Uber and Lyft claim victory as California court upholds right to treat drivers as contractors

Proposition 22, which passed in November 2020, allowed these businesses to continue to treat their workforce as independent contractors. A California court ruled it unconstitutional in 2021. Monday’s order overturned parts of that lower court ruling.

Uber and others are in a global tussle with regulators over whether and how to extend more benefits such as paid sick leave and health insurance to workers in the so-called gig economy, where apps distribute individual tasks to a group of people that businesses typically consider independent contractors.

California sued Uber and Lyft in 2020, claiming they violated a new state law that sought to reclassify their drivers as employees. A legal battle ensued, culminating in Proposition 22, in which Uber, Lyft, DoorDash Inc.

and Instacart Inc. asked voters in the state to exempt them from the law. The companies spent a record amount of money on a California ballot measure, about $200 million.

Companies have promised workers flexibility as well as some benefits if the ballot measure passes.

In TV, print and radio ads from the time, the companies told voters that a reclassification would kill the flexibility workers enjoy and dramatically raise ride-sharing and delivery prices for consumers.

A group of ride-hailing drivers and unions challenged the constitutionality of Proposition 22. In August 2021, a California judge ruled that it was unconstitutional because it limited the authority of the state legislature and its ability to enact future laws. The companies appealed the ruling, leading to Monday’s ruling in the California Court of Appeals for the First District.

“Today’s decision is a historic victory for the nearly 1.4 million drivers who rely on the independence and flexibility of app-based work to earn income, and for the integrity of the driving system. ‘California initiative,’ the companies’ Prop 22 campaign said.

Shares of Uber and Lyft each rose 5% in after-hours trading following the decision. DoorDash shares climbed 4%.

While the court preserved the companies’ independent contractor models, it removed a clause that made it difficult for workers to unionize. The ballot measure required a seven-eighths majority of the California legislature to change workers’ collective bargaining rights, a hard-to-respect bar critic said. The court severed this requirement from the rest of the proposal.

“The right to join a union is the most powerful way for workers to challenge the exploitative business model of small businesses that benefits from paying low wages and silencing its workers. Today’s ruling opens the door to that possibility,” said Theresa Rutherford, board member of the Service Employees International Union, a union that has challenged the constitutionality of Proposition 22 alongside several drivers.

The group plans to appeal Monday’s decision to the California Supreme Court.

Proposition 22 set the tone for the regulation of gig workers in the rest of the country. Washington state passed a law last year preserving the independent contractor models of businesses. The companies also joined forces to hold a Proposition 22-like ballot in Massachusetts, but it was blocked by the state’s highest court in June.

The effort to win popular support in California has led companies to secure new protections.

Under Proposition 22, companies offer health insurance to drivers who work 15 or more hours a week, workers’ compensation insurance, and 30 cents for every mile driven, among other protections. Critics say the benefits are lower than those given to full-time employees.

Uber, which has a bigger global footprint, had to make bigger concessions outside of the United States. It has agreed to grant its UK drivers employment status entitling them to holiday pay and pension contributions after exhausting its legal options in 2021.

Write to Preetika Rana at preetika.rana@wsj.com