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Uber, Lyft Legal Blow Widens Door For Labor Law Challenges (1)

Oct. 23, 2020, 8:06 PMUpdated: Oct. 23, 2020, 9:34 PM

A California appeals court ruling that Uber Technologies Inc. and Lyft, Inc. must treat their drivers as employees not only portends steep increases in operating costs that the companies say they can’t afford, but gives workers legal backup to secure a slew of new labor protections.

It defined even more strongly that the ride-sharing companies’ futures will hinge on how California voters decide Proposition 22, a ballot measure that would exempt them from the rigid state law on worker classification that the appeals court backed in its ruling. Polls have indicated the vote, on what has become the most expensive voter initiative in state history, is likely to be close.

If the drivers are classified as employees, gig companies will be on the hook for claims of harassment, discrimination, and workers’ compensation, on top of paying for insurance, benefits, and minimum wage. Workers will also have the right to form a union. The change would lead to an estimated 20% to 40% increase in operations costs. Uber and Lyft have said they will shut down or dramatically reduce their operations in California if Proposition 22 fails.

The companies could face “the whole panoply of employment law litigation,” said Katherine Catlos, a partner in San Francisco with management-side firm Kaufman Dolowich & Voluck LLP. “I would imagine an onslaught of misclassification, unpaid business expenses, harassment claims and unemployment claims caused by Covid-19 too.”

The arbitration agreements that workers sign, a major point of contention in the gig economy, will also potentially keep claims out of court, she said. Workers’ compensation and discrimination claims would remain steeper hurdles to prove in court for drivers even if they are employees.

But there would likely be a wave of litigation over unpaid wages and overtime, said Erin Hatton, a sociology professor at the University at Buffalo, who studies the gig economy and labor policy.

Prop 22 Offers Way Out

Uber, Lyft, and other gig-economy companies have spent $200 million to support Proposition 22. That effort itself led to a lawsuit filed Thursday, just before the appeals court ruling emerged, in which Uber was accused of coercing its own drivers to support the measure.

That lawsuit, alone, may show the benefit of employee status. The California law that forbids employers from attempting to influence political activities protects employees from pressure from companies.

Proposition 22, which is set for a vote Nov. 3, exempts the companies from paying for full benefits that employees currently get under California law, such as unemployment insurance and complete workers’ compensation, while requiring a pay guarantee for drivers’ time on trips, health care contributions, and medical and disability coverage, among others.

It’s an attempt to exempt the gig companies from Assembly Bill 5, or A.B. 5, which sets a narrow standard for classifying workers as contractors and has inspired other states to look at similar proposals. The law codified a 2018 California Supreme Court decision that lays out a three-factor “ABC test” that a company must meet to label its workers as contractors instead of employees.

“The difference is huge. That’s how we structured our labor market,” Hatton said. “All of these benefits and privileges are attached to employment.”

Uber and Lyft have said that a majority of its drivers want to remain independent contractors so they set their own schedules, work as much as they’d like, and not answer to a boss.

Several other states use the ABC test, which in part requires a contractor to do work “outside the usual course of business,” including Massachusetts, New Jersey, and Connecticut. The Massachusetts Attorney General sued Uber and Lyft for not complying with their law, as well.

Recent research from the University of California, Berkeley Labor Center found that most drivers are paid much less than the current minimum wage and if the companies changed their classification to employee, their pay would increase 30 percent. But it also said profits of the companies would increase.

Stronger Case as Employees

Wage-and-hour battles fighting for overtime and minimum wage pay have been common disputes in California and around the country against Uber, Lyft and, other gig economy companies. But being an employee versus a contractor could also prove critical in disputes where drivers and customers say they were harassed or assaulted while using the ride-hailing apps.

In defending dozens of civil lawsuits in court, the companies can claim they’re not responsible for criminal incidents “outside the scope of the employment relationship,” in part because they consider their drivers independent contractors. That distinction is part of the complex balancing test used in cases involving employer liability for negligence and other personal injury claims.

Being forced to treat drivers as employees could mean that alleged victims would have an easier time in court holding them accountable for damages and responsibility for the reported rapes, murders, accidents, and assaults, employment attorneys and academics say—though employers aren’t automatically responsible for the behavior of their workers.

A previous Bloomberg Law analysis of court records found dozens of personal-injury lawsuits filed against Lyft and Uber in state courts in recent years, and Uber has faced at least 30 cases in federal court.

Declaring drivers as employees makes these liability and tort cases “tremendously easier,” said Tyler Fox, of counsel based in Boston with Altman and Altman, who frequently represents workers in sexual assault cases. He said in classifying drivers as contractors, gig companies deny reality and make it harder for victims to sue.

“They can always argue, ‘They aren’t employees, so we aren’t responsible,’” Fox said. “It’s one form of justice that is limited in certain ways if Uber drivers aren’t held to be employees.”

Arbitration Remains Hurdle

Uber and Lyft have long used arbitration agreements to keep driver disputes out of court, which for years allowed them to elude a conclusive ruling on their business models. The agreements have been bolstered by the U.S. Supreme Court and led to thousands of individual arbitration filings against companies, including DoorDash Inc. and Postmates.

“These companies avoided this day of reckoning using their arbitration clauses,” said Shannon Liss-Riordan, a Boston-based attorney who has sued Uber and Lyft over worker misclassification for years.

She said in these cases she has argued that the companies owe drivers reimbursements for business expenses, even if they use their own cars. This is on top of minimum wage, being paid when they are working not just when they have passengers, and overtime.

Arbitration will remain a hurdle for drivers whether they are employees or contractors, but several appeals courts have considered whether they should be exempt from the enforcement of the contracts under a transportation driver exemption in the Federal Arbitration Act. That would allow their claims to move forward in court, rather than in the private-dispute resolution process.

“The biggest barrier to lawsuits by both drivers and consumers is individual arbitration, and A.B. 5 didn’t solve that problem,” said Charlotte Garden, co-associate dean and professor at Seattle University School of Law. “So I think we may see more mass arbitrations, especially aimed at collecting back pay under California law.”

Other companies in California should also take heed of Thursday’s appeals court ruling, said Michael Droke, a labor & employment partner at international law firm Dorsey & Whitney in California.

“This was not the first time a court had issued such a ruling against ride-sharing companies. But with approximately 311,000 drivers in California in 2019 alone, it has a significant impact on the gig-economy model and the companies involved,” Droke said. “The case serves as a pointed reminder to all companies engaging independent contractors in California that each worker classification should be reviewed under the new test.”

(Updated with additional reporting.)

To contact the reporter on this story: Erin Mulvaney in Washington at emulvaney@bloomberglaw.com

To contact the editors responsible for this story: Bernie Kohn at bkohn@bloomberglaw.com; Jay-Anne B. Casuga at jcasuga@bloomberglaw.com

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