The shutdown of the ride-hailing apps Uber Technologies, Inc. and Lyft, Inc. in the state of California was narrowly avoided this week when a judge temporarily halted an order that had required the apps to reclassify their drivers as “employees” so the companies could appeal the decision.
This latest development comes on the back of a long dispute between the ride-sharing services and the California legislature on the classification of drivers as “independent contractors” or “employees.”
Although a chaotic shutdown of operations appears to have been temporarily avoided, the central dispute remains to be solved.
What happens in California could have significant implications for the rest of the United States and the very future of Uber and Lyft.
Contractor or employee?
The recent escalation in the dispute between the ride-hailing apps and California centers on one key issue – the classification of Uber and Lyft drivers as “employees” or “independent contractors.”
Prior to its 2019 IPO (initial public offering), Uber filed documents stating that it believed its drivers “are independent contractors.” Uber cited its drivers’ freedom to choose whether, when and where to provide their service on the Uber platform.
Michael Trust, a California-based HR Consultant, told TMS that the stance of Uber and many other “gig” companies, “is that they simply provide a technological platform where buyers and sellers (in this case, riders and drivers) can share information and connect.”
Uber and Lyft “fundamentally do not believe that they are in the rideshare business, but rather the tech business,” Trust stated.
Uber and Lyft have faced difficulties over these “independent contractor” classifications of their workers before, particularly outside of the US.
In 2018, a court in the United Kingdom held that Uber’s drivers should be classed as workers with access to minimum wage and paid holidays. Earlier this year a French court also ruled that a former Uber driver should have been considered an employee and been employed with a contract, denting Uber’s “independent contractor” claims.
The escalation of this issue of employee classification in the US, specifically California, comes as a result of a new labor law adopted in September 2019 that came into force at the beginning of this year.
The law, known as AB5, targeted the alleged “misclassification” of workers that is prevalent in the gig economy. California’s Labor Federation stated that this law solidified California’s “position as the national leader on workplace rights, setting the standard for the rest of the country to follow.”
The new law adopted an “ABC” test whose criteria must be met for a worker to be defined as an independent contractor. Criteria required that a worker be free from the control of the “hiring entity,” that they perform work outside of the company’s main line of business and that they are regularly engaged in an “independent” business of the same nature as the work performed.
Uber initially piloted new features on its app in California in the hope that this would allow it to avoid reclassifying its drivers as employees. New features included letting drivers set their own payment rates and providing them with more ride details upfront than before.
Critics, however, were not impressed.
Steve Gregg, an organizer for the “Gig Workers Rising” group stated that these efforts were “a smokescreen to make it look like we have more say than we do” and stopped far short of providing the same benefits provided to employees, including minimum wage and health insurance.
Despite these efforts to avoid the new law’s stipulations, Uber and Lyft faced a suit filed by the California Attorney General, alongside several city attorneys, in May of this year that asserted that the companies “gain an unfair and unlawful competitive advantage by misclassifying workers as independent contractors.”
Further pressure was added by the filing of another motion in June 2020 that aimed to force Uber and Lyft to reclassify their workers as employees.
Classifying their workers as independent contractors has allowed the ride-hailing apps to cut costs and avoid paying out several key benefits.
Brian Cairns, the chief executive officer of ProStrategix Consulting, told TMS that by classifying its workers this way, ride-hailing apps “hurts the states disproportionally” because “contract or self-employed individuals do not pay payroll taxes.”
A California judge ruled this month that Uber and Lyft drivers were in fact employees, an announcement that resulted in an immediate drop in the share price of the companies.
While the injunction reclassifying Uber and Lyft drivers as employees has been temporarily halted, with both Uber and Lyft stating that their operations would have to be shut down in California for months in order to comply, the dispute is far from over.
Uber and Lyft account for roughly a combined 500,000 drivers in California. The futures of these drivers now appears uncertain given the recent court developments. The coronavirus pandemic has already seen Uber lay off thousands of its engineers and other nondriver employees.
Oral arguments for Uber and Lyft’s appeal against the reclassification are expected to begin this October. A measure, sponsored by many gig companies, will also be put to a vote in a ballot referendum this November in California, which would create a third way of classifying gig workers, but still stops short of providing the full benefits entitled to full-fledged employees.
Uber’s CEO has argued that the potential reclassification of its drivers as “employees” would have a profound impact, which would see some casual workers “not be able to earn” while “prices are going to go up.”
Brain Cairns argues that, given the budget crises many states across the US are facing as a result of the coronavirus pandemic, it is likely that the outcome of these reclassification efforts in California will have national repercussions with worker-friendly states such as New York and New Jersey following suit if California is successful.
The chances that Uber, Lyft and gig companies more generally prevail in the dispute appear slim, with the passing of the AB5 law demonstrating the attention that the California legislature is paying to this issue in particular.
According to Michael Trust, “Uber and Lyft have already lost and anyone who follows CA employment law seriously would not think that Uber and Lyft will prevail on appeal.”
The unresolved dispute over their workers’ classifications hangs over the ride-sharing apps’ operations, not just in California, but throughout the US and the world.
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