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Preliminary injunction requires Uber and Lyft to re-classify independent contractors as employees: California ruling

Written by
FordHarrison LLP, nationwide U.S. law firm with a singular focus on HR law.
Authors
Jack Schaedel
FordHarrison LLP
Jamin Xu
FordHarrison LLP
United States
18.08.20
5
On 10 August 2020, the San Francisco Superior Court granted a preliminary injunction that would require Uber and Lyft to reclassify drivers as employees. The gig economy operators have ten days to file an appeal before the injunction becomes effective.

Introduction

On 12 May 2020, we reported on a lawsuit filed by California Attorney General Xavier Becerra and the city attorneys of San Francisco, Los Angeles, and San Diego against Uber and Lyft on 5 May 2020, seeking to require them to reclassify their drivers as employees, entitled California v. Uber Technologies Inc. and Lyft Inc., San Francisco Superior Court Case No. CGC-20-584402 (discussed in further detail here).

On 10 August 2020, San Francisco Superior Court Judge Ethan Schulman granted a motion by the State and cities for a preliminary injunction ordering Uber and Lyft to re-classify their California drivers from independent contractors to employees and to comply with the California Labor Code, the Unemployment Insurance Code, and the Industrial Welfare Commission wage orders.

In that same order, the court denied several challenges by Uber and Lyft to the lawsuit (see below for details). The court further deferred ruling on a motion to compel arbitration filed by Uber and Lyft, stating at one point, that:

‘Defendants are not entitled to an indefinite postponement of their day of reckoning. Their threshold motions are groundless.’

The court’s order concluded that the government will have an ‘overwhelming likelihood’ of ultimately 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 (our Alert discussing AB 5 in detail is available here).

Although the court stayed the injunction for ten days to provide Uber and Lyft an opportunity to appeal, the decision is likely to spur additional class and representative actions from private parties and enforcement actions from government entities against all sorts of gig economy businesses and others who engage independent contractors, even though forthcoming appeals from Lyft and Uber (if they choose to file one) as well as the legal action in its entirety is likely to continue to be litigated for many more months (if not years).

Background

The lawsuit seeks an injunction requiring Uber and Lyft to comply with AB 5 and restitution in the form of 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.

While similar challenges to gig economy business models have persisted for many years, the filing of this lawsuit and granting of this order highlight the state’s intensifying interest in disrupting the gig economy model itself, which was signalled by the enactment of AB 5 which codified the California Supreme Court’s holding in Dynamex Operations West, Inc. v. Superior Court of Los Angeles ((2018) 4 Cal.5th 903). Dynamex’s now familiar ‘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 (click here for a full discussion of Dynamex).

Summary of the Order

Most significantly, the order requires Uber and Lyft to reclassify their drivers as employees and to provide benefits commonly associated with non-exempt employees in California, including those under the California Labor Code such as unpaid minimum wages and overtime premiums, meal and rest period premiums, unreimbursed business expenses, unpaid sick leave, workers’ compensation coverage, unemployment insurance, paid family and sick leave, and wage replacement programs like disability insurance. The order further requires Uber and Lyft to provide benefits under the Unemployment Insurance Code and the Industrial Welfare Commission wage orders to their drivers.

In the same order, the court also denied a number of motions filed by Uber and Lyft, including several motions to stay pending Uber’s constitutional challenges to AB 5 with the Ninth Circuit, until the November 2020 election, when the voters will consider Proposition 22, which proposes exempting Uber and Lyft from AB 5, and until the final resolution of other lawsuits alleging similar claims. Specifically, the court stated that even if there is a change in the law, the court cannot:

‘Duck its obligation to rule on a matter properly before it based on speculation that current law may be struck down or modified in the future.’

It further stated that:

‘Even if the ballot initiative passes, it would not moot out the People’s prayer for remedies for past violations.’

Additionally, Uber and Lyft had earlier filed a motion to compel arbitration on the basis that the government’s claims for restitution of unpaid wages and other benefits are on behalf of individual drivers (the ‘real parties in interest’) who are subject to arbitration agreements. However, the court deferred ruling on this motion at this time, particularly because it was deemed unnecessary to ruling on the motion for preliminary injunction and because it is unable to determine whether, and to what extent, certain drivers may have opted out of their respective arbitration agreements. Finally, the court further noted that even if certain claims for restitution could be subject to the drivers’ arbitration agreements, Uber and Lyft failed to contest that the government’s request for injunctive relief and civil penalties would not be subject to arbitration.

Likely impact

Although Uber and Lyft are likely to continue challenging the court’s preliminary injunction and the overarching lawsuit, the court has explicitly stated in its order 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.’

Therefore, technology companies should beware that a common defence to misclassification claims that independent contractors ‘do not perform work that is ‘outside the usual course’ of their business’ may be less likely to succeed in similar actions. Specifically, the court here held that:

‘Defendants’ insistence that their businesses are ‘multi-sided platforms’ rather than transportation companies is flatly inconsistent with the statutory provisions…’

Uber, Lyft, and other gig economy companies will likely persist on the legislative front, by for example, supporting a popular ballot initiative for the 3 November 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. However, the court’s order states that:

‘[e]ven if the ballot initiative passes, it would not moot out the People’s prayer for remedies for past violations.’

Therefore, potential changes in the law are unlikely to insulate technology companies from potential challenges that their workers should be classified as employees instead of independent contractors, based on violations of the law between the effective date of AB 5 and the effective date of any potential changes.

Additionally, government agencies and private parties in class and representative actions (such as those under the private attorneys general act (PAGA)) are likely to seize on the findings in this decision to take similar actions against Uber and Lyft as well as other gig economy companies. Depending on the court’s forthcoming ruling on Uber’s and Lyft’s motion to compel arbitration, this lawsuit may present a unique challenge for widespread relief in the form of increased government actions that class action waivers in arbitration agreements often insulate employers from.

In fact, on 5 August 2020 just five days before this decision, the California Department of Industrial Relations filed separate but similar actions against Uber and Lyft in Alameda County Superior Court, further signifying government entities’ focus on attacking technology companies’ business model.

In light of these challenges, companies who utilise independent contractors in California should continue to evaluate the viability of that classification under the ABC test, particularly because any ‘relaxing’ changes in the law, whether through a ballot initiative or other challenges presented by Uber, Lyft, and/or other gig economy entities are unlikely to be retroactive. Therefore, liability could result from class and representative actions filed by purported employees, regardless of Uber’s and Lyft’s future successes. Even if arbitration agreements could provide some protection from widespread damages against class actions, this lawsuit highlights the likelihood that government entities and PAGA actions will persist despite class action waivers in arbitration agreements.