Leading Ride Share Servicers Sued by the State of California for Continued Misclassification of Drivers as Independent Contractors

05.27.2020

On May 5, 2020, the California Attorney General, along with the City Attorneys of Los Angeles, San Diego and San Francisco filed a lawsuit on behalf of the State and respective cities, in San Francisco County Superior Court, against the leading ride-share service providers, Uber and Lyft (“Defendants”), for their continued classification of drivers as independent contractors.  The case is entitled People v. Uber Technologies, Inc., et al.

The Complaint asserts two causes of action for: (1) Injunctive Relief, Restitution and Penalties for Violations of the California Business and Professions Code (“Bus. & Prof.”) Section 17200 et seq. and (2) Injunctive Relief for Violations of Assembly Bill 5 (“A.B. 5”), codified in Labor Code Section 2750.3(j).  The Complaint alleges that since the inception of their respective businesses, Defendants have made the calculated business decision to misclassify their on-demand Drivers as independent contractors rather than employees and continue to do so, despite the enactment of A.B. 5 by the California Legislature on January 1, 2020. 

A Look at AB5 and Continued Use of Independent Contractors

A.B. 5 codified and extended the California Supreme Court’s landmark, unanimous decision in Dynamex Operations W., Inc. v. Superior Court (2018) 4 Cal.5th 903.  In Dyanmex, the Supreme Court concluded that in determining whether, under the suffer or permit to work definition, a worker is properly considered the type of independent contractor to whom the wage order does not apply, it is appropriate to look to the standard, commonly referred to as the “ABC” test, that is utilized in other jurisdictions in a variety of contexts to distinguish employees from independent contractors.  Under the ABC test, a worker is properly considered an independent contractor to whom a wage order does not apply only if the hiring entity establishes:

1. that the worker is free from the control and direction of the hirer in connection with the performance of the work, both under the contract for the performance of such work and in fact;
2. that the worker performs work that is outside the usual course of the hiring entity’s business; and
3. that the worker is customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed for the hiring entity. 

As a result of A.B. 5, California law now requires that employers establish each of the three factors embodied in the ABC test of Dynamex, to overcome the presumption their workers are employees and not independent contractors.  The Complaint alleges the Defendants cannot overcome this presumption with respect to their Drivers and goes on to provide a panoply of reasons why each factor cannot be met.

As a preliminary matter, the Complaint divides Drivers into two distinct categories: (1) all individuals who have driven for Uber as ride-hailing drivers in the State of California since May 5, 2016 (a) who signed up to drive as a ride-hailing driver directly with Uber or an Uber subsidiary and (b) are/were paid by Uber or an Uber subsidiary for their services as a ride-hailing driver and (2) all individuals who have driven for Lyft as ride-hailing drivers in the State of California since May 5, 2016 (a) who signed up to drive as a ride-hailing driver directly with Lyft or a Lyft subsidiary and (b) are/were paid by Lyft or a Lyft subsidiary for their services as a ride-hailing driver.  However, as the Defendants’ business models are virtually identical, the allegations in the Complaint regarding Defendants’ inability to meet the strict ABC test apply to both Defendants equally.

With respect to Part A of the test (“free from control and direction”), the Complaint identifies approximately twenty-five characteristics of Defendants’ business model which establish that Defendants do in fact control and direct their Drivers, including the following:

• Defendants determine what Drivers are eligible to provide ride-hailing services;
• Defendants set the fares passengers pay, collect fares directly and pay Drivers from the fares received through their Apps,
• Defendants track Drivers through their Apps;
• Defendants monitor Drivers work hours and log Drivers off their Apps for 6 hours if the Driver reaches a 12-hour limit;
• Defendants control the routes Drivers take;
• Drivers are not free to negotiate the terms of an on-demand rides as Defendants set compensation;
• Defendants limit the amount of time Drives can accept or reject trip requests and penalize Drivers who consistently fail to accept or reject requests within the time limit;
• Defendants specify rules for Drivers to follow to create a uniform ride experience;
• Defendants allow passengers to rate Drivers and use information from the passenger ratings to make decisions about disciplining or terminating its Drivers.

With respect to Part B of the test (“outside usual course of business”), the Complaint alleges Defendants’ business is the provision of on-demand rides and as the Drivers are the ones who provide the on-demand ride, they are an integrated and essential part of Defendants’ business.  The Complaint further alleges that Defendants only generate income if Drivers transport and provide ride to passengers.  Therefore, without the Drivers’ labor to provide Defendants’ service—the on-demand ride—Defendants’ ride-hailing business would not exist. 

Finally, with respect to Part C of the test (“independently established trade, occupation of business”), the Complaint alleges Drivers are not engaged in an independently established trade as they are not engaged in their own transportation business, but are instead driving passengers and generating income for Defendants.  Additionally, Drivers are not required to have any specialized skills or training and are permitted to drive with an ordinary driver’s license.  Furthermore, Defendants provide Drivers with the necessary tools and instrumentality to provide on-demand rides—the App—the exclusive means by which passengers and Drivers can connect to request and provide Defendants’ ride-hailing service.

The Complaint goes on to allege that Defendants’ intentional misclassification of Drivers constitutes an unfair business practice as it deprives Drivers of their employee rights, including but not limited to: (1) minimum wages; (2) overtime wages; (3) reimbursement of business expenses; (4) meal and rest periods; (5) wage statements; (6) paid sick leave and health benefits and (7) the benefits of Defendants’ contributions to social insurance programs intended to provide wage replacement and other benefits, in the event an employee is unable to work.  Defendants alleged unlawful conduct also harms competitors by allowing Defendants to utilize the savings they gain from depriving Drivers of the full compensation and benefits they are entitled and failing to pay full taxes, to offer their ride-hailing services at an artificially low cost, thereby decimating competitors and generating billions of dollars in private investor wealth.

The Attorney General and City Attorneys are seeking an injunction against Defendants from continued unfair competition, restitution for any monies or property acquired as a result of Defendants’ violation of Bus.& Prof. Code Section 17200 et seq., civil penalties of up to $2,500 per violation of Bus.& Prof. Code Section 17206, and pursuant Bus.& Prof. Code Section 17206.1, additional civil penalties of up to $2,500 per violation of the California’s Unfair Competition Laws perpetrated against any senior citizen or disabled person.

Ballot Initiative?

Prior to the filing of the Complaint, Uber and Lyft, along with a few other tech-based companies, have been in the process of securing signatures for the California App-Based Driver Regulations Initiative, which may appear on the ballot on November 3, 2020.  The ballot measure would consider app-based drivers to be independent contractors and not employees or agents, thereby overriding A.B. 5, on the question of whether app-based drivers are employees or independent contractors.  The ballot measure would also enact a number of labor and wage policies specific to app-based drivers and companies, including a net earnings floor based on 120 percent of the state’s or municipality's minimum wage and 30 cents per mile; a limit to the hours permitted to work during a 24-hour period; healthcare subsidies; occupational accident insurance; and accidental death insurance.  The ballot measure would also require the companies to develop anti-discrimination and sexual harassment policies.  The companies have apparently secured more than enough valid signatures for the measure to appear on the ballot. 

Take-Aways for California Employers

This lawsuit is a clear indication classification issues will continue to be at the forefront of employment related disputes in California, despite the impending California App-Based Driver Regulations Initiative and current statewide shutdown due to the COVID-19 Pandemic.  If a company is using independent contractors, whether as a predominant staffing model, like Uber and Lyft, or on an occasional basis, they should re-evaluate their models.  A wave of like lawsuits brought in a concerted effort by the Attorney General and multiple City Attorneys is foreseeable and could have serious ramifications for business owners.  If you have any questions regarding whether your business may be at risk, you can contact the attorneys at Atkinson, Andelson, Loya, Ruud & Romo to assist you.

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