California judge: Uber and Lyft must make drivers employees

OAKLAND — A California judge has ordered Uber and Lyft to stop classifying its drivers as independent contractors, handing the state a signal victory in a battle over the gig economy Monday.

After the state passed a law broadly requiring more workers to be treated as employees, California Attorney General Xavier Becerra and city attorneys sued the ride-hailing firms this year, arguing they were violating the law by deeming their drivers to be independent contractors. Becerra went to court for an injunction immediately compelling the companies to treat their drivers differently.

San Francisco Superior Court Judge Ethan Schulman said “substantial public harm will result” if the state did not order the companies to change their ways, writing that the status quo deprives Uber and Lyft drivers “of the panoply of basic rights to which employees are entitled under California law.” He also rejected the firms’ argument that the price would be unsustainable.

“While they undoubtedly will incur costs in order to restructure their businesses, the costs are only those required in order for them to bring their businesses into compliance with California law,” Schulman wrote in a 34-page ruling.

Schulman's decision to grant the state's request for an injunction rebuffed attorneys for Uber and Lyft, who had argued the week earlier that a sweeping injunction was unnecessary and would cause broad harm. They wanted California to hold off on the injunction request pending a lawsuit from the gig companies challenging the underlying employment classification law, CA AB5 (19R).

The results could be seismic. The companies’ business models rely on fleets of app-dispatched independent contractors who set their own hours but are not entitled to labor guarantees like state minimum wage, paid sick leave and unemployment insurance and could trigger a ripple effect across their operations in other states. Schulman’s order could shatter that framework while imposing enormous new costs on the companies.

As they battle headwinds in the courts, Uber and Lyft are turning to the voters for relief. Along with DoorDash, Instacart and Postmates, they are funding a ballot initiative that would allow them to continue treating workers as contractors while offering them some wage and benefit guarantees.

The injunction doesn’t take effect for 10 days — a window Uber and Lyft immediately said they would use to file legal challenges.

“The vast majority of drivers want to work independently, and we’ve already made significant changes to our app to ensure that remains the case under California law,” Uber spokesperson Davis White said in a statement. “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.”

And another blow for the companies is looming: Schulman indicated that California is likely to win its case that Uber and Lyft are misclassifying drivers, writing that the companies’ argument to the contrary “flies in the face of economic reality and common sense.”

The California Labor Federation, a politically formidable player that championed AB 5 and has become the gig tech industry’s chief antagonist in its home state, hailed Schulman’s ruling.

“The years-long ploy of these behemoth corporations to stall, obfuscate and flat-out break the law has failed,” said Art Pulaski, the group's executive secretary-treasurer, in a statement. “There must be no more delays. We demand these companies immediately adhere to this ruling and provide their drivers with the protections and benefits they so richly deserve.”