Uber and Lyft score victory in California gig economy case

California's Supreme Court says ride-hailing services can treat workers as contractors rather than employees. Photo / 123rf

California’s Supreme Court has upheld a landmark ruling that permits gig economy companies to treat workers as independent contractors, in a long-awaited decision that comes as a big victory for the likes of Uber.

The decision by the state’s highest court is a significant blow to the labour rights groups that have sought for years to overturn a controversial law known as Proposition 22.

The law allows gig economy companies to treat their workers as independent contractors rather than employees, a decision California citizens voted decisively in favour of in 2020.

Prop 22 exempted the companies from complying with a new state law that would have classified their workers as employees, and instead gave the workers the right to limited healthcare benefits and a minimum earnings guarantee.

Uber said Thursday’s (Friday NZ time) decision confirmed “the will of the nearly 10 million Californians who voted to deliver historic benefits and protections to drivers, while protecting their independence”.

Companies such as Uber and Lyft had campaigned aggressively in support of the proposal before the 2020 vote, arguing any requirement on them to treat workers as employees would pose an existential threat to their businesses.

They funded much of a US$200 million ($340m) campaign backing the measure, which vied with labour groups that voiced strong opposition to Prop 22.

Companies, including Uber and food delivery group DoorDash, had warned that any requirement to reclassify drivers as employees would necessitate a fundamental change in their business models.

Such a change would “incur significant additional expenses” and would be likely to result in “significant price increases for riders”, Uber said in May.

Gig economy companies also argued that such a change could have led to drivers and couriers leaving the platforms, since they would have been bound by strict work contracts and would no longer have the flexibility to work whenever they wanted to.

Drivers’ “freedom to work when and how they want is now firmly etched into California law, putting an end to misguided attempts to force them into an employment model that they overwhelmingly do not want”, Uber said on Thursday.

Before the ruling, Jefferies analysts estimated a repeal of Prop 22 would have resulted in additional costs for Lyft, DoorDash and Uber of about US$300m, US$1 billion and US$1.1b, respectively in 2025. The companies could have offset about 85% of those additional costs in part via higher fees, they said, though that could have reduced demand.

The Supreme Court’s decision marks the final stage of a years-long challenge in the California courts by individual drivers and the Service Employees International Union that sought to overturn Prop 22.

Uber and Lyft in June agreed to pay a combined US$175m to settle a long-running Massachusetts state lawsuit over whether drivers should be classified as employees or independent contractors. Although drivers there will remain independent contractors, the companies agreed to grant them a range of benefits, including limited healthcare and a minimum earnings guarantee.

Written by: Camilla Hodgson

© Financial Times