On August 10, a California court required Uber and Lyft to treat their California drivers as employees. The August 10 order held that Uber and Lyft drivers will almost certainly be found to be employees under California Assembly Bill 5 (“AB-5”). On August 20, the decision was stayed, and the court granted permission to Uber and Lyft to continue temporarily treating drivers as independent contractors.
Everything is officially stalled, but on the minds of many is the question: How does this decision impact the transportation industry as a whole in California?
Background on AB-5
As a refresher, California’s Assembly Bill 5, signed into law in September 2019, essentially adopted what is commonly known as the “ABC Test” to determine employment classification. The ABC Test presumes that workers are employees rather than independent contractors, placing the burden on the presumptive employer to show that each worker they seek to classify as an independent contractor:
- Is free from the direction and control of the presumptive employer regarding the performance of the work;
- Performs work that is outside the usual course of the presumptive employer’s business; and
- Is customarily engaged in an independently established trade, occupation or business of the same nature as the work performed by the worker for the presumptive employer.
While AB-5 was set to go fully into effect on January 1, 2020, the California Trucking Association won an injunction on January 16 as the law applies to trucking.
The Uber/Lyft Order to Classify Drivers as Employees
In May 2020, the California Attorney General, along with the City Attorneys of Los Angeles, San Francisco, and San Diego, sued Uber and Lyft on the theory that they were not classifying their drivers as employees under AB-5. They requested an order forcing the ride-hailing companies to include drivers as employees, including providing employee benefits. On August 10, Superior Court Judge Ethan Schulman granted their request, primarily relying upon the reasoning that the drivers for Uber and Lyft do not perform work that is “outside the usual course” of Uber and Lyft’s business—thus failing part “B” of the test.
Uber and Lyft argued that their businesses encompass far more than transportation and driving, and are best classified as “multi-sided platforms” rather than transportation companies. Judge Schulman did not agree, stating that it went against “economic reality and common sense” to view drivers as tangential rather than central to the ride-hailing industry, and that the statutory provisions regulating Uber and Lyft regard them as transportation network companies, defined as engaging “in the transportation of persons by motor vehicle for compensation”.
Both Uber and Lyft stated that they would not be able to comply with the injunction and announced plans to cease operations in California, at least temporarily. They, additionally, filed for an emergency stay of the order on the grounds that there was no logistical way for them to comply with the preliminary injunction in the given 10-day compliance window. The emergency stay was granted on August 20 for both companies.
What’s Next for Ride Hailing?
The August 20 emergency stay allows Uber and Lyft to continue to classify and treat their drivers as independent contractors while the companies’ appeal of the injunction moves through the court system. The provisions of the stay require that each company submit a detailed brief by September 4, 2020 showing their intentions for future compliance, including a sworn statement from each company’s chief executives agreeing to implement such plans should the court ultimately side with the state.
Also potentially impacting this issue, California has a ballot initiative, Proposition 22, slated for vote in November 2020. It is possible the people of California will vote to exempt passenger and delivery drivers from being classified as employees. Proposition 22 offers to provide drivers with a base pay of 120% the minimum hourly wage, potential healthcare subsidies, vehicle expense compensation, and access to Occupational Accident insurance coverage, even though they would not be classified as employees. The ride-hailing companies Uber and Lyft, as well as delivery companies, have backed Proposition 22.
Impact on Larger Transportation Industry
Although the August 10 injunction, and lengthy opinion by Judge Schulman, sent shockwaves through the entire transportation world, the decision does not have an immediate impact on other transportation entities, such as commercial motor carriers. The opinion was specific to passenger ride shares.
Several ongoing lawsuits remain pending that are specific to motor carriers. In one of those cases, CTA et al v. Xavier Becerra, et al, the US District Court for the Southern District of California has held, at least temporarily, that motor carriers may continue to use the services of owner operator drivers as independent contractors. One of the leading arguments for distinguishing motor carriers is that federal law preempts the state law. Federal preemption refers to the fact that when the laws of the United States federal government conflict with state laws over an issue, the Supremacy Clause of the United States Constitution allows that the federal law will displace, or preempt, the state law.
The federal law at play in this instance is the 1994 Federal Aviation Administration Authorization Act (“FAAAA”). In the FAAAA, Congress sought to eliminate barriers to interstate transport by preempting the individual state laws controlling pricing, routes, and services in the transportation industry that hampered the flow of commerce. Thus, in the case of motor carriers, at least one California court has stopped enforcement of AB5 because that state law may directly encroach on the federal government’s control of interstate transport. The issue remains to be determined, but the trucking industry is urging that enforcement of AB5 and destroying the current owner-operator independent contractor model would undermine the FAAAA and have an impermissible impact on trucking prices, routes, and services.
This is not to mean that the trucking industry should not pay attention to the Uber/Lyft court rulings. While the Uber/Lyft injunction does not concern federal preemption and the FAAAA, it does show that at least one court has taken strong steps to enforce compliance with AB-5. Uber and Lyft’s response to continued legal pressure from the state may show a possible pathway to recourse for the transportation industry as a whole—if you can’t win in the courts, take it to the voters through a ballot measure.
Taylor and Associates is a full-service transportation law firm assisting clients to meet their federal and state compliance requirements. If you have questions about this or other issues, contact us.
Co-authors: Kristen Johnson & Elizabeth M. Slattery