(Bloomberg) -- Uber Technologies Inc. and Lyft Inc. can keep classifying California drivers as independent contractors, after the state’s top court said a company-backed law passed by voters doesn’t wrongly curtail the legislature’s power over worker protections.
The unanimous ruling upholding California’s Proposition 22, which received majority voter support in 2020, was released Thursday.
The favorable ruling for the gig economy companies removes what investors regarded as a major regulatory overhang. Had the judge ruled to invalidate Prop 22, the companies would have faced the threat of millions of dollars in additional cost to pay drivers if they were to be reclassified as employees, upending their business models and potentially raising user costs in one of their biggest US markets.
Shares of Uber, Lyft, DoorDash, and Instacart all spiked on the news, with Lyft jumping most by 7.4%. The shares have mostly erased gains at 2:18 p.m. New York time.
Justice Goodwin H. Liu wrote Thursday that California’s constitution doesn’t bar voters from passing legislative initiatives on matters impacting workers’ compensation, the issue that this case specifically centered on.
“It would unduly restrict the initiative power to give the Legislature what would essentially be a first-mover advantage, precluding the electorate from undoing any action the Legislature takes pursuant to” the workers’ compensation system, Liu wrote.
Liu in May oral arguments said the law doesn’t necessarily preclude workers from ever receiving workers’ compensation, a system to help workers injured on the job that the state legislature has constitutional power to oversee. The law doesn’t block legislators from deciding that independent contractors are eligible for workers’ compensation, Liu said.
The ruling is a win for the industry as gig companies like Uber, Lyft, and DoorDash Inc. poured more than $200 million into their 2020 campaign to preserve the core of their business models and keep drivers classified as independent contractors. They celebrated the decision Thursday.
Lyft said in a blog post on its website that it’s “thrilled that the California Supreme Court unanimously upheld the democratic will of the voters.”
“Prop 22 is here to stay,” said Liz Jarvis-Shean, DoorDash’s vice president of communications and policy in a statement.
The court ruling affirms “the will of the nearly 10 million Californians who voted to deliver historic benefits and protections to drivers, while protecting their independence,” Uber said in a statement.
But further legal and legislative fights loom ahead. Drivers and labor advocates that argued the law improperly shifts the cost of doing business onto gig workers and denies them other protections, such as minimum wage, sick leave, and overtime pay, renewed their calls to unionize in response to the ruling in emailed statements.
Hector Castellanos, the plaintiff in the case, called Prop 22 “a bait-and-switch meant to enrich global corporations at the expense of the Black, brown and immigrant workers who power their earnings,” adding that the ruling “only strengthens our demand for the right to join together in a union.”
SEIU International President April Verrett also said the ruling is disappointing. However, she said, “Uber and Lyft drivers in the state refuse to back down from their fight to win union rights and bring these companies to the bargaining table.”
California’s Senate Labor Committee Chair Lola Smallwood-Cuevas said the decision is frustrating but also motivating.
“I’m more determined than ever to ensure that all workers — including our diverse and Black, Indigenous, and people of color-led gig workforce — have the basic protections of workers compensation, paid sick leave, family leave, and disability insurance and the right to form a union.”
Passenger app drivers make a median wage of about $5.97 per hour without tips in California when factoring all work time, gas, and vehicle weathering, according to a May University of California at Berkeley study.
Securing better treatment will require drivers to work together to develop more clout, said UC Irvine workplace law professor Veena Dubal, an opponent of Prop 22. “The only way for workers really to have power to rebuild labor rights is to organize,” she said. “It’s going to be a long fight.”
However, the companies’ victory could deter other states from passing legislation they oppose, she said. “It sends the message to legislators who want to address these issues to not even try, because they will use their deep pockets and legal sophistication to undermine any effort.”
The California high court’s ruling comes as legal battles play out over a Biden administration final rule that makes it harder for workers to be deemed contractors under federal wage-and-hour law. App-based gig companies have defended against Fair Labor Standards Act lawsuits nationwide, arguing that their drivers aren’t employees entitled to minimum wage and overtime protections.
Other states and cities have also attempted to tackle the app-based gig worker classification issue, in many cases by letting Uber and Lyft continue using an independent contractor status in exchange for setting floors on driver pay and benefits.
The companies struck such deals over the last year in Massachusetts and New York to settle legal actions by those states, while Washington state and Minnesota have passed driver protections through their legislatures. New York City regulates app-based driver pay through its taxi and limo driver commission.
It’s not the first time this term the California Supreme Court has weighed in on the extent of California’s uniquely expansive right for voters to pass new laws and amend existing ones.
The state top court in June blocked a ballot measure that would have asked voters to make new state and local taxes harder to enact. The measure would have revised the state constitution, which is beyond the power of voters, the opinion said.
Olson Remcho LLP and Altshuler Berzon LLP represent Castellanos. O’Melveny & Myers LLP and Nielsen Merksamer Parrinello Gross & Leoni LLP represent Protect App-Based Drivers and Services.
The case is Castellanos v. California, Cal., No. S279622, 7/25/24.
--With assistance from Chris Marr and Rebecca Rainey.
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