A U.S. appeals court on Monday rejected a bid by Uber and subsidiary Postmates to secondarily challenge a California law that could have forced companies to treat drivers as employees rather than independent contractors, who are typically cheaper.
An 11-judge panel of the 9th U.S. Circuit Court of Appeals in San Francisco upheld a lower court ruling that found Uber failed to prove that the 2020 state law, AB5, unfairly discriminated against app-based transportation companies and excluded other industries.
Uber said in a statement Monday that the ruling does not change its relationship with its drivers, who are considered contractors under a 2020 ballot measure known as Proposition 22.
The fate of Proposition 22 is pending in a separate case at the state Supreme Court, which last month heard arguments from the union and four drivers who argued the ballot measure is unconstitutional.
A representative for the California Attorney General’s Office did not immediately respond to a request for comment.
“There are good reasons to treat transportation and distribution placing companies differently from other types of placing companies,” the 9th Circuit said in its decision.
The California Legislature “identified transportation and distribution companies as the most significant perpetrators of the problem it was trying to solve: worker misclassification,” Circuit Judge Jacqueline Nguyen wrote.
Employees are entitled to a minimum wage, overtime pay, expense reimbursement, and other protections that do not apply to independent contractors.
Uber, Postmates and similar services typically treat workers as contractors to control costs.
The fight over the scope of AB5 comes amid a wider national debate over state, federal and other regulations that could require more businesses to classify workers as employees.
U.S. business groups sued the Biden administration in federal court in March over efforts to make it harder for companies to treat some workers as independent contractors rather than employees.
Research suggests that hiring employees can be up to 30% more costly for a business than contract workers.
The Massachusetts Supreme Court is considering whether voters in November should have the opportunity to consider a ballot proposition that would redefine the working relationship between on-demand drivers and the companies in the state.
California’s AB5 law raised the bar for proving that workers are truly independent contractors, requiring companies to show that workers are not under the company’s direct control or regular duties, but operate their own independent business.
Uber and two of its drivers filed a lawsuit in December 2019 challenging California’s law.
They called AB5 “an unreasonable, unconstitutional law designed to target and oppress workers and businesses in the on-demand economy.”
A federal judge in Los Angeles dismissed the case early on.
But last year, a three-judge panel of the 9th Circuit Court of Appeals resurrected the case.
The court said at the time that the law’s exemptions were “piecemeal” enough to uphold Uber’s lawsuit. The ruling, handed down Monday by the 11-judge circuit court, overturned an earlier victory for Uber.
