A week after clearing the way for California governments to sue Uber and Lyft for allegedly misclassifying their drivers as independent contractors, the U.S. Supreme Court dealt another blow to the companies, similarly turning a cold shoulder to Uber's attempt to directly challenge the constitutionality of a controversial California state labor law that lawmakers openly acknowledged they intended to use to legally assail the companies.
On Oct. 15, the U.S. Supreme Court denied a petition from Uber and affiliated food delivery service Postmates to review a federal appeals court's decision upholding the state law known as AB5.
Voters have since overridden the law as it applies to rideshare and food delivery service drivers.
But the ruling likely opens the doors to a potential raft of potentially costly class actions and other lawsuits against the app-based rideshare and food delivery operators, ostensibly on behalf current and former drivers who may argue the alleged misclassification violated their rights under California law and shorted them pay in prior years.
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 test established under the so-called Borello decision. That test 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.
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 specifically refused to exempt companies like Uber and Postmates from the ABC Test, indicating the law was meant to punish Uber and others like them for allegedly intentionally misclassifying workers as independent contractors.
Critics of the law said it was enacted at the behest of labor unions, specifically to allow unions to either organize rideshare and delivery drivers, or use the law to crush the companies. They noted, for instance, that AB5's author, former Assemblywoman Lorena Gonzalez, D-San Diego, departed the legislature in 2022 for a leadership spot in the AFL-CIO labor union.
Uber and Postmates sued, claiming lawmakers' decision to directly target them with the law violated their rights to equal protection under the law.
Upon its first stop to the Ninth Circuit, a three-judge panel agreed that the "animus" displayed by lawmakers toward Uber and similar companies in tailoring the law to hurt them makes the law unconstitutional.
However, that decision was vacated by the rest of the Ninth Circuit court, and assigned to be reconsidered en banc by what is considered a full panel of 11 judges.
In the meantime, California voters enacted a measure known as Proposition 22, which gutted AB5 as applied to Uber, Postmates and similar companies, officially declaring their drivers should be considered independent contractors, regardless of AB5.
The lawsuit, however, continued, as Prop 22 did not apply to claims against Uber and the other rideshare and app-based delivery companies for the period between the passage of AB5 and the effective date of Prop 22, a period which could still expose the companies to potentially significant financial liability for alleged violations of AB5.
Prop 22 has survived an attempt by California Attorney General Rob Bonta to strike down the will of the voters, as the California Supreme Court found voters could use the ballot process to address labor law.
On appeal to the full Ninth Circuit, however, the 11-judge court rejected Uber's assertions AB5 itself had been unconstitutionally enacted.
The 11-0 decision was affirmed by a blend of Democratic and Republican appointees, including appointees of President Donald Trump.
They said they believed lawmakers had "plausible justification for their disparate treatment" of Uber, Postmates and their competitors and cohorts.
Particularly, they said lawmakers were within their authority to target the companies they considered the most egregious among those considered to have misclassified employees as independent contractors.
"The legislature may have perceived Uber as the pioneer of the on-demand app-based business model that many other services replicated," Judge Jacqueline Nguyen wrote for the unanimous court in the decision. "It is certainly reasonable for the legislature to try to target the problem of misclassification at its origin."
The judges further said the court cannot consider whether the law actually would accomplish its stated purposes of improving working conditions, rather than just serving as a cudgel for the state and unions to use against disfavored businesses.
Uber and Postmates then appealed that ruling to the U.S. Supreme Court, seeking a declaration AB5 amounted to an unconstitutional direct governmental attack on their businesses.
The U.S. Supreme Court's denial of Uber's petition was issued without any stated dissents from the high court's nine justices.
In a statement published by the San Francisco Chronicle, an attorney for Uber said the company is confident Prop 22 will continue to shield them from the worst overreaches by the state of California and trial lawyers under AB5 and will allow the companies to continue operating in California.
“Fortunately, in Proposition 22, California voters rejected AB5 because it threatened to take away the flexible work opportunities of hundreds of thousands of Californians,” said attorney Theane Evangelis, of the firm of Gibson Dunn & Crutcher, of Los Angeles.
“Prop 22 remains the law of the land in California and ensures that drivers and couriers retain the independence and flexibility they want and also receive the benefits they deserve.”
The Supreme Court's denial comes just a week after the court similarly rejected a petition from Uber and Lyft to review a California state appeals court's decision allowing Attorney General Rob Bonta and the city attorneys of San Francisco, Los Angeles and San Diego to sue the rideshare companies in pursuit of a potentially big payday, accusing the companies of having violated AB5 in the period before voters enacted Prop 22.