Proposition 22 in California allows companies like Uber Technologies and Lyft to continue classifying drivers as contract workers rather than full-time employees. It’s not clear whether that designation applies retroactively, and that poses a multibillion-dollar risk for investors.
California’s attorney general and municipal officials from around the state have sued Uber (ticker: UBER) and Lyft (LYFT), attempting to claw back what they say is four years of back pay, work expenses, and civil penalties for the benefit of drivers estimated in a 2019 California state report as having driven 4.3 billion miles in 2018 alone. The state’s labor commissioner also has similar litigation pending. Repaid at an average Internal Revenue Service reimbursement rate of 56 cents per mile for four years would be $9.6 billion. And those expenses are only one portion of what plaintiffs allege the companies owe, with data from a 2019 University of California, Berkeley study suggesting potential claims into the tens of billions of dollars.
Prop 22, which took effect on Dec. 16, provides for healthcare subsidies, a minimum earning guarantee, vehicle expenses at about half the IRS rate, and insurance—costs well short of the benefits that California requires to be provided to employees. Yet even after the success of what campaigns tracking firm California Target Book said was a $205 million effort to pass Prop 22, California courts continued erecting possible obstacles. On Jan.14, the state Supreme Court had affirmed that California’s employee classification rules could be applied retroactively, and the California plaintiffs vowed to pursue such retroactive claims.
Now, Uber and Lyft argue that Prop 22 blocks those claims, an argument the California plaintiffs reject. Similar lawsuits from the state’s labor commissioner were recently stayed, pending the state attorney general’s suit.
While Wall Street has fretted about Uber’s and Lyft’s burn rate, elusive robotaxis, a driver shortage, and a ruling in the United Kingdom ordering Uber to expand driver benefits, the California lawsuits aren’t seen as posing existential danger. “After winning Prop 22, and some of the other legal battles that they now have, there are definitely going to be some legal risks. But in the eyes of the Street, they’re contained risks,” Wedbush Securities analyst Dan Ives said in an interview
Scholars say, however, that the companies’ alleged past-due bill could be material and should be of interest to investors. “We’re talking about an incredible amount of money,” said Ken Jacobs, chairman of the UC Berkeley Labor Center. What’s more, he says, “The state is very likely to prevail, given what we’ve seen in preliminary rulings.”
Recent news has been mixed for Uber and Lyft. A federal judge in a separate class action against Uber said on April 9 that he had been hasty in determining that Prop 22 didn’t apply retroactively, reopening the question of whether the new law wipes away historical liability. However, attorneys representing 4,800 drivers in that case responded in an April 28 filing that Prop 22 said nothing about being retroactive, and that Uber’s contention that the ballot measure disallowed previous claims was frivolous. More recently, the Biden administration’s labor secretary, Marty Walsh, said that most U.S. gig workers should be classified as employees and receive related benefits.
Uber representative Noah Edwardsen told Barron’s, “We’re not able to discuss our litigation strategy at this time.” Lyft spokeswoman Julie Wood said in an email that the company’s court filings are the “only source for on-record comments from us [at] this stage.”
In its 2020 annual securities filing at the end of February, Uber said that it “may face liability relating to periods before the effective date of Proposition 22.” Lyft noted the attorney general’s suit, saying the case is now proceeding in San Francisco Superior Court without providing extensive detail. Neither company’s securities filings appear to mention money reserved or set aside for the California cases.
Of course, civil litigation is often settled at a fraction of plaintiff demands. According to recent securities filings, Uber set aside $600 million for negotiated settlements of historical claims with 70,000 drivers in the U.K. whom a court ruled had been misclassified as independent contractors. That is about a third the number of active California drivers Uber reports having in a quarter, and a fourth the number that Lyft reports having in a full year.
On May 5, Lyft asked a judge to put the California attorney general’s lawsuit on hold, and grant Lyft and Uber a request to have the disputes over historical driver classification be resolved through arbitration proceedings with individual drivers. California has argued that it’s the state’s role to press these claims in court.
A judge has ordered the parties to prepare for discovery, where each asks the other side for documents that might help their case. If Lyft’s arbitration delay were granted, it could possibly push this kind of risk well into the future, and ease potential liability.
Already there have been tens of thousands of arbitration demands filed by drivers, said San Diego’s James Treglio, one of several attorneys who have taken on California driver classification demand cases. He says he currently has pending 2,000 such cases with individual back-pay claims as great as $300,000. “In terms of raw value, these are fairly significant cases,” he said.
Proceeding with arbitration could mean years of delays and potential payouts smaller than implicit in legal demands from California officials. In arbitration “it’s not going to be the full dripping wet liability,” said Barry Winograd, previous president of the National Academy of Arbitrators.
If the disputes remain in the courts, however, investors should pay attention, as the costs could quickly become material. “At a minimum, Uber and Lyft owe their drivers for years of unpaid wages, benefits, and business expenses that accrued before Prop 22 took effect. The sum is substantial,” said John Coté, a spokesman for San Francisco’s city attorney, in a statement to Barron’s. “Getting that money reimbursed to drivers is our primary goal in this case.”