For Over Eight Years, Uber and Lyft Have Denied Drivers Employee Protections. Here's How They Did It

Last week, Uber and Lyft drivers in California came as close as they've ever been to getting employee status. After eight years of struggling, basic protections like unemployment insurance and guaranteed minimum wage were just a few hours away.

In early August, a state judge had issued an injunction demanding the companies recognize their drivers employees. In that order, San Francisco Superior Court Judge Ethan Schulman noted the companies “prolonged and brazen refusal to comply with California law,” adding that they “may not evade legislative mandates merely because their businesses are so large that they affect the lives of many thousands of people.”

It seemed like employee status would finally happen. But then, at the last moment, a state appeal court stepped in and stayed the injunction. Now drivers who want basic protections once again have to wait, perhaps until the election in November.

There are two major lawsuits in progress. California Attorney General Xavier Becerra and a handful of city attorneys are suing Uber and Lyft for failing to comply with AB5, a law that went into effect back in January. The state labor commissioner is suing for back pay for alleged worker misclassification.  Meanwhile, Uber and Lyft are ramping up advertising for Proposition 22, a ballot initiative in November that would exempt them from state laws.

This fight isn’t new. Treating drivers as independent contractors has been legally suspect ever since Uber and Lyft began over eight years ago. Yet over and over again these companies, and those who copied their business model, have continually found ways to avoid giving workers employee status and protection.

This evasion has been core to the business models of these companies. Until now, the companies have continued classifying workers as contractors, despite pressure from regulators, local and state governments and thousands of drivers. In that time, Uber and Lyft were able to use the contractor model to build multi-billion dollar companies.

‘Tech Startups,’ Not Transportation Companies

The saga begins in 2012 with a fuzzy pink mustache and a fist bump.  Back then Lyft, Uber's smaller competitor, was advertising itself as 'your friend with a car." It was Lyft, not Uber, that first started paying drivers to use their own cars to do taxi work.

Uber soon followed suit. Both companies emphasized that they weren’t transportation companies, but rather tech startups with “platforms” to connect riders to drivers.

Uber and Lyft also both chose to classify their workers as contractors, which significantly reduced both companies' liability and payroll expenses. That tactic became a major selling point for venture capitalists, who began investing billions in both companies.

The two companies, though, faced a seemingly major hurdle. Many major cities had taxi regulations that mandated drivers had a medallions. Operating without them was illegal. Taxi drivers, many of whom had paid tens or hundreds of thousands of dollars for these medallions, pointed out that Uber and Lyfts were not operating legally.

But this was 2013, and the tech industry was enjoying a rosy reception by both the public and regulators. The companies were viewed as job creators, a designation that carried a lot of weight, especially as the nation was still emerging from the shadows of the 2008 financial recession. Most politicians didn’t want to stand in the way.

Pundits and journalists also helped fuel the positive portrayal, commonly painting the companies as innovative agents of change ushering in a future that was not only inevitable, but also desirable.

In fact, the “Sharing Economy” as a concept was largely created and perpetuated by media organizations, which decided not to look at these companies through the lens of transportation or labor, but instead as "tech" companies. If you look back at the media coverage in the first years of these companies, it was generally swooning.

That largely uncritical coverage helped pave the way for a handful of companies representing a tiny fraction of the economy to have an outsize impact on law, corporate practices and the very way our society thinks about work.

Overcoming Regulatory Hurdles

As cities like San Francisco were opting to allow Uber and Lyft to operate in violation of local taxi laws, state regulators also embraced the companies, handing them a major win in the fall of 2013.

The California Public Utilities Commission in 2013 decided to create an entire new regulatory category, allowing Uber and Lyft to operate in cities throughout the state without being required to follow to local taxi laws. When announcing the creation of “Transportation Network Companies,” then CPUC President Michael Peevey parroted the rhetoric of the companies themselves.

“The internet is challenging many traditional business models by turning average everyday consumers into service providers,” Peevey said at the time. “This is a rapidly growing sharing economy.”

Contracting Problems

But the independent contractor model quickly began to create problems for the companies’ drivers. They had no workers' compensation for accidents and lacked unemployment insurance and overtime benefits — all basic protections guaranteed to employees.

This brought lawsuits. In the fall of 2013, Shannon Liss-Riordan filed class action lawsuits against both companies that aimed to get drivers back pay and to end the alleged misclassification of drivers as contractors.

Uber and Lyft were able to successfully snarl these lawsuits in the court system. It took six years to resolve both cases. The combined $47 million in settlements fell far short of the plaintiff's original goal, and drivers continued to be classified as contractors.

Mandatory Arbitration Clauses

Uber and Lyft were able hamstring that lawsuit, and subsequent others, largely through mandatory arbitration clauses: controversial agreements that all Uber and Lyft drivers have to sign mandating that labor disputes be handled privately behind closed doors rather than in court.

“Lawyers have been filing misclassification cases more or less since these companies came on the scene,” said Charlotte Garden, a professor at the Seattle University School of Law. "By looking at how those cases have ended, it is really a testament to how effective individual arbitration is at preventing people from being able to enforce their rights.”

Uber and Lyft also fended off regulation by appealing to consumers. They relied on their vast venture capital reserves to make rides artificially cheap — to the ire of traditional taxi drivers. And then, when a city or state enacted unfavorable regulations, the companies would threaten to leave.

Sometimes the companies would leave for a few months, but they always came back.

Angry customers, meanwhile, put pressure on politicians who often caved and dropped regulations.

Garden said the victories Uber and Lyft enjoyed early on dissuaded other local regulators from trying to rein in the companies.

“They knew regulation would be met with the companies ignoring the regulations and then fighting tooth and nail,” she said.

Uber and Lyft grew rapidly over the next five years and, by 2018, had amassed a combined $20 billion in venture capital. Meanwhile, a spate of new companies like Postmates and Instacart began adopting similar contract-labor models.

The ‘ABC Test’

In 2018, drivers seeking employee status scored a major victory — ironically, as a result of a California Supreme Court case that had nothing to do with gig companies.

This case began in 2005, three years before smartphones even existed, and close to a decade before the dawn of the gig economy. A truck driver sued a delivery company called Dynamex for classifying him as a contractor and not paying employee benefits.

In April 2018 — 13 years after the case started — the court ruled in favor of the driver. The ruling established an “ABC test” for employment, in which workers can only be considered contractors if they:

a. are free of control and direction from the company;
b. perform work outside the normal course of the company’s business;
c. regularly engage in some kind of independently established trade or occupation

Nevertheless, in the absence of any enforcement, Uber and Lyft continued to classify their drivers as contractors.

The following year, the state Legislature took up the issue.

AB 5, introduced by Assemblywoman Lorena Gonzalez, D-San Diego, went into effect Jan. 1, 2020, codifying the Dynamex decision into law.

In advocating for the bill, Gonzalez specifically called out gig companies like Uber and Lyft.

“In letting a new industry come in and say, ‘Because I hire you through an app, I don’t have any rules’ — that jeopardizes everything,” Gonzalez told lawmakers as they debated the bill in 2019.

But Uber and Lyft have since still continued to classify drivers as contractors.

In response to AB 5, Uber, Lyft and the delivery company DoorDash put more than $110 million behind Proposition 22 — on the statewide ballot this November — which would exempt gig companies from the new legislation.

And Then Came the Pandemic ...

In March, the coronavirus pandemic delivered a nightmare scenario for drivers who saw a precipitous drop in customers and weren't eligible for the paid sick time and unemployment benefits afforded regular employees.

As the pandemic raged on, California Attorney General Xavier Becerra in May finally stepped in, announcing a lawsuit against the companies.

Becerra admitted that it had taken the coronavirus for the state to act on the issue of worker misclassification.

“Sometimes it takes a pandemic to shake us into what that really means and who suffers the consequences of it,” he said.

And on Aug. 10, Judge Schulman issued his preliminary order to make Uber and Lyft classify their workers as employees while the state lawsuit unfolds.

Uber and Lyft went on the offensive. They wrote to their drivers and riders, asking them to vote in favor of Proposition 22. And in a New York Times opinion piece, Uber CEO Dara Khosrowshahi urged lawmakers to create a new category of worker for Uber and Lyft drivers to accommodate its unique business model.

Then, in an interview with MSNBC, Khosrowshahi pulled out a tactic from Uber’s old playbook: He threatened to temporarily suspend service in California.

“We think we comply by the laws,” Khosrowshahi said. “But if the judge and the court finds that we are not and they don’t give us a stay to get to November, then we will have to eventually shut down Uber until November.”

So now, after eight years and the involvement of every branch of California’s state government, Uber and Lyft may finally be forced to give California drivers basic employee protections — or, far more unlikely, suspend operations in the state.

And if the courts ultimately find that Uber and Lyft have been misclassifying their drivers, the companies may also be forced to give them billions of dollars in back pay for wages and benefits.