim that Defendants have misclassified their drivers is overwhelming; there is no need to address the other two prongs of the test.” As such, California employers should note that that a common defense to misclassification claims that independent contractors “do not perform work that is ‘outside the usual course’ of their business” may be less effective against such claims going forward.

Uber, Lyft, and other “gig” economy companies are actively seeking a legislative solution, like the initiative slated to appear on the ballot for the November 3, 2020 general election, which seeks to provide an exemption to AB 5 for ride-hailing companies by permitting the classification of drivers 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. The court’s order, nonetheless, specifies that “[e]ven if the ballot initiative passes, it would not moot out the People’s prayer for remedies for past violations.”

The court’s order will most likely invite new filings by private plaintiffs in class and representative actions (such as those under the private attorneys general act (PAGA)) against Uber and Lyft as well as other similar companies. Companies that utilize independent contractors in California should, therefore, carefully evaluate the viability of that classification under the ABC test, particularly because any changes in the law, whether through ballot initiative, legislative action, or other court challenges, are unlikely to be retroactive. Companies could, thus, face substantial liability from class and representative actions filed by purported employees, regardless of Uber’s and Lyft’s future successes. The current lawsuit further highlights how even arbitration agreements with class action waivers might not provide protection from heavy damages, in light of the persistence of PAGA actions and actions by government entities, which are not subject to arbitration.

We are continuing to monitor the situation with Uber and Lyft and all matters concerning misclassification of independent contractors and we can provide answers to your employment law-related questions.