Introduction: On May 5, 2020, California Attorney General Xavier Becerra and the city attorneys of San Francisco, Los Angeles, and San Diego filed a lawsuit in San Francisco Superior Court against Uber and Lyft for allegedly misclassifying their drivers as independent contractors instead of employees, in violation of California law AB 5.
The lawsuit alleges that, due to Uber's and Lyft's purported violations of AB 5, Uber and Lyft failed to pay their employees minimum and overtime wages, reimbursements for business expenses, workers' compensation coverage, unemployment insurance, paid family and sick leave, and wage replacement programs like disability insurance. Based thereon, the lawsuit seeks an injunction requiring Uber and Lyft to comply with AB 5, restitution in the form of unpaid minimum and overtime wages, meal and rest period premiums, unreimbursed business expenses, unpaid sick leave, and taxes and penalties.
This lawsuit marks a new battleground in a larger dispute surrounding gig companies and their classification of drivers and other gig workers, which has been raging in various courts and agencies throughout California for a number of years. While this lawsuit does not necessarily raise any novel issues, it does raise the stakes, as the Attorney General and the various city attorneys have powers, and potentially resources, beyond those of a normal class-action litigant.
Almost since their inception, Uber and Lyft, as well as other technology companies involved in the gig economy, have been embroiled in class and representative lawsuits in multiple states across the country (including in California), based on allegations that their business model--providing a technology platform for workers to provide their services to others-was, in reality, employment of those workers.
In California, the current standard for determining that fundamental question was established by the California Supreme Court in Dynamex Operations West, Inc. v. Superior Court of Los Angeles (2018) 4 Cal.5th 903, which 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).
In September 2019, the California Legislature passed, and the Governor signed, AB 5, which codified the Dynamex decision (including the ABC test) into law. AB 5, which took effect January 1, 2020, also expanded the application of the ABC Test from just the Wage Orders to the Labor Code and Unemployment Insurance Code. (our Alert discussing AB 5 in detail is available here.
As alleged in the lawsuit, Uber and Lyft lobbied extensively for an exemption to AB 5 prior to its enactment, without success. As described below, they, along with other gig economy players, have engaged in a multi-pronged approach by defending a number of current lawsuits on the grounds that drivers do not qualify as employees under the ABC test, affirmatively challenging the constitutionality of AB 5 as applied to them, and supporting a popular ballot initiative for the November 2020 general election which would create a separate category of worker and likely exempt them from AB 5's application. As gig economy classification has been a heated topic in the Golden State, it is perhaps unsurprising that the State of California and local jurisdictions are targeting Uber and Lyft in ways that could radically alter the regulatory landscape of the gig economy and how consumers and workers interact with these companies.
Summary of the Lawsuit:
At the heart of the lawsuit is the question of whether Uber and Lyft drivers should be classified as employees or independent contractors. This fundamental question is whether the drivers are entitled to many statutory protections for employees, such as those for minimum and overtime wages, meal and rest breaks, benefits, unemployment insurance, and workers' compensation insurance.
The lawsuit challenges the independent contractor classification through three main arguments. First, the lawsuit alleges that Uber and Lyft drivers were not free from Uber's and Lyft's direction and control in the performance of their work, because both companies allegedly:
- Supervise drivers through their respective apps as algorithmic managers;
- Monitor drivers' work hours and trip status and log drivers off the app for six- hour intervals if the drivers reach a twelve-hour driving limit;
- Control the flow of passengers and drivers and their respective information through the app;
- Regulate the drivers and types of cars that may be used;
- Retain the right to terminate or pause a worker's tenure;
- Monitor and control the performance of drivers through passenger feedback;
- Set and collect the passengers' fares;
- Determine their drivers' amount of compensation; and
- Handle invoicing and resolution of conflicts between drivers and passengers, including any misconduct, lost items, damaged vehicles, cleaning fees, fee disputes, etc.
Second, the lawsuit alleges that Uber and Lyft drivers are engaged in Uber's and Lyft's usual course of business of providing on-demand rides. Specifically, the lawsuit indicates that both Uber and Lyft advertise themselves to the public as providers of quality, on-demand rides and are reliant on the labors of their drivers to provide these services. The lawsuit further alleges, even these companies' respective technology applications are focused on the specific choreography and provision of these services, including but not limited to the collection of fees, managing incentives and prices, and monitoring the hours, movements, and qualities of services of their drivers. Therefore, the lawsuit alleges that Uber and Lyft are engaged in the usual course of business of providing transportation.
Third, the lawsuit alleges that Lyft's and Uber's drivers are not engaged in an independently established trade, occupation, or business because drivers provide services and generate income for Lyft and Uber rather than for their own independent businesses. The lawsuit goes on to allege that these drivers are not engaged in their own independent businesses because they do not need to invest their own capital aside from a smartphone and a car, are restricted from freely declining and cancelling rides, accessing passenger information, or marketing themselves outside of the apps, and are controlled by the app in setting earnings, incentives, and prices. Finally, the lawsuit alleges that drivers do not require any necessary trade or skill, an allegation that will likely rustle the feathers of the same drivers the state and cities are purportedly looking to protect.
Potential Responses from Uber and Lyft
Along with challenging the merits of this lawsuit, Uber, Lyft, and other entities that created and engage in the gig economy, will almost certainly continue fighting the enforcement of AB 5 both in the legislature and in the courtroom. In fact, just recently, on February 10, 2020, Uber sought, without success, a preliminary injunction requesting that the court enjoin enforcement of AB 5 in Olson v. State of California., 2020 U.S. Dist. LEXIS 34710, * 2 (C.D. Cal. 2020). In that case, Uber and Postmates, along with an individual worker for each of those respective companies sued the State of California (potentially in anticipation of this new lawsuit), alleging that AB 5 violates the U.S. and California constitutions by unfairly singling out app-based technology platforms and seeking declaratory and injunctive relief. Id. at 6. The court in that case denied Uber's and Postmates' request for a preliminary injunction, but the lawsuit remains, and Uber and Postmates will presumably continue to pursue that case on its merits. In denying a preliminary injunction, the court reasoned that it could not second guess the legislature's choice to enact AB 5 and that the State's and the hundreds of thousands of California workers' interests in enforcing the law outweighed Uber's and Postmates' interests. Id. at 45. Uber and Postmates subsequently appealed this decision, which is now pending in the 9th Circuit Court of Appeals, and regardless of their success in this appeal, their case for declaratory and injunctive relief is likely to proceed even without a preliminary injunction. Lydia Olson, et al v. State of California, Case No. 20-55267 (9th Cir. 2020).
Due to the overlapping issues, Uber and Lyft could move to stay and/or dismiss this matter pending the resolution of the issues presented in Olson or file a cross-complaint alleging similar violations. Under either route, it is likely that we are still years away from any clear judicial resolution.
In the meantime, on the legislative front, Uber, Lyft, Doordash, and other gig economy companies are likely to continue their lobbying efforts for legislative changes. In fact, they qualified a popular ballot initiative for the November 3, 2020 general election which, if approved by voters, will provide an exemption for ride-hailing companies from AB 5 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 text of the ballot initiative is available here).
Ultimately, the outcome of this new lawsuit, as well as the other previous lawsuits, could take years to come to fruition. In the meantime, this lawsuit signals that the State and major cities are beginning to seek to enforce AB 5 on a wider scale. It remains to be seen if Uber and Lyft will be the only test cases, or if other lawsuits against other gig companies will follow.
Companies who engage independent contractors should continue to evaluate the viability of that classification under the ABC test. Any success achieved by Uber, Lyft, and/or other gig economy entities in challenging the application of AB 5, may or may not be retroactive, and may or not may not apply outside of the particular company or the gig economy. Therefore, liability could result from government enforcement and class and representative actions filed by purported employees, regardless of Uber's and Lyft's successes.
Developments in California's lawsuit against Uber and Lyft will likely have a significant impact on employers and consumers in California, even apart from the gig economy. Other states tend to follow the Golden State, so whatever happens in California might not stay in California. FordHarrison attorneys are available to assist you in implementing these changes in the law and ensuring compliance with AB 5.
Originally published May 12, 2020
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.