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This post is authored by Pranav Tomar and Ridhima Bhardwaj, Associate Editors at RGNUL Financial and Mercantile Law Review (RFMLR).
Introduction:
The Apex court of California in its recent judgment has directed the two ride-sharing companies Uber and Lyft to re-classify their drivers as ‘employees’ instead of ‘independent contractors’. The court has given ten days to both the companies to either appeal the order or amend their business models as per the directions of the court.
Both the companies objected to the petitioner’s claim by stating that the drivers working for the company are more like independent freelancers rather than an employee. According to the company, the drivers are at will to turn off their Uber services during their course of employment. While deciding the case, the court referred the ABC test established by the Supreme Court in the case of Dynamex Operations West, Inc. v. Superior Court in order to determine the classification the employees under employment.
Insight into Assembly Bill 5:
The California Supreme Court relied on its 2018 ruling in Dynamex Operations v. Superior Court which laid down the ABC Test later codified as the Assembly Bill 5 (“Bill”/ “AB5”), commonly referred to as the “gig workers bill.”
The primary objective of AB5 is to guarantee to the workers standard labor and employment rights as well as the incentives that are normally/ usually refused to independent contractors, namely minimum wage and overtime pay, paid leaves, workers’ compensation coverage, and unemployment insurance reimbursements.
The court established this test for the companies to use a three-fold approach in order to recognize workers as “employees” or “independent contractors,” under which, a worker shall be classified as an independent contractor if the following conditions are met:
A) the worker is independent of control and direction from the hiring entity regarding the performance of work, both under the contract for the performance of the work and in fact;
B) the worker performs work that is outside the usual course of the hiring entity’s business;
C) the worker is customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed.
This test, nevertheless, transfers the burden of proof on the employers, to establish that the workers are not “employees” by repudiating any of the aforementioned conditions. With the objective of being exempt from any liability and further, categorizing their drivers as independent contractors under the second clause, Uber and Lyft, claimed that they are neither transportation companies nor “hiring entities,” but are rather service providers for ease of transactions between drivers and customers which implies that the drivers perform work outside the usual course of their business. This argument, however, was rejected by the California Supreme Court.
Thus, reliance was placed on this test for bringing the gig-workers, i.e., the drivers working for Uber and Lyft, at par with their status as an employee of the company and not an independent contractor and to guarantee the rights and perks associated with the former.
Dimensions of Competition Law:
The California Supreme Court held that misclassification of workers as “independent contractors” would hamper the basic rights and protections to which the workers are entitled. Under Californian labour and employment laws, the rights such as minimum wages, wages compensation, unemployment insurance, and paid sick & family leave are protected by the government. The court stated that the companies are making its drivers vulnerable to these rights by misclassification.
Misclassifying the workers would give an unfair trade advantage to the company over other competitors. Competition between ride sharing companies has always been a center of the debate. Due to ‘independent worker’ clause in place, the companies will be absolved from the liabilities of the acts performed by its drivers.
The company may widen their edge over the competitors with the reserves it generated through misclassification of workers. Moreover, serious concerns were also raised for creating a ripple effect amongst the ride-sharing companies who have been abiding by the law till now, but might change their business models as per Uber and Lyft.
With such a widespread scope, deep discounting can be implemented by the ride-sharing giant and this would result in attracting provisions of anti-competitive agreements throughout the world. Even if the scope is limited to California, Uber & Lyft accounts for about 68% and 29% of market share respectively in United States and is a dominant entity in the country and is abusing its dominant position for implementing arbitrary and partial policies.
Indian Perspective:
Comprehending India’s position on the status of the drivers in this dispute has introduced us with ambiguities in the existing Indian laws and their decreasing relevance, as well as the future implications of a decision in either party’s favour.
The definitions given by the Motor Transport Workers Act, 1961 or the tests laid down by the Supreme Court were considered to be beneficial in making a well-informed distinction between an employee and an independent contractor, however, with changing times, varying circumstances and different work environment for such drivers, there exists an overlap of elements among the two categories signifying a desperate need for reform in the legal framework or a new model to protect their interests to the fullest.
A decision categorising these drivers as employees could have serious implications for these companies in India. This would imply that these service platforms are no longer an intermediary between the drivers and customers, rather, a business which provides transport services electronically. For this no FDI is allowed in India which would significantly affect their global market. However, if the drivers remain independent contractors, there may not be any reform in their conditions and work environment.
Conclusion and Future Prospects:
This decision has come at a time when there exists a despairing need for transformation for independent workers, particularly with the evident evolution of the gig economy. The AB5 plays a significant role in ascertaining that companies cease to exploit their employees by categorizing them as independent contractors.
The incentives also bring some obstacles, like flexibility of working hours for independent contractors, radically decreasing the earning potential thus, reducing their ability to capitalize on their retirement savings. At the same time, employers are dissatisfied due to increased costs associated with hiring an employee as compared to an independent contractor.
The overarching effect of this judgment is highly unforeseen yet. However, the key concern remains whether the benefits of being categorized as an employee will overshadow the detriments or not. Conclusively, it will be intriguing to witness if there arises a third way for gig workers to enjoy both the perks and the flexibility.