Uber to reclassify its drivers as employees


Affirmation Of The State In Uber’s Appeal Against AB-5

By James M. Mulcahy and Allard Chu on October 26, 2020

As detailed in Mulcahy LLP’s multi-part series starting with "Where Uber Is In California And Where It Is Going", Uber recently appealed a state court preliminary injunction requiring Uber to reclassify its drivers as employees pursuant to Assembly Bill-5. In part 3 of Mulcahy LLP’s multi-part series on Uber’s appeal, we take a look at the opinion upholding the state court preliminary injunction. In a surprisingly speedy response, the appellate court issued its 70-page opinion less than two weeks after oral arguments.

The Appellate Court Upholds That Uber Has Misclassified Drivers as Independent Contractors

On October 22, 2020, the appellate court upheld the trial court’s injunction requiring Uber to reclassify its California drivers as employees instead of independent contractors. This comes just nine days after oral arguments were heard on October 13, 2020.

In the unanimous opinion, the appellate court found that the State is likely to prevail on the merits with respect to AB-5. It rejected a threshold challenge by Uber that it was not subject to the ABC test of AB-5 as it was not a hiring entity as envisioned under AB-5. The court instead provided that the issue of whether Uber was a hiring entity was part of the Prong B of the ABC test, which looks to whether the worker’s work is “outside the usual course” of the hiring entity’s business.

The court further evaluated Uber’s arguments with respect to the ABC test, noting that Uber must establish all three prongs to show its drivers are independent contractors. Although the court recognized that Uber drivers had flexibility different from the traditional workplace, it found that Uber’s business “depend[s] on riders paying for riders. The drivers provide the services necessary for [Uber’s business] to prosper.” Slip op. at 36.

In its Prong B analysis, the court rejected Uber’s attempt to distinguish itself as a technology company rather than a transportation company. The court found that Uber’s business model was inherently based on its drivers driving passengers. It quoted language from prior cases where courts had rejected Uber’s argument that it was not a transportation company: “Uber does not simply sell software; it sells rides.” Slip op. at 32 (quoting O’Connor v. Uber Technologies, Inc., 82 F.Supp.3d 1133, 1141 (N.D.Cal. 2015)). 

Additionally, the court rejected Uber’s arguments that the State did not establish irreparable harm and that the injunction would itself cause irreparable harm. Instead, there was concern of irreparable harm as Uber did not currently have a means to track when drivers are not transporting passengers and what benefits that would be entitled to. Without interim injunctive relief, the court posited that Uber could not be held accountable for its ongoing failure to provide benefits.

Separately, the court agreed with the State’s argument that Uber “suffers no grave or irreparable harm by being prohibited from violating the law.” Id. at 52. Uber’s argument that the injunction causing irreparable was also unpersuasive as the court said Uber already had two years to make contingency plans. Moreover, the court noted that part of the appeal process had been the requirement that Uber provide a statement that it could enact policy changes within 30 days to bring itself into compliance with AB-5. The court took a dim view of Uber’s argument as it noted that Uber should have evaluated the situation when the Dynamex opinion establishing the ABC test issued and again when AB-5 passed.

In sum, the court supported the trial court’s finding “that rectifying the various forms of irreparable harm shown by the People more strongly serves the public interest than protecting Uber, Lyft, their shareholders, and all of those who have come to rely on the advantages of online ride-sharing delivered by a business model that does not provide employment benefits to drivers.” Id. at 62.

Uber’s Recourse

  • Voter Proposition 22

With their second loss in court, Uber will undoubtedly redouble its efforts on getting Proposition 22 passed. Proposition 22 seeks to exempt app-based transportation and delivery companies from AB-5 and allows the drivers to be classified as independent contractors. Importantly, Proposition 22 includes a 7/8th super majority in the California legislature to change the terms.

Uber and other rideshare companies have spent over $170 million backing Proposition 22. However, its passage is far from certain as the voting public weighs exempting Uber from AB-5, which was targeted at Uber and other gig economy companies.

Nearly two months after the polling by Redfield & Wilton Strategies mentioned in Part 2 of this series, a recent UC Berkeley poll https://escholarship.org/uc/item/4cd2r446 still has Prop 22 ahead, but at a much reduced margin of 39% “Yes” to 36% “No” with a significant percentage of voters still undecided (25%).

As an aside, Uber’s push for support has led to drivers filing a class action complaint alleging that Uber is coercing drivers to support Proposition 22 in violation of employment rights. The lawsuit is case no. CGC-20-587266 filed in the Superior Court for the County of San Francisco. The lawsuit alleges that Uber has used in-app messages to unlawfully push for drivers to vote for Proposition 22 when California law prohibits employers from controlling or directing their employees’ political activities.

  • Petition to the California Supreme Court

In addition to their on-going support for Proposition 22, it is highly likely that Uber will petition the California Supreme Court to review the lower courts. Uber has ten days from the appellate decision becoming final to petition the Supreme Court. Due to the timing of the opinion nearly two weeks in advance of the November 3, 2020 election date, Uber will likely try to preserve this option should Proposition 22 fail to pass.

  • Contemplation of a Franchise Model

If Uber is unsuccessful with both Proposition 22 and further appeal, Uber will have to contemplate restructuring its business to comply with AB-5 while still working towards profitability. In Part 2 of this multi-part series, we evaluated Uber’s potential restructuring as a franchise system. [CHRIS: PLEASE LINK TO PART 2 ARTICLE],

Conclusion

Whether Uber is successful in overcoming the presumption of its drivers being employees under AB-5 will have consequences potentially reaching beyond rideshare companies. If unsuccessful, Uber may have to significantly overhaul its operating model. Please join us while we evaluate Uber’s strategy as it unfolds in real-time with Mulcahy LLP’s multi-part series.

Part 1: Where Uber Is In California And Where It Is Going

Part 2: Can Uber Avoid Labor Laws With A Franchise Model? Doubtful

Part 4: Resolution For Uber But Precedent Set For Others

This article was prepared by James M. Mulcahy (jmulcahy@mulcahyllp.com) and Allard Chu (achu@mulcahyllp.com) of the Orange County, California law firm of Mulcahy LLP. Mulcahy LLP is a boutique litigation firm that provides legal services to franchisors, manufacturers and other companies in the areas of franchise, trademark, trade secret, unfair competition, and distribution laws.

Disclaimer: While every effort has been made to ensure the accuracy of this article, it is not intended to provide legal advice as individual situations will differ and should be discussed with an experienced franchise lawyer. For specific technical or legal advice on the information provided and related topics, please contact the author.

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