Labor & Employment Law Daily Injunction banning Uber and Lyft from classifying drivers as independent contractors upheld
News
Tuesday, October 27, 2020

Injunction banning Uber and Lyft from classifying drivers as independent contractors upheld

By Ronald Miller, J.D.

Whether ride-share drivers for Uber and Lyft were employees or independent contractors was a question of first impression in California.

A trial court did not abuse its discretion when it granted a preliminary injunction that restrained Uber and Lyft from classifying their drivers as independent contractors, ruled a California court of appeals. In 2019, the legislature enacted Assembly Bill 5 (AB 5), which codified the “ABC Test” for determining whether a worker is an employee or independent contractor. According to the state, Uber and Lyft evade California’s workplace standards and safeguards and commit unfair business practices by misclassifying drivers as independent contractors. Labor Code Section 2775 establishes a presumption that one who “provid[es] labor or services for remuneration” is an employee, the appeals court stated. It rejected the rideshare companies’ contention that they were in the business solely of creating technological platforms, and concluded that rideshare drivers provide services that are squarely within the usual course of the companies’ businesses—providing transportation (The People v. Uber Technologies, Inc., October 22, 2020, Streeter, J.).

The State of California brought a civil enforcement action against Uber and Lyft, alleging that the rideshare companies improperly classified drivers using their ridesharing platforms as independent contractors rather than employees, thereby depriving them of a host of benefits to which employees are entitled. It alleged that this misclassification gave the companies an unfair advantage over competitors, while costing the public significant sums in lost tax revenues and increased social-safety-net expenditures that are foisted on the state because drivers must go without employment benefits.

ABC test. In 2019, the legislature enacted Assembly Bill 5, which codified the California Supreme Court’s decision in Dynamex Operations West, Inc. v. Superior Court. AB 5 provides that 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:

1. 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.
2. The person performs work that is outside the usual course of the hiring entity’s business.
3. The person is customarily engaged in an independently established trade, occupation, or business of the same nature as that involved in the work performed.

Significantly, in AB 5, the legislature went beyond Dynamex in some critically important respects. First, it expressly conferred on the Attorney General, district attorneys, and certain city attorneys and prosecutors the power to seek injunctive relief against those who misclassify employees as independent contractors. Second, the legislature made clear that it was broadly adopting the Dynamex holding for purposes of all benefits to which employees are entitled under the Unemployment Insurance Code, the Labor Code, and all applicable wage orders.

Business model. Both Uber and Lyft offer mobile phone apps that operate by matching those in need of a ride to rideshare drivers available to give them rides using their own vehicles. The contracts between them and the drivers specifies that the parties’ relationship “is solely as independent business enterprises.” Drivers may use the app as much or as little as they want, they are free to accept or decline ride requests, and they may use a route of their or the passenger’s choosing.

However, both companies ensure drivers meet certain standards before authorizing them to use their platform and hold themselves out as Uber or Lyft drivers. Drivers are also required to pass criminal background and driving record checks, and to show that they are properly licensed and insured, that they have a right to drive their vehicles, and that their vehicles are in good operating condition and meet safety standards. Lyft and Uber both prohibit drivers using their apps from accepting street hails, bringing their friends along while providing rides, or receiving payment for rides in cash. They may also monitor or collect information about drivers’ locations, communications with riders, and driving habits.

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.

Injunction. The state alleged that Uber and Lyft are transportation companies in the business of selling rides to customers and that their drivers are employees under Dynamex and AB 5. According to the state, the companies evade California’s workplace standards and safeguards and commit unfair business practices by misclassifying drivers as independent contractors, thus depriving them of the benefit of minimum wages, overtime pay, reimbursement for business expenses, workers’ compensation, paid sick leave, disability insurance, and paid family leave.

Shortly after filing this complaint, the state moved for a preliminary injunction enjoining Uber and Lyft, during the pendency of this action, from “classifying their Drivers as independent contractors in violation of [AB 5].” The trial court granted the motion, but the injunction was stayed pending this appeal.

The merits. Notably, AB 5 expressly authorizes injunctive relief to prevent misclassification of employees. Accordingly, the appeals court applied the framework set forth in IT Corp. v. County of Imperial, which asks first whether plaintiff has shown a reasonable probability it will prevail on the merits.

Hiring entities. Whether ride-share drivers for Uber and Lyft were employees or independent contractors was a question of first impression in California. Labor Code Section Section 2775 establishes a presumption that one who “provid[es] labor or services for remuneration” is an employee, observed the appeals court. This presumption may be rebutted if “the hiring entity” demonstrates that all three “ABC” conditions are satisfied.

The appeals court rejected Uber and Lyft’s contention that the threshold question in an ABC analysis was whether they were hiring entities and so declined to import a “hiring entity” inquiry into section 2775 by judicial construction. Reading the term “hiring entity” in context, the appeals court concluded that the phrase is used in Dynamex and in section 2775 for its neutrality, so that it covers both employment status and independent contractor status, and thus does not presuppose an answer one way or another.

Application of ABC Test. In its ruling, the trial court addressed only the second ABC factor, that is, whether “[t]he person performs work that is outside the usual course of the hiring entity’s business,” and concluded that the defendants were in the business of transporting passengers for compensation. Here, the appeals court made quick work of the defendants’ contention that they are in the business solely of creating technological platforms, not of transporting passengers, pointing to Cotter v. Lyft, Inc., Rogers v. Lyft, Inc., and O’Connor v. Uber Technologies, Inc., to find that under AB 5, rideshare drivers provide services that are squarely within the usual course of the company’s business.

The appeals court pointed out that the dispositive issue is whether the mode in which the drivers were used met the elements of the ABC test. Here, the court found considerable evidence that the rideshare drivers involved met this test, despite the changes in the traditional workplace enabled by modern technology. Significantly, both Uber and Lyft solicit riders, they screen drivers and set standards for vehicles that can be used, they track and collect information on drivers when they use the apps, and they may use negative ratings to deactivate drivers. Further, riders request rides and pay for them through the apps, and payments are remitted to the drivers. Viewing the conduct of the defendants’ businesses as a whole, the appeals court concluded that the trial court properly found—based on prong B alone—that there is more than a reasonable probability the state will prevail on the merits at trial.

Expert comment. Michael Droke, a labor and employment partner at the international law firm Dorsey & Whitney in California, offered his observations on the impact of this decision. With approximately 311,000 drivers in California in 2019 alone, this decision will have a significant impact on the gig-economy model and the companies involved, Droke says. He noted that in determining the appropriateness of an injunction, the state appellate court quoted the late Supreme Court Justice Ruth Bader Ginsburg, who observed that equitable principles justified applying a “sliding scale” to impose an injunction even when there is “a lower likelihood of harm when the likelihood of success is very high.” The appeals court held just that.

The ABC test presumptively considers all workers to be employees and permits workers to be classified as independent contractors only if the hiring business demonstrates that the worker in question satisfies each of three conditions of California’s “ABC Test.” The appeals court concluded that there was a likelihood that although the workers were classified as contractors, California’s “ABC Test” would require them to be reclassified as employees, stated Droke.

Interested in submitting an article?

Submit your information to us today!

Learn More

Labor & Employment Law Daily: Breaking legal news at your fingertips

Sign up today for your free trial to this daily reporting service created by attorneys, for attorneys. Stay up to date on labor and employment legal matters with same-day coverage of breaking news, court decisions, legislation, and regulatory activity with easy access through email or mobile app.