Uber and Lyft must make their drivers in California full employees, judge rules

California Superior Court Judge Ethan Schulman said the companies had failed to comply with the state's landmark Assembly Bill 5, which was signed into law last year and classified certain categories of gig workers as employees. Schulman ordered the companies to stop referring to drivers as independent contractors and comply with unemployment and wage floor provisions for the workers.

The companies argue they are technology platforms rather than transportation services and that drivers aren't core to their platforms.

Schulman laid into Uber and Lyft's arguments, issuing an injunction to enforce the law on grounds that "none" of their pleas for delay were "persuasive" and they weren't likely to prevail at trial. The state's lawsuit had sought the injunction to allow for enforcement of AB5 against Uber and Lyft, which argued the employment provision did not apply to their companies. Uber and Lyft, he said, "cannot possibly" succeed in arguing drivers aren't core to their business.

"It's this simple: Defendants' drivers do not perform work that is 'outside the usual course' of their business," Schulman wrote.

The ruling does not automatically convert the state's ride-hailing drivers into employees and instead kicks off what is expected to be a lengthy appeal process. The ruling was stayed for 10 days to allow for an appeal. Uber and Lyft said Monday they plan to appeal.

By considering their millions of drivers as contractors, not full employees, Uber and Lyft are able to offer quick and low-cost rides by maximizing the number of drivers on their platforms, emphasizing the ease of signing up and refraining from providing them benefits such as health insurance as they champion so-called flexible work models.

"The vast majority of drivers want to work independently, and we've already made significant changes to our app to ensure that remains the case under California law," Uber spokesperson Noah Edwardsen said. "When over 3 million Californians are without a job, our elected leaders should be focused on creating work, not trying to shut down an entire industry during an economic depression."

"Drivers do not want to be employees, full stop," Lyft spokesperson Julie Wood said.

Both companies cited an independent but unscientific driver survey that found more than 70% of 734 respondents identifying themselves as drivers said they did not want to be classified as employees. The company argued that many turn to gig work as a temporary outlet when they lose their jobs or find themselves in adverse economic circumstances, and said 86% of its drivers in California work less than 20 hours per week. Those drivers champion the flexibility of contract work, Lyft argues.

Uber and Lyft have suffered substantial losses during the pandemic as rides have nearly evaporated, with Uber's bookings declining 75% in the period from April through June. Lyft, which said rides were down 75% in April, reports on its quarterly earnings this week.

The companies argue that reclassifying drivers as employees would be a costly endeavor that would practically redefine their business model, forcing them to establish schedules in what has traditionally been a flexible work arrangement and changing the passenger experience, leaving a costlier and less convenient app in its wake.

Schulman noted the adverse economic impact the pandemic has had on the companies, but noted the historic ridership lows presented an opportunity to rebuild their services around adhering to the law.

The order could have broad implications not only for ride-hailing but the tech industry which relies on gig work to stand up massive labor forces without providing them the traditional benefits of employment. Under AB5, companies are required to prove that independent contractors are performing work outside the business's core function, are free from the entity's control and traditionally perform such work independently of the company.

"Uber's argument is a classic example of circular reasoning: because it regards itself as a technology company and considers only tech workers to be its 'employees,' anybody else is outside the ordinary course of its business," Schulman wrote. "Were this reasoning to be accepted, the rapidly expanding majority of industries that rely heavily on technology could with impunity deprive legions of workers of the basic protections afforded to employees by state labor and employment laws."

The lawsuit leading to Monday's injunction was filed in May by California Attorney General Xavier Becerra along with the city attorneys of San Francisco, San Diego and Los Angeles.

"The court has weighed in and agreed: Uber and Lyft need to put a stop to unlawful misclassification of their drivers while our litigation continues," Becerra said in a statement. "Our state and workers shouldn't have to foot the bill when big businesses try to skip out on their responsibilities. We're going to keep working to make sure Uber and Lyft play by the rules."

Uber, Lyft and other gig work companies in the food delivery sector are backing a ballot initiative aimed at establishing their drivers and couriers as a separate class of worker with benefits, exempting them from the employment requirement of AB5. They've poured $110 million into the effort, which is expected to be on the November general election ballot.