A San Francisco Superior Court judge dealt Uber and Lyft a significant blow Monday, issuing a preliminary injunction that requires the companies to temporarily classify their drivers as employees while the state’s lawsuit against them is heard.
Judge Ethan Schulman issued the ruling after hearing arguments in the preliminary injunction request Thursday. The case stems from a lawsuit filed in May by the California Attorney General’s office and city attorney offices in San Francisco, San Diego and Los Angeles seeking to force Uber and Lyft to comply with gig worker law AB 5.
The preliminary injunction will take effect in 10 days and remain in place until the case goes to trial and a ruling is made in that case, or upon further notice from the court.
“Drivers do not want to be employees, full stop,” Lyft (NASDAQ: LYFT) said in a statement. “We’ll immediately appeal this ruling and continue to fight for their independence. Ultimately, we believe this issue will be decided by California voters and that they will side with drivers.”
The two ride-hailing giants are pouring millions into a November ballot initiative that would overturn major provisions in AB 5, which was passed last September by the California General Assembly and took effect Jan. 1. The ballot initiative, if passed, would exempt Uber, Lyft and other app-based drivers like DoorDash, Postmates and Instacart from abiding by AB 5, which seeks to reclassify a wide swath of contractors as employees.
“The court’s ruling is stayed for a minimum of 10 days, and we plan to file an immediate emergency appeal on behalf of California drivers. The vast majority of drivers want to work independently, and we’ve already made significantchanges to our app to ensure that remains the case under California law. When over 3 million Californians are without a job, our elected leaders should be focused on creating work, not trying to shut down an entire industry during an economic depression,” an Uber spokesman said.
The court’s ruling affects any Uber or Lyft driver in California signed up to drive for either company, or with one of the companies’ subsidiaries, under their own name, or as a fictional or corporate name, and are paid by either company or their subsidiaries, according to a copy of the ruling.
“The People have shown a reasonable probability (indeed, an overwhelming likelihood) of prevailing on the merits of their claim that Defendants are violating A.B. [5] by misclassifying their drivers as independent contractors,” Judge Schulman said in his ruling. “Defendants have not shown that they would suffer such grave or irreparable harm if an injunction were to issue requiring them to comply with California law that would outweigh the harms to their drivers, other businesses, and the public generally if the Court were to deny the People’s motion.”
The judge took issue with the companies’ arguments that they were not “hiring entities” and, as a result, would not be subject to AB 5.
“Defendants assert that they are not hiring entities within the meaning of AB 5 because their drivers do not provide services to them and Defendants do not pay remuneration to drivers for their services. Nonsense,” Judge Schulman contended, adding, “defendants do not contest the People’s showing that they 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.”
Judge Schulman also took umbrage with the companies’ arguments that they were not in the business of providing transportation to passengers for compensation, but instead were purely a technology platform that matched drivers and riders. Uber, for example, noted transporting riders was outside the company’s normal business and the work performed by its employees.
“Uber’s argument is a classic example of circular reasoning, because it regards itself as a technology company and considers only tech workers to be its ’employees,’ anybody else is outside the the ordinary course of its business, and therefore is not an employee,” said Judge Schulman.
During the preliminary hearing last week, Uber and Lyft cited the financial harm that would come to the companies, their drivers and riders if they were forced to reclassify drivers as employees. Judge Schulman, however, did not put much weight in those arguments.
The judge took into account statements from Uber and Lyft drivers who testified working long-hours to support their families without the benefit of overtime pay, rest or meal breaks, or compensation when waiting for rides or returning from dropping off a passenger without a new passenger for the return trip. He also noted drivers did not receive reimbursement for businesses expenses like gasoline, car insurance or maintenance on the vehicle.
“Defendants have not shown that the harm to them from issuance of an injunction requiring them to comply with California law would be ‘grave or irreparable.’ Even if they could, they have not shown that any harm to them would outweigh the harm to drivers, competing businesses, and the general public in the absence of an injunction,” Schulman said.
Both Uber and Lyft stock were down more than 2% in after-hours trading.