Rideshare companies, like Uber and Lyft, and their equivalent app-based food delivery services have moved closer to being the targets of a forthcoming raft of potentially costly lawsuits accusing the companies of misclassifying their drivers as independent contractors under a controversial California state labor law, after the U.S. Supreme Court refused to take up one of the rideshare companies' appeals seeking to block enforcement of the law.
On Oct. 7, the U.S. Supreme Court denied petitions from Uber and Lyft to review and potentially overturn on appeal the ruling from a California state appellate court saying the companies can't use federal law to curb legal action against the companies by California Attorney General Rob Bonta and the city attorneys of Los Angeles, San Diego and San Francisco.
The denial came without any noted dissents from any of the high court's nine justices.
The legal action, commenced in 2020 by Bonta's predecessor and the attorneys from three of California's largest cities, accused the highly popular rideshare companies Uber and Lyft of allegedly misclassifying their drivers as independent contractors, rather than employees.
The legal action was based around the controversial law known as AB5.
AB5 was enacted by California lawmakers and Gov. Gavin Newsom in 2019 to specifically require businesses to follow the so-called ABC legal employment classification test established by the California Supreme Court under the so-called Dynamex decision.
Up to that point, employers had been required to use a different test established under the so-called Borello decision, which centered on the amount of control an employer held over the worker to determine if the worker was properly classified as an independent contractor.
Under the new ABC Dynamex test, however, the California Supreme Court required A) the worker to be "free from the control and direction of" the employer "in connection with the performance of the work;" B) the worker "should perform work that is outside the usual course of the hiring entity's business;" and C) the worker "is customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed for the hiring entity."
Failure to meet even one of the "ABC factors" could mean a worker must be classified as a regular employee, subject to state wage and hour and other labor regulations, and not an independent contractor. Critics have asserted there is no way for employers to meet the requirements of Factor B, as any employer would naturally seek people to provide services within the normal course of their business.
Despite the criticism, the state's Democratic supermajority in Sacramento moved quickly to enact AB5 to make the ABC Test state law.
However, lawmakers then amended the law to include a host of exemptions for a number of different kinds of "independent contractor" employers, including a range of app-based services, such as a dog-walking service described as the "Uber for dogs." Those exemptions allowed those other services to use the Borello test to classify their workers.
Lawmakers, however, specifically refused to exempt ridesharing services like Uber or food delivery services like Postmates from the ABC Test. And in the process, lawmakers said so, indicating the law was meant to punish Uber and others like them for allegedly intentionally misclassifying workers as independent contractors.
The legal action filed by the state and cities served to confirm that apparent embedded animus.
In response to the move against them, Uber and Lyft helped to win approval of Proposition 22, a voter initiative which explicitly allowed them to declare their drivers independent contractors.
However, Prop 22 would not shield the rideshare and food delivery companies from legal actions based in the time between the passage of AB5 and the passage of Prop 22, including the actions brought by Bonta and the California city attorneys.
California has also won in federal court, where the U.S. Ninth Circuit Court of Appeals said lawmakers' apparent desire to tailor the law to target the rideshare and food delivery companies doesn't mean the law is unconstitutional.
The rideshare companies have petitioned the U.S. Supreme Court to review that ruling.
In the actions brought against them by the governments, Uber and Lyft argued those lawsuits should be blocked by federal contract law, because the drivers' contractor agreements include a provision directing disputes over pay and other employment matters to go to arbitration, and not to court as lawsuits.
A California state appellate court, however, said the lawsuits should be allowed to proceed, despite the arbitration agreements, because the governments bringing the actions didn't agree to those arbitration provisions, and AB5 empowered them to sue on the workers' behalf.
That decision prompted Uber and Lyft to petition the U.S. Supreme Court to overturn that ruling and declare the governments' legal action should be blocked by the Federal Arbitration Act (FAA).
They argued the legal actions mark "California's latest attempt to create a loophole in the FAA."
The decision, they said, could have far-reaching effects, as there is nothing within its reasoning that "would prevent state legislatures from deputizing just about anyone to litigate on behalf of just about anybody who agreed to arbitrate just about any dispute."
"The FAA should not remain subject to such easy evasion," the rideshare companies wrote.
The U.S. Supreme Court, however, opted not to take the case, apparently clearing the way for the state and three California cities to continue their action seeking a big payday, ostensibly on behalf of workers, from the companies.
In response to the U.S. Supreme Court's denial of the rideshare companies' petition, an attorney for Uber said she and the companies hope the Supreme Court will yet take up the matter in the future.
“The California Court of Appeal’s arbitration decision violates the Federal Arbitration Act and conflicts with decisions of the U.S. Supreme Court and other courts. While the Supreme Court did not take this opportunity to weigh in now, it should do so in the future, holding once again that the FAA preempts state efforts to undermine arbitration agreements," said attorney Theane Evangelis, of the firm of Gibson Dunn & Crutcher, of Los Angeles, in a statement published in a report by Pymnts.com.
Evangelis also noted the high court has not yet ruled on whether to take the rideshare companies' petition to appeal the AB5 ruling from the Ninth Circuit Court of Appeals.
"As we explained in detail in our complaint in that case — and to which a three-judge panel of the Ninth Circuit unanimously agreed — in enacting AB5, the California legislature unfairly targeted my clients out of animus rather than reason. We’re asking the U.S. Supreme Court to grant review and give us our day in court," Evangelis said.