Uber, Lyft Score Victory as California Court Affirms Right to Treat Drivers as Contractors

Uber Technologies Inc., UBER 5.78%increase; green up pointing triangle Lyft Inc. LYFT 4.43%increase; green up pointing triangle and other companies scored a victory with a California court ruling that preserves their independent-contractor model in the state and could boost their efforts to maintain that model elsewhere.

A state appeals court said that workers should continue to be treated as independent contractors under a California ballot measure known as Proposition 22, though it asked that a clause which put restrictions on collective bargaining by workers be severed from it.

Proposition 22, which passed in November 2020, allowed these companies to continue to treat their labor force as independent contractors. A California court deemed it unconstitutional in 2021. Monday’s order reversed parts of that lower-court ruling.

Uber and others are in a global tug of war with regulators over whether and how to grant more benefits such as paid sick leave and health insurance to workers in the so-called gig economy, where apps distribute individual tasks to a pool of people whom companies generally regard as independent contractors.

California sued Uber and Lyft in 2020, saying they were in violation of a new state law that sought to reclassify their drivers as employees. A legal battle ensued, culminating in Proposition 22, in which Uber, Lyft, DoorDash Inc. and Instacart Inc. asked state voters to exempt them from the law. The companies spent a record amount of money for a California ballot measure, about $200 million.

The companies promised workers flexibility alongside some benefits if the ballot measure passed.

In television, print and radio ads at the time, the companies told voters that a reclassification would kill the flexibility that workers enjoy and significantly raise ride-share and delivery prices for consumers.
 

A group of ride-share drivers and labor unions challenged the constitutionality of Proposition 22. In August 2021, a California judge ruled that it was unconstitutional because it limited the state legislature’s authority and its ability to pass future legislation. The companies appealed that decision, which led to Monday’s ruling in the California First District Court of Appeal.

“Today’s ruling is a historic victory for the nearly 1.4 million drivers who rely on the independence and flexibility of app-based work to earn income, and for the integrity of California’s initiative system,” the companies’ Prop 22 campaign said.

Uber and Lyft shares each rose 5% in after-hours trading following the ruling. DoorDash shares climbed 4%.

While the court preserved the companies’ independent-contractor models, it did away with a clause that made it tough for workers to unionize. The ballot measure required a seven-eighths majority of the California legislature to amend workers’ rights to collective bargaining, a bar critics said was tough to meet. The court severed that requirement from the rest of the proposition.

“The right to join together in a union is the most powerful way for workers to challenge gig corporations’ exploitative business model that profits off of paying low wages and silencing its workers. Today’s ruling opens the door to the possibility,” said Theresa Rutherford, a board member of the Service Employees International Union, a labor union that challenged the constitutionality of Proposition 22 alongside several drivers.

The group is considering appealing Monday’s ruling to the Supreme Court of California.

Proposition 22 set the tone for gig-worker regulation in the rest of the country. Washington state passed a law last year preserving the companies’ independent-contractor models. The companies also joined forces to mount a Proposition 22-like ballot in Massachusetts, but it was blocked by the state’s top court in June.

The effort to win popular support in California did lead the companies to guarantee new protections.

Under Proposition 22, the companies offer health insurance for drivers who work 15 hours or more a week, occupational-accident insurance coverage and 30 cents for every mile driven, among other protections. Critics say that the benefits fall short of those awarded to full-time employees.

Uber, which has a larger global footprint, has had to make bigger concessions outside the U.S. It agreed to grant its U.K. drivers an employment status entitling them to vacation pay and pension contributions after exhausting its legal options in 2021.

Write to Preetika Rana at preetika.rana@wsj.com

Appeared in the March 14, 2023, print edition as 'Uber, Lyft Win Ruling On Contractor Model'.