Mike Scarcella
(Reuters) – A U.S. appeals court on Monday rejected a bid by Uber (NYSE:) and subsidiary Postmate to renew their challenge to a California law that could force companies to treat drivers as employees rather than as independent contractors, who are typically less expensive.
An 11-judge panel of the 9th U.S. Circuit Court of Appeals in San Francisco upheld a lower court ruling that said Uber failed to prove that a 2020 state law known as AB5 unfairly singled out app-based transportation companies. at the same time exempting other industries from paying taxes.
Uber said in a statement Monday that the decision would not change the status of the company’s relationship with drivers, who are considered contractors under the 2020 ballot initiative known as Proposition 22.
The fate of Proposition 22 is being considered in a separate case before the state Supreme Court, which last month heard arguments from a union and four Teamsters arguing that the ballot measure is unconstitutional.
A spokesman for the California attorney general’s office did not immediately respond to a request for comment.
The 9th Circuit said in its ruling that “there are compelling reasons to treat transportation and delivery service companies differently from other types of referral companies.”
The California Legislature “perceived transportation and delivery companies as the most serious culprits for the problem it sought to solve: worker misclassification,” District Judge Jacqueline Nguyen wrote.
Employees are entitled to minimum wage, overtime pay, expense reimbursement, and other protections that do not apply to independent contractors. Uber, Postmate and similar services typically treat workers as contractors to control costs.
The debate over the scope of AB5 comes amid a broader national debate over state and federal laws and other regulations that could require more companies to treat their workers as employees.
U.S. business groups sued the Biden administration in federal court in March over its efforts to make it more difficult for companies to treat some workers as independent contractors rather than employees.
Research shows that employees can cost companies up to 30% more than contract workers.
The Massachusetts Supreme Court is weighing whether voters in November should have the opportunity to consider ballot proposals that would change the working relationship between on-demand drivers and their companies in the state.
California’s AB5 raised the bar for proving that workers are truly independent contractors by requiring a company to demonstrate that the workers are not under its direct control or engaged in their normal activities, but are conducting their own independent business.
Uber and two of its drivers sued in December 2019 over the California law. They called AB5 “an irrational and unconstitutional law designed to harass 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 reopened the case last year. At the time, the court said that “incremental” exceptions to the law were enough to satisfy Uber’s claim. Monday’s decision by the 11-judge district court overturned Uber’s previous victory.