California Court Orders Uber and Lyft to reclassify their drivers as employees

Independent Contractor vs. Employee

On August 10, 2020, San Francisco Superior Court Judge Ethan P. Schulman recently ordered Uber and Lyft to classify its drivers as employees, in a startling upset to the multimillion-dollar rideshare companies that base their business models on working with drivers as independent contractors rather than hiring them as employees. 

Judge Schulman’s decision is in response to a lawsuit filed by city attorneys of Los Angeles, San Francisco, and San Diego, after Uber and Lyft, refused to classify drivers as workers under California State Assembly Bill No. 5 when the law went into effect on January 1, 2020.  California lawmakers introduced State AB-5 back in 2018 to raise the threshold for hiring entities when classifying their workers as independent contractors.  AB-5 requires employers to follow a three-part test, to establish if a worker is an independent contractor.  This law makes it harder for companies to classify workers as independent contractors.  Under The “ABC” test, employers can only classify workers as independent contractors if:

(A) The person is free from the control and direction of the hiring entity in connection with the performance of the work, both under the contract for the performance of the work and in fact;

(B) The person performs work that is outside the usual course of the hiring entity’s business;

(C) The person is customarily engaged in an independently established trade, occupation, or business of the same nature as that involved in the work performed.

Legal Counsel for Uber and Lyft argued that their entities satisfied the threshold mainly because the companies were not in the transportation business, rather, the companies acted as intermediaries when they connected drivers with riders through their app.  Judge Schulman rejected these arguments before handing down his ruling against the rideshare giants and granted California city attorneys a preliminary injunction requiring Uber and Lyft to start reclassifying their drivers by August 21, 2020.  Judge Schulman gave Uber and Lyft 10 days to appeal his decision.  In response, Uber and Lyft have threatened to cease operation in California on August 21, 2020, the day the injunction will take effect, leaving approximately 200,000 drivers without access to their ridesharing app.

While this ruling does not apply to Uber and Lyft’s operations in its’ other markets such as New York, other legislators maybe choose to use California as a model to force Uber and Lyft to classify its drivers as employees.  In New York, drivers for Uber and Lyft independent contractors are treated differently than employees with respect to the rights to minimum wage, overtime, sick leave, employee benefits such as unemployment benefits and workers compensation benefits, anti-discrimination laws as well as other basic protections that protection employees are entitled to in the workplace.  Under New York law, generally, a worker would be classified as an independent contractor if the worker is free from supervision, direction, and control in the performance of their duties.

Ultimately, Uber and Lyft face a harsh reality if other markets require them to classify their drivers as employees.  Not only will Uber and Lyft face rising operating costs to comply with State and Federal Law concerning compensating their new employees, but the flood gates of litigation could also consume the companies.  However, Uber and Lyft may choose to abandon certain markets, similar to their threat in California, to avoid compliance, and leave millions of drivers without access to their platform.

If you any questions on misclassification of employees or independent contractors, contact the New York wage and hour and overtime attorneys Borrelli & Associates, P.L.L.C. immediately to schedule a consultation.