(CNN) — By going after Uber and Lyft’s ride-hailing business for allegedly violating a worker classification law, the California Attorney General is taking on what had long been the jewel of the on-demand economy. How the state’s top lawyer fares could determine whether other parts of the industry are similarly targeted — in particular, fast-growing on-demand grocery and food delivery businesses.
The fight over whether ride-hail drivers should be treated as employees in response to the new California law, or independent contractors, as they have long been treated by Uber and Lyft, has been heated. Last month, following a court order, Uber and Lyft threatened to shut down their ride-hailing services in California before being granted a temporary reprieve.
Had the companies suspended their services in the state, Uber said it would’ve continued operating its food delivery service, Eats, which has been a breakout star for the company during the pandemic. But Eats similarly treats workers as independent contractors and must answer to the same California worker classification law, known as AB-5, that is aimed at making it more difficult for companies to classify workers as independent contractors.
The law, which went into effect January 1, codifies an “ABC” test stemming from the California Supreme Court’s 2018 Dynamex decision. Under it, employers must meet three requirements to prove their workers are independent contractors, including that the service the workers are providing is outside the company’s core business.
California Assemblywoman Lorena Gonzalez, who authored the bill, said the intent of AB-5 was to narrow who the Dynamex decision applied to — with the on-demand gig economy being one of those targets.
Despite being in effect since the beginning of the year, it wasn’t until May that the Attorney General and a coalition of city attorneys went after the best known companies in the industry and their original services.
According to William B. Gould IV, a law professor at Stanford University, it “certainly makes a lot of sense for the AG to put a lot of their marbles in the Uber basket.”
“You’re dealing with a company that has thumbed its nose at the rule of law for some time now and thinks there’s no restriction that they can’t evade,” added Gould IV, a former chairman of the National Labor Relations Board.
Jenny Montoya Tansey, policy director at the Public Rights Project, a public interest legal nonprofit that has been involved with enforcement efforts in California, said another factor is that “drivers have organized in numbers and are doing a really compelling job in getting their stories out, letting regulators, enforcers and policy makers understand some of the experiences that drivers go through.”
That said, Montoya Tansey added, “food delivery hasn’t escaped the notice of AB-5 enforcers.”
Other legal battles in California have started to chip away at the similar alleged misclassification of workers of on-demand food and grocery delivery companies, which have only grown in significance as consumers rely on them to avoid public spaces amid the ongoing public health crisis.
Prior to AB-5, San Diego City Attorney Mara Elliott filed a suit against Instacart, the on-demand grocery delivery startup valued at $14 billion, over worker classification; the case is on-going. More recently, in June, San Francisco District Attorney Chesa Boudin filed a suit against DoorDash, the food delivery startup valued at $16 billion.
“Food delivery is in demand now more than ever. Multi-billion dollar corporations that deliver food are profiting off this crisis while they exploit their drivers and deny them a living wage, unemployment insurance, sick leave and other basic workplace protections,” said Assemblywoman Gonzalez of San Diego in a statement to CNN Business, adding praise to Elliott and Boudin’s actions.
“I hope other officials follow their lead. These companies need to be held to the same standards as any other law-abiding business in the state,” Gonzalez added.
Deciding to go after deep-pocketed companies, and which ones, comes down to resources for local officials.
“This has been a tough fight. It always is when you’re taking on billion-dollar industries — there’s a lot at stake for them,” said San Diego’s Elliott, of the Uber and Lyft lawsuit during an event in August with the Public Rights Project.
California Governor Gavin Newsom’s budget has earmarked $20 million towards AB-5 enforcement, but it is unclear if it will target any other companies while the case against Uber and Lyft plays out this fall. The Attorney General’s office declined to comment on its potential legal strategy.
Of the Instacart suit, Elliott said she was “a little reluctant initially and that’s because it is a big case for an office like ours,” adding that they have just three litigators.
The threat to the combined on-demand business model is evident. Uber, Lyft, Instacart, DoorDash and Uber-owned Postmates have funneled more than $110 million into passing a referendum in November, known as Prop 22, that would exempt them from the law while providing drivers with some additional benefits.
Additionally, Uber and Lyft are facing lawsuits from California’s Labor Commissioner’s Office over allegedly committing wage theft by misclassifying their on-demand workers as independent contractors instead of employees.
Beth Ross, a labor employment attorney in San Francisco who led a high-profile worker misclassification case against FedEx, said it is “anybody’s guess” whether other cases regarding on-demand food and grocery delivery workers will crop up in the meantime.
“The City Attorneys in San Diego, Los Angeles and San Francisco have planted their flags on the Uber and Lyft case,” Ross said. “Will they file further public enforcement cases? I’d be surprised because it’s a resource issue — they may wait to see what happens.”
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