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In a significant setback for Uber and its subsidiary Postmates, the 9th U.S. Circuit Court of Appeals in San Francisco on Monday rejected their bid to challenge a California law that could force the companies to treat drivers as employees rather than independent contractors.
The 11-judge panel upheld a lower court's ruling that Uber failed to demonstrate that the 2020 state law, known as AB5, unfairly targeted app-based transportation companies while exempting other industries.
AB5 raises the bar for proving that workers are truly independent contractors, requiring companies to show that workers are not under their direct control, are not engaged in the company's usual course of business, and operate their own independent enterprises.
In response to the ruling, Uber stated that it would not change the status of its drivers, who are considered contractors under a 2020 ballot initiative known as Proposition 22.
The fate of Prop 22 is currently being debated in a separate case before California's top court, which recently heard arguments from a labor union and four drivers arguing that the measure is unconstitutional.
In its ruling, the 9th Circuit stated, “there are plausible reasons for treating transportation and delivery referral companies differently from other types of referral companies.”
Circuit Judge Jacqueline Nguyen noted that the California legislature saw transportation and delivery companies as significant contributors to the problem of worker misclassification.
Employees are entitled to minimum wage, overtime pay, expense reimbursements, and other protections not extended to independent contractors.
Uber, Postmates, and similar services typically classify workers as contractors to control costs, as studies suggest that employees can cost companies up to 30% more than contract workers.
The debate over AB5 comes amid a broader national conversation about state and federal regulations that could compel more companies to classify their workers as employees. In March, U.S. business groups sued the Biden administration over its efforts to make it harder for companies to treat workers as independent contractors.
Additionally, Massachusetts' top state court is considering whether voters should decide on ballot proposals that would redefine the working relationship between on-demand drivers and their companies.
Uber and two of its drivers initially sued over the California law in December 2019, calling AB5 "an irrational and unconstitutional statute designed to target and stifle workers and companies in the on-demand economy."
A federal judge in Los Angeles dismissed the lawsuit at an earlier stage, but a three-judge 9th Circuit panel last year revived the case, stating that the "piecemeal fashion" of the law's exemptions was sufficient to sustain Uber's lawsuit.
However, the 11-judge panel's ruling on Monday nullified Uber's earlier victory.
