CA v. The Gig Economy

Redefining Misclassification: What Uber and
Lyft’s Worker Classification Battle Means for

the Future of California’s Gig Economy

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By: Josue Aparicio1

Last week, a California Judge granted a preliminary injunction ordering that the popular ride-
hailing companies, Uber and Lyft, stop classifying their drivers as independent contractors during
the pendency of their litigation against the state of California.

In May, California Attorney General Xavier Becerra joined forces with the City Attorneys of San
Francisco, Los Angeles and San Diego to file a lawsuit against Uber and Lyft, asserting the two
companies misclassified their drivers as independent contractors in violation of California’s
Assembly Bill No. 5 (“A.B. 5”). Then, in June, the State moved for a preliminary injunction
enjoining Uber and Lyft from classifying their drivers as independent contractors.

Uber and Lyft opposed the State’s
motion, and filed three additional
motions,2 including a motion to
stay the litigation until the Ninth
Circuit rules on Uber’s pending
constitutional challenges to A.B. 5;
or at least until the November
2020 election when California’s
voters will consider Proposition
22, a California ballot initiative
that, if enacted, would classify
certain app-based drivers as
independent contractors and
essentially override A.B. 5. The
court did not take kindly to the companies’ additional motions, which it characterized as the
companies’ “attempt to delay or avoid a determination [on] whether … they are engaged in
ongoing and widespread violations of A.B. 5.”

In a 34-page decision, Judge Ethan Schulman of the San Francisco Superior Court granted the
State’s preliminary injunction. The ruling does not automatically convert California’s Uber and
Lyft drivers into employees, instead it sets up what is expected to be a lengthy appeal process
arising from California’s ongoing enforcement of its controversial new law, A.B. 5. If upheld, the
ruling would require Uber and Lyft to substantially change their business practices, including
reclassifying thousands of drivers as employees and providing them certain benefits employees
are entitled to under California law, such as minimum wage, overtime pay, workers’
compensation, unemployment insurance, paid sick leave, and paid family leave.

1 Josue Aparicio is an Attorney with Freeman, Mathis & Gary who specializes in worker misclassification claims
under California law. (https://www.fmglaw.com/attorney_bio.php?id=408)
2 Uber and Lyft filed three additional motions: (1) a motion to stay the litigation; (2) a demurrer and motion to
strike; and (3) a motion to compel arbitration.

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Importantly, the ruling also poses an existential threat to the “gig economy” business model,
which relies on a fleet of app-based, on demand, independent contractors. The following are just
a few ways Judge Schulman’s monumental decision may impact the future of California’s gig
economy:

Gig Economy Companies Are “Hiring Entities” Within the Meaning of A.B. 5

A.B. 5, which took effect on January 1, 2020, codified the so-called “ABC test” adopted by the
California Supreme Court in its 2018 landmark decision, Dynamex Operations West, Inc. v.
Superior Court.3 Under the ABC test, any person providing labor or services for remuneration is
presumed to be an employee, rather than an independent contractor, unless the “hiring entity”
demonstrates that all three of the following conditions are satisfied:4

A. The person is free from the control and direction of the hiring entity in connection with
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.

In opposition to the State’s motion for preliminary injunction, Uber and Lyft asserted that A.B. 5
did not apply to them at all because they are not “hiring entities” within the meaning of the
statute. Specifically, the companies argued that they are not “hiring entities” because “their

drivers do not provide services to them” and
neither Uber nor Lyft remunerate the drivers
for their services, rather it is the passengers
who compensate the drivers. The court found
this argument meritless for three key reasons.

First, the court held that A.B. 5 does not
establish any “threshold requirement” to
show that a putative employer is a “hiring
entity” before applying the ABC test. Instead,
as the court noted, the “ABC test focuses on
the individual worker, not on the employer.”5

3 Dynamex Operations West, Inc. v. Superior Court (2018) 4 Cal.5th 903.
4 Lab. Code § 2750.3(a)(1)
5 The court added that the legislature’s use of the undefined term “hiring entity,” was intended to avoid using the
term “employer,” and is synonymous with the more cumbersome phrase “the person to whom service is
rendered” that was commonly used under the Borello test that predated the enactment of A.B. 5.

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Second, the court found that “nothing in the plain statutory language requires that the
‘remuneration’ be paid directly by the ‘hiring entity,’ only that the individual must be ‘providing
labor or services for remuneration.’”

Finally, the court concluded that Uber and Lyft are indeed hiring entities because they are
regulated by the California Public Utilities Code, which provides that a transportation company
“shall not contract with, employ, or retain a driver” who has been convicted of certain criminal
offenses.”6 Additionally, Uber and Lyft “set drivers’ qualification standards, solicit applications,
conduct background checks and in-person interviews with applicants, engage certain applicants
as drivers while rejecting others, and enter into standard form contracts with drivers.” Under the
court’s interpretation, contracting with or retaining drivers constitutes “hiring.”

The Court’s interpretation of the term “hiring entity,” which is undefined in the statute, is
problematic for the gig economy because it would essentially cover all gig economy companies
regardless of the “control” a company exerts over workers. In fact, under Judge Schulman’s
interpretation, the company’s conduct is somewhat irrelevant because the analysis would focus
on whether the individual worker provided labor or services for remuneration, rather than
whether the company directly compensated or contracted with the gig worker.

Gig Economy Companies in the Business of Transporting Passengers (or Goods)
May Not Satisfy the ABC Test

In determining whether the State had a reasonably probability of prevailing on its
misclassification claim, the court found that it need only address the “B” prong of the ABC test,
which asks whether “[t]he person performs work that is outside the usual course of the hiring
entity’s business.”7 However, in order to answer that question, the court first had to identify the
nature of Uber and Lyft’s “usual business operation.”

Uber and Lyft both vigorously deny that they are “transportation companies” or otherwise in the
business of providing transportation services. Instead, they assert that they are purely
“technology companies,” which manage online platforms that operate as “matchmakers” to
facilitate transactions between drivers and passengers. Under their reasoning, the companies’
business is the online platform itself—the smartphone app—and thus the work performed by the
drivers (e.g., transporting passengers) is outside the usual course of their business.

6 Pub. Util. Code § 5445.2(a)(2), (3).
7 Lab. Code § 2750.3(a)(1)(B).

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The court rejected this argument and held that Uber and Lyft’s “entire business is that of
transporting passengers for compensation.” In so holding, the court found that “[u]nlike an
independent plumber or electrician who may visit a retail store on one occasion to perform a
single, limited task such as repairing a leak or installing a new electrical line, [Uber and Lyft’s]
drivers are part of their usual, everyday business operations, and their work falls squarely within
the ordinary course of that business.”

This analysis can easily be applied
to some of today’s most popular
gig economy companies whose
businesses primarily involve
delivering groceries such as
Instacart and Amazon’s Prime
Now; or delivering meals, such as
DoorDash, Postmates, GrubHub
and even Uber’s other business,
“Uber Eats.” Just like Uber and
Lyft, these companies utilize a fleet
of independent contractors to
transport goods to consumers.
Under Judge Schulman’s
interpretation of the nature of a company’s business, all of these companies would likely be
unable to satisfy the “B” prong of the ABC test.

California Courts Will Grant a Preliminary Injunction to Prevent Worker
Misclassification Even if it Potentially Displaces Thousands of Workers

In determining whether substantial public harm would result if it did not issue a preliminary
injunction, the Court relied on guidance from the California Supreme Court’s Dynamex decision,
and the Legislature’s intent in enacting A.B. 5. In doing so, the court recognized that
misclassification of workers: (1) harms “the misclassified workers who lose significant workplace
protections,” (2) is unfair “to employers who must compete with companies that misclassify,”
and (3) causes the state to lose needed revenue, such as payment of payroll taxes, premiums for
workers’ compensation, Social Security, unemployment and disability insurance. The court also
reviewed numerous declarations from individual drivers who testified that although they work
grueling hours for Uber and Lyft, they receive no overtime pay, no meal or rest breaks, no
compensation for time waiting for fares; nor are they reimbursed for business expenses, such as
the cost of vehicle maintenance, insurance, gasoline or cell phone use.

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In response, Uber and Lyft stressed that they would suffer irreparable harm if they were required
to comply with A.B. 5, including incurring substantial costs associated with restructuring their
entire business model. The companies also highlighted that a preliminary injunction could have
adverse effects on their drivers, including the risk that some drivers would be unable to continue
earning income, and the risk that if reclassified as employees the drivers could lose their eligibility
for emergency federal benefits available to self-employed workers during the COVID-19
pandemic.
The Court, however, had little sympathy for Uber and Lyft, and found that the potential adverse
effects on drivers are substantially mitigated for two reasons. First, as Uber and Lyft emphasized,
the vast majority of drivers work on a casual or sporadic basis, for a limited number of hours per
week, and thus the effects on such drivers are likely to be correspondingly minor. Second, since

the ongoing pandemic has drastically reduced the demand for Uber and Lyft’s services, now may
be the best time for them to change their business model without causing widespread adverse
effects on their drivers. Accordingly, although Judge Schulman recognized that Uber and Lyft had
shown some measure of irreparable harm, he nevertheless held that “the balance of equities and
public interest weigh[ed] in favor of permitting the State to enforce [A.B. 5.]”
This decision should send a message to all gig economy companies regardless of the size of their
workforce or customer base. Courts will indeed enforce injunctive relief against a company even

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if it means displacing thousands of workers at a time where the country is facing mass layoffs and
unprecedent unemployment rates. In Judge Schulman view, companies “may not evade
legislative mandates simply because their businesses are so large that they affect the lives of
thousands of people.”

California’s Ongoing Efforts to Enforce A.B. 5 on the Gig Economy

California has made clear that it
intends to fully enforce A.B. 5 on the
gig economy. At the beginning of the
year, Governor Newsom allocated
approximately $21 million in
additional funding to aid California’s
government agencies in enforcing
A.B. 5, including $17.5 million for the
Department of Industrial Relations,
$3.4 million for the Employment
Development Department, and
$780,000 for the Department of
Justice.8 Since then, California’s state
and local government agencies have initiated several lawsuits to enforce A.B. 5.

In February, the San Diego City Attorney’s office obtained a similar preliminary injunction against
the grocery-delivery platform, Instacart, alleging the company misclassifies its shoppers and
delivery drivers as independent contractors in violation of A.B. 5.9

In June, the San Francisco District Attorney’s office filed a lawsuit10 against the takeout delivery
platform, DoorDash, Inc., alleging the company misclassifies its delivery drivers as independent
contractors in violation of A.B. 5. That action also seeks a preliminary injunction against
DoorDash, which will soon be decided by Judge Anne-Christine Massullo of the San Francisco
Superior Court.

Finally, just last week, the California Labor Commissioner’s Office filed a pair of lawsuits in
Alameda County Superior Court, which allege Uber and Lyft committed systemic wage theft by
misclassifying drivers as independent contractors.

8 http://www.ebudget.ca.gov/2020-21/pdf/Enacted/BudgetSummary/FullBudgetSummary.pdf
9 The People of the State of California v. Mablebear, Inc., San Diego Superior Court, Case No. 37-2019-00048731
10 The People of the State of California v. DoorDash, Inc., San Francisco Superior Court, Case No. CGC-20-584789
(filed June 16, 2020).

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In response, three tech companies—Uber,
Lyft, and Doordash—funded and filed
Proposition 22,11 a California ballot initiative
on the November 2020 ballot that, if enacted,
would classify certain app-based drivers as
independent contractors and essentially
override A.B. 5. Uber and Postmates, Inc. also
filed a lawsuit12 in federal court against the
State of California asserting that A.B. 5
unconstitutionally “targets” gig economy
companies and treats them differently from
similarly situated groups. In February 2020, a
federal district court denied Uber and
Postmates’ request for a preliminary
injunction that would have prevented the
state of California from enforcing A.B. 5
against the two tech companies. An appeal to
this ruling is pending in the Ninth Circuit
Court of Appeal.

Uber CEO Dara Khosrowshahi has even
turned to the federal government for
assistance. In a letter to President Donald
Trump, Khosrowshahi encouraged the
formation of a “third way” to classify workers
to be built into labor laws.

Freeman, Mathis & Gary will continue to monitor California’s increased efforts to enforce A.B. 5
and will report on further developments. If you have any questions or would like more
information, please contact Josue Aparicio at [email protected]

DISCLAIMER: Information conveyed in this document should not be construed as legal advice or represent any
specific or binding policy or procedure of any organization. Information provided in this presentation is for
educational purposes only. These materials are written in a general format and not intended to be advice
applicable to any specific circumstance. Legal opinions may vary when based on subtle factual distinctions. All
rights reserved. No part of this presentation may be reproduced, published or posted without the written
permission of Freeman Mathis & Gary, LLP.

11 Proposition 22, the Protect App-Based Drivers and Services Act, would provide that app-based rideshare and
delivery drivers are independent contractors and not employees or agents with respect to their relationship with a
network company if certain conditions are met. (Qualified Statewide Ballot Measures, Cal. Secretary of State,
https://www.sos.ca.gov/elections/ballot-measures/qualified-ballot-measures/).
12 Olson v. California (C.D. Cal. Feb. 10, 2020) No. CV 19-10956-DMG, appeal filed, No. 20-55267 (March 11, 2020)

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