On August 10, 2020, a California judge ordered Uber Technologies, Inc. and Lyft Inc., to reclassify their drivers from independent contractors to employees by August 20, 2020. The ruling is the opening salvo in the litigation brought by California Attorney General Xavier Becerra to enforce state labor laws under Assembly Bill 5 (AB5) widely regarded as a major threat to the once burgeoning gig economy. Both Uber and Lyft released statements immediately following the ruling and intend to appeal the decision.
“The vast majority of drivers want to work independently, and we’ve already made significant changes to our app to ensure that remains the case under California law,” an Uber spokesperson said. “When over 3 million Californians are without a job, our elected leaders should be focused on creating work, not trying to shut down an entire industry during an economic depression.”
“Drivers do not want to be employees, full stop,” Lyft said in a statement. “We’ll immediately appeal this ruling and continue to fight for their independence. Ultimately, we believe this issue will be decided by California voters and that they will side with drivers.”
Assembly Bill 5 (AB5)
On September 18, 2019, Governor Gavin Newsom signed AB5 into law. The bill codifies the 2018 California Supreme Court ruling in Dynamex Operations West, Inc. vs. Superior Court of Los Angeles into the California Labor Code. In Dynamex the court ruled that companies must use the three-pronged test (the A-B-C test) to determine whether workers are employees or independent contractors. Under the A-B-C test, any person providing labor services for renumeration is presumed to be an employee instead of an independent contractor, unless the employer demonstrates that the following conditions are satisfied:
- 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.
- The person performs work that is outside the usual course of the hiring entity’s business.
- The person is customarily engaged in an independently established trade, occupation, or business of the same nature as that involved in the work performed.
The Preliminary Injunction
California Attorney General Xavier Becerra filed a preliminary injunction, in connection with a lawsuit initiated in May in San Francisco, Superior Court, alleging that Uber and Lyft violated AB5, by failing to reclassify their workers as independent contractors. Superior Court Judge Ethan Schulmann granted the preliminary injunction, ordering Uber and Lyft to reclassify workers by August 20th. In his opinion, the judge recognized “[t]here can be no question that in order for [Uber and Lyft] to comply with A.B. 5, they will have to change the nature of their business practices in significant ways, such as by hiring human resources staff to hire and manage their driver workforces.”
Following the ruling, Uber CEO Dara Khosrowshahi, revealed that if the court order was not overturned, Uber may have to suspend services in the state. Uber has previously advocated for solutions to address this issue. On the same day the ruling came out, Khosrowshahi wrote an op ed in the New York Times advocating for a “third way” to the current classification debate by establishing benefit funds to give workers cash to use for any benefits they want such as health insurance or paid time off.
There is no other way to put it: Judge Schulman’s order is a significant setback for the gig economy in California that may potentially require Uber and Lyft to suspend services in order to comply. Uber and Lyft have indicated that they will appeal the order. Should things remain as is, the gig economy in California may be gone. With lawsuits all across the country this decision may be used as a barometer to achieve similar results. The net effect of this decision could very well destroy an industry that provided convenient new ways for people to travel. It remains to be seen, if this order signals the beginning of the end for gig economy, or the end of the beginning with appeals to follow, and the lawsuit to continue.