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Uber, Lyft Won’t Eliminate Legal Fights With New Business Models

Aug. 26, 2020, 9:46 AM

The ongoing legal fight in California over the business models used by Uber Technologies Inc. and Lyft Inc. has implications for other industries that rely on independent contractors, and could still mean years of litigation if the ride-sharing companies try shifting to new structures such as franchising.

Uber and Lyft stood down last week on threats to shut down in California, where they get roughly 15% of their business, when an appeals court paused the enforcement of a court order that would force them to convert their drivers to employees from independent contractors. The companies will report to the court on Sept. 4 how they plan to abide by the order.

Such an order would force them to restructure their workforces in California and possibly change to franchise relationships to get around the state law known as A.B. 5. The companies have estimated that the employee classification change would increase costs by 20 to 40%.

“A business calling itself a franchise in an effort to evade the law is like a bank robber saying that they ‘work in finance’—just saying something because it sounds better doesn’t make it true,” Matthew Haller, the senior vice president for government relations and public affairs for the International Franchise Association, said in an email.

An Uber spokesman said that the company won’t speculate about whether it will change its model, and said it’s “continuing to fight for drivers to be able to work the way they want to work, which, by a large margin is as independent contractors and not as hourly employees.” Gig-economy companies including Uber and Postmates Inc. are funding a ballot measure to overturn the California law.

The company in a statement said franchise arrangements would be similar to how UberBlack, its first car service, operated a decade ago, “with higher prices and less reliability.”

“In some models, drivers bring their own cars; in others, the cars are owned by the fleet. In either case, drivers would likely earn a predetermined hourly wage for their time on-app—but, in exchange, fleets would need to monitor and enforce drivers’ activity and efficiency, for instance by putting drivers into shifts, dictating where and when they must drive, and enforcing trip acceptance criteria. We are not sure whether a fleet model would ultimately be viable in California.”

Lyft didn’t respond to a request for comment.

Litigation Would Continue

Legal battles over worker classification were going on for decades before the gig economy brought these issues to the forefront.

A blueprint exists from other cases involving FedEx drivers, janitorial services providers, and construction and hotel workers. FedEx, in fact, moved to a franchise model after a court ruled that the company’s employees were misclassified as independent contractors in 2014.

In an ongoing case in California, JanPro International and a group of its workers have been in a decade-long battle over the janitors’ status. That case implicates the California law that codified the ABC test, which makes it harder to label a worker a contractor. In that case, a janitorial franchise company sells a cleaning franchise to a worker, who isn’t considered an employee but rather an independent contractor.

Altering the contractor relationship to a franchise relationship doesn’t address the underlying issue, said Shannon Liss-Riordan, who represents workers in classification battles in several industries, including the gig company. She represents the workers in the JanPro case, as well as workers against Uber and Lyft.

“This change in model would just be another way that Uber would be trying to avoid its obligations as an employer,” Liss-Riordan said. “We have been fighting—and winning—cases in which companies attempt to dodge employment protections for their workers through franchise and multi-tier schemes. So a shift to this model would just mean further litigation.”

A true franchise follows federal, state, and local regulations, said Haller of the International Franchise Association.

There are approximately 75,000 independent franchises in California, and there’s sympathy to address challenges created by California labor laws for them. There’s less sympathy to solve those same problems for Uber and Lyft, he said.

Legal Blueprint

Because California has relatively stringent labor laws governing joint employment, Uber and Lyft still could be liable for their workers even if they transition to a franchise model, said Rey Fuentes, a fellow with the Partnership for Working Families.

Joint employment liability refers to when two or more companies in franchise, staffing, or other relationships should be on the hook together for labor and employment law violations. The issue has been heavily litigated and subject to controversial federal regulations.

“This is not going to be an easy road for Uber or Lyft in either case,” Fuentes said. The companies could have used “this opportunity of low demand to really figure out a business model that worked, and follows the law, instead of coming up with a new, flashy business model that still breaks the law.”

Teasing the idea of a franchise model buys Uber time and could set it up for success, especially considering how the interpretation of joint employer responsibility has changed during the Trump administration, said Maria Figueroa, Cornell University’s director of labor and policy research at its Worker Institute.

“It’s a strategy game,” she said. “If I were them, I would do it.”

Figueroa agrees with Fuentes that Uber could still be on the hook for some employment liability if it pivots to a franchise model.

“The catch is that the franchisor, like Uber, they will have to still be making sure that the franchisees comply with all of the quality standards that they want to maintain to protect their brands, and that implies a certain level of control over how the work is performed,” she said. “That’s where they run the risk of being perceived as or being classified as a joint employer, and that’s what they’ve been fighting to the death.”

Larger Than Gig Economy

The vast majority of contractors will be covered under the ABC test in California, according to a reportfrom the University of California Berkeley Labor Center. These include truck drivers, janitors, retail workers, and childcare workers, in addition to Uber and Lyft drivers, in the state.

“This is larger than a gig classification issue. It’s part of a larger shifting of structure,” said Jenny Yang, former chair of the Equal Employment Opportunity Commission and senior fellow at the Urban Institute. “These companies keep wages low, but they set up structures to escape liability for worker protections. That’s a broader issue in the latest discussion franchising is raising.”

She said this issue also extends beyond California, where many other states also have strict standards and companies must also comply with the Fair Labor Standards Act.

If Uber and Lyft can continue delaying an order to convert their California drivers to employees and reorganize into franchise models, it would signal to other companies that corporations have the power to avoid complying with the law, said Ken Jacobs, chair of the Berkeley Labor Center.

“These disputes aren’t set up to resolve quickly. The companies have figured out a way to use the law to delay. It’s a process of constant delays,” Jacobs said. “Uber and Lyft have various options here, and we will soon see what they choose.”

To contact the reporters on this story: Erin Mulvaney in Washington at emulvaney@bloomberglaw.com; Paige Smith in Washington at psmith@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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