Uber and Lyft are currently initiating and defending a flurry of legal actions. A California appellate court ruled on October 23, 2020 that an injunction issued against Uber and Lyft was properly issued by a trial court, because the two companies would likely not succeed in their attempt to be exempted from AB 5’s ABC test based on what has already been presented to the court. Due to the Court’s detailed application of the ABC test to the drivers for Uber and Lyft, this opinion serves as a new precedent for other businesses who are also subject to AB 5 and the ABC test.
Recap of Function of ABC Test:
There is a presumption that a person who “provid[es] labor or services for remuneration” is an employee. Dynamex places the burden on the “hiring entity to establish that the worker is an independent contractor who was not intended to be included within the wage order’s coverage.” There are three prongs to the test: (A) worker is free from the control and direction of the hiring entity, (B) worker performs work that is outside the usual course of business for the hiring entity, and (C) worker is customarily engaged in independently established work of the same nature as the work performed for the hiring entity. A hiring entity must show that all three prongs are satisfied before classifying the worker as an independent contractor.
Background:
The People of California requested a preliminary injunction against Uber and Lyft in 2019 to prohibit the two companies from misclassifying their drivers as independent contractors, arguing that the drivers should be considered employees under AB 5. To secure a preliminary injunction, the People had to establish that they are likely to succeed on the merits. The trial court found that the People were likely to succeed on the merits and granted the preliminary injunction, but Uber and Lyft appealed the order that granted the injunction. Here, the appellate court affirmed the trial court’s decision.
Issue:
The overarching issue addressed in this opinion is whether the trial court abused its discretion in granting a preliminary injunction that restrains Uber and Lyft from continuing to classify their drivers as independent contractors.
The Court adds, however, that “[t]he crux of this lawsuit is whether drivers for Uber and Lyft are employees or independent contractors,” under the ABC test, which has been codified in section 2775 of the California Labor Code.
Holding:
The Court ultimately found that there was no legal error in the trial court’s granting of the preliminary injunction, and that the trial court was acting within its discretion. The Court therefor affirmed the order issuing the preliminary injunction against Uber and Lyft.
The Court reiterated throughout its opinion that its decision is not equivalent to a conclusion that the claims of Uber and Lyft are frivolous, but it is instead just a finding that there was no abuse of discretion found at the trial court level in making its decision to issue the injunction.
Reasoning:
1. Clarification of the Importance and Meaning of “Hiring Entity”
Uber and Lyft argued that the threshold question in an ABC analysis should be whether the companies are “hiring entities,” based on an interpretation of the ABC test in Massachusetts and other out-of-state cases that were issued before Dynamex. The Court clarified that the Dynamex decision is not limited by the Massachusetts case law that originally created the outline of the ABC test. The California ABC test is distinguished from the Massachusetts test because California’s test derives from the “suffer or permit to work definition embedded in the wage orders it was construing.”
Uber attempted to argue that the nature of the hiring entity was relevant to consider before even engaging in the ABC Test, but the Court found that this was essentially an attempt by the company to create a “step zero” for the ABC test, “which is inconsistent with the holding in Dynamex.”
Based on the language in Labor Code Section 2775, which is derived from the language of the Dynamex opinion, the Court stated that the meaning of “hiring entity” is “intended to be expansive for reasons specific to California wage and hour laws and the longstanding social safety net objectives of those laws in this state.” The Court further clarified that the nature of a hiring entity is relevant to prong B of the ABC, but it has “no talismanic significance as a threshold indicator of employment status.” Consequently, the Court rejected this “threshold question” argument presented by Uber and Lyft.
2. Application of the ABC Test
To decide if Uber and Lyft would prevail on the merits of their argument that their drivers should not be classified as employees under the ABC test, the Court applied the ABC test to determine if that argument had merit. Prevailing on a claim that drivers are not employees would require that the two companies establish that all three of the ABC factors applied to their drivers. The trial court only addressed the second of the three factors, prong B, and that is what the appellate court decided to focus on here as well. Prong B asks whether the worker performs work that is outside the usual course of the hiring entity’s business. Prongs A and C were not addressed in this opinion.
Providing Services Versus Hiring Employees
The argument from Uber and Lyft is that they provide services to drivers, rather than employ them, and the companies offered expert witnesses to help make their case. Both companies also stated that they do not assign schedules and do not prohibit drivers from switching over to other app-based platforms. Uber and Lyft contended that they are “solely in the business of creating technological platforms, not of transporting passengers.”
The Court relied on several court cases from 2014 through 2020 that found that Uber and Lyft are not merely technology companies, but are transportation companies, and that they only make money if drivers complete rides. Therefore, the Court concluded that Uber and Lyft were not merely providing services. In reliance on these many judicial findings, the Court found a strong suggestion that the trial court did not abuse its discretion in finding that the People had met its burden to show a reasonable probability of success on the merits.
Remuneration
The Court found that the “most pertinent” part of its analysis is regarding a finding of remuneration. The argument made by Uber and Lyft is that these companies are providing services and that these drivers are customers of Uber and Lyft. This argument was not accepted by the Court. Uber and Lyft solicit riders, and those riders place requests and payment for the rides through the apps. More specifically, the court stated that “remuneration here may reasonably be seen as flowing from riders to defendants, then from defendants to drivers, less any fee associated with the ride. With the possible exception of rides obtained using Uber’s Drive Pass subscriptions…defendant’s revenues are directly connected to the fees that riders pay for each ride.” (Uber’s Drive Pass is available in four California cities and provides drivers the opportunity to buy a pass that allows them to receive a 0% service fee on a certain number of rides in a week, resulting in no service fee for Uber.) The Court found these facts to be ample enough to support a conclusion that “whether or not drivers purchase a service from defendants, they perform services for them in the usual course of defendant’s businesses. [Uber and Lyft] depend on riders paying for rides.”
Continual Coordination of Work
Uber and Lyft referred to a number of out-of-state cases where brokers were in charge of matching consumers (i.e., a service supplying hospitals with temporary nurses), and the brokers were not classified as employers. However, none of the cases mentioned by Uber and Lyft involved continual coordination between worker and company at every stage of the work performed or the financial interdependence that the Court found to be present between Uber and Lyft and their drivers. Based on the way that Uber and Lyft operate their businesses, the Court found a presence of “continual coordination between worker and company at every stage of work performed” and “financial interdependence.”
Employer’s Failed Attempt to Adjust to New AB 5 Standard
Since the passage of AB 5, Uber has made changes to its business practice, including providing drivers the option of setting a multiplier for fares and allowing drivers to purchase Drive Passes which can reduce Uber service fees to zero percent. Even though Uber had taken steps since the passage of AB 5 to try to adjust to the new legal standard, the court is “not persuaded they make a difference to the analysis” that the Court provided in this case. In other words, what Uber has done thus far is not enough to exempt it from being subjected to the ABC test.
Regulation by the Public Utilities Commission
Uber and Lyft are regulated by the Public Utilities Commission (PUC) as a “transportation network company,” and they argued that the trial court’s “evaluation of the merits was based on a misapplication” of the governing statutes. The trial court concluded that Uber and Lyft are in the business of transporting passengers for compensation, based on the definitions provided in the regulations. Uber and Lyft disagreed with the trial court’s conclusion. Uber pointed out that some of the business practices it engages in (conducting background checks, ensuring vehicle inspections, ensuring proper licensing of drivers, and reporting numbers of rides requested and accepted) were required by governing statutes or the PUC, and argued that compliance with these standards does not make a driver an employee. The Court agreed that complying with legal requirements is of less importance than independent business choices, but the Court also stated that it is not irrelevant to assess legally compelled practices in the scope of the normal course of business.
Looking at the way Uber and Lyft conduct their businesses as a whole, the Court found that the trial court was proper in finding that the People had more than a reasonable probability of prevailing on the merits of their claims at trial.
Takeaways:
With the California Attorney General and a plethora of district and city attorneys now utilizing their authority to prosecute employers who misclassify workers, it is more important than ever for employers to properly classify their workers.
Although this opinion is not the final conclusion on the arguments brought forward in this case, it does provide a detailed application of the ABC test by the Court, which is helpful for employers who are working to maintain compliance with California’s independent contractor laws.