The Appellate Court’s Reasoning


Part 4: Resolution For Uber But Precedent Set For Others

By James M. Mulcahy and Allard Chu on November 12, 2020

In the final installment of Mulcahy LLP’s multi-part series on the State of California’s preliminary injunction against Uber and Lyft, we conclude with an update on the relevant ballot initiative Proposition 22 (“Prop 22”) and some thoughts on how the appellate court’s reasoning in affirming may affect others besides from the ridesharing companies.

As we last reported in Part 3: Affirmation Of The State In Uber’s Appeal Against AB-5, the appellate court upheld the trial court’s injunction requiring Uber to reclassify its California drivers as employees instead of independent contractors. However, less than two weeks later, California voters passed Prop 22 to exempt ridesharing companies from AB-5 and allow them to classify their drivers as independent contractors rather than employees.

In a turn of events, the ridesharing and food delivery companies originally targeted by AB-5 will now be able to escape its grasp. However, the judiciary’s rationale in determining that the drivers are employees under the ABC test of AB-5 may be relevant to the application of AB-5 in other industries, including franchising.

The Scope Of Prop 22

While the entire country was voting on our next president, Californians were also voting on whether to override the California legislature with ballot initiative Prop 22. Proponents of Prop 22, including Uber, Lyft, and DoorDash, set a record for raising money for an initiative campaign, raising over $205 million.

The aim of Prop 22 was to create a specific exemption from AB-5 for app-based transportation and delivery drivers such that the drivers could be classified as independent contractors and not employees. This would specifically overrule any findings by the courts that drivers for Uber were employees under the ABC test of AB-5. In an attempt to temper opposition to avoiding classification of drivers as employees, the proposition provided:

  • 120% of the minimum wage and 30 cents per mile for “engaged” driving time, which was defined as time between accepting a service request and completing the request;
  • Health care subsidies equal to 82% of the average California Covered premium for drivers with over 25 hours of engaged driving time per week and 41% for drivers between 15 and 25 hours; and
  • Occupational accident insurance for medical expenses and lost income from injuries while a driver is online.

These concessions by proponents of Prop 22 can be seen as partial substitutes for protections guaranteed to employees.

Prop 22 ultimately passed with approximately 59% of the votes. Passage was far from certain as prior polling showed significant opposition and uncertainty from voters.

Importantly, the proposition paired its provisions with an unprecedented requirement that any amendment to Prop 22 requires a 7/8ths or 87.5% vote of both the state Assembly and Senate. This high threshold for consensus among the Assembly and Senate will make it very difficult to amend. In application, this requirement should make it unlikely for the state legislature to impose additional requirements on ridesharing and delivery companies in the near future.

Additionally, of note, Prop 22 does not appear to be retroactive. As such, it does not absolve Uber of liability for misclassifying drivers for the time period between enactment of AB-5 and enactment of Prop 22. To that extent, the State will almost certainly continue seeking remedies for the past violations.

Uber Is Denied A Rehearing By The Appellate Court

Four days after the public voted to approve Prop 22, Uber unsuccessfully petitioned the appellate court for rehearing. Uber argued that the ballot initiative explicitly displaces and supersedes AB-5. As the changes of Prop 22 will come into effect before the court’s stay until 30 days after remitter, Uber contended that the appellate court’s opinion effectively becomes “a purely academic exercise.” However, the State argued that there was no basis for rehearing because Prop 22 was not yet in effect.

Ultimately, the court denied rehearing without prejudice to Uber’s right to file a motion to vacate in the trial court. Instead, the court modified the opinion so that the previous stay issued on the injunction shall expire 60 days after issuance of the remittitur or 30 days after the trial court rules on a motion to vacate. Prop 22 should be in effect by the expiration of the stay.

Uber Escapes But Leaves Others As Collateral Damage

It is an interesting turn of events that the intended targets of AB-5 were ultimately exempted from its application. AB-5 was specifically intended to force gig economy companies to provide employee benefits to the gig economy workers they use. Uber and Lyft’s combined 500,000 drivers in California were the poster children of the intended group to be protected. Yet, Uber and similar gig economy companies have now avoided the application of AB-5 through sheer willpower, bypassing the legislature and going directly to Californians.

The dilemma now though is assessing the extent to which AB-5 applies to other industries outside of the dominant gig economy hiring entities. Although Prop 22 means that AB-5 will miss its mark of the ridesharing companies, the text of AB-5 may have far reaching effects on other industries. A number of industries have already sought exemption from application of AB-5 through Assembly Bill No. 2257 (“AB-2257”). However, in light of the numerous carve-outs, including Uber now, it then seems like application of AB-5 on an industry becomes an issue of lobbying efforts rather than any specific legislative goal.

As we previously discussed, many in the franchising community have expressed concern with whether AB-5 applies to the franchise model. Although neither Prop 22 nor AB-2257 helped to resolve the concerns of franchisors, Uber’s saga in challenging AB-5 has provided significant discussion from the judiciary that may provide insight on how franchises will be looked upon. If all else fails, franchisors may have a roadmap to follow in terms of seeking a ballot initiative for a carve out for franchise systems from AB-5.

Conclusion

Although Uber’s loss in the courts was ultimately circumvented by the passage of Prop 22, the court battle may provide insight on how other industries will be treated under AB-5. It is ironic, however, that the intended target of AB-5 ended up escaping its clutches and many other industries have resorted to seeking exemptions, leaving remaining industries in the lurch regarding how to deal with AB-5.

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

This article was prepared by James M. Mulcahy (jmulcahy@mulcahyllp.com) and Allard Chu (achu@mulcahyllp.com) of the Irvine law firm of Mulcahy LLP. Mulcahy LLP is a boutique litigation and regulatory 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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