Uber’s baffling claim that its drivers aren’t core to its business, explained

Last week, California lawmakers passed AB 5, a bill that’s expected to upend the business models of gig economy companies like Uber and Lyft that depend on the cheap, relatively unregulated labor of a contractor workforce. Experts predict that the law could cost Uber an additional $500 million in annual operating costs alone if it ends up compelling the company to reclassify its workers as employees, who would be eligible for minimum wage, health care, and overtime protection.

But Uber and Lyft say they’re not worried. In fact, both ride-hailing companies say the new law doesn’t force them to make the costly change of turning their drivers into employees. That’s because to do so they would have to consider drivers as part of their “usual course” of business. Uber has said its drivers aren’t because the app is really a tech platform for “digital marketplaces” and not primarily an employer of drivers.

Labor groups and politicians are seething over Uber’s argument. In interviews with Recode, they said they see it as another way that Uber and Lyft (which also said it won’t change its business) are trying to get out of providing basic employment protections to their hundreds of thousands of drivers in California.

“They’re digging in their heels like a child would and saying, ‘we refuse to change,’” said Veena Dubal, a law professor at UC Hastings who researches the gig economy. “[Uber’s chief legal officer] Tony West on some level probably realizes how preposterous it is, but that’s the line they’ve taken, and they have to be consistent with it.”

Uber declined to expand on its legal reasoning to Recode, but it’s made this argument before. It goes something like this: Uber’s core business is providing technology that connects people to each other. Drivers are free to accept or decline rides as they please, so they are not employees of Uber but rather customers of its marketplace, just like the people who take rides.

Despite how nonplussed Uber and Lyft might seem, the stakes for both companies are high. The political battle over AB 5 comes at the same time that both Uber and Lyft have been struggling in the stock market since going public. Two weeks ago, shares of both firms were trading at an all-time low. And meanwhile, both firms have been bleeding cash: Uber lost more than $5.2 billion last quarter and Lyft lost almost $650 million.

Both ride-hailing giants have met with politicians, the governor, and union leaders to try to negotiate on AB 5, and they launched aggressive campaigns against the bill (which some drivers say have been misleading) that threatened that drivers could lose the ability to work flexible hours if they indeed became employees. A few weeks ago, Uber, Lyft, and DoorDash announced they’re pouring $90 million into a 2020 California ballot initiative that would directly appeal to voters to undo the legislation.

So, does Uber have a case when it says its drivers aren’t a core part of its business? Or is it just delaying the inevitable regulation that will fundamentally change its business and add to its financial woes?

Several legal and labor experts told Recode that Uber’s AB 5 defense isn’t going to work. But even though the argument may not hold up in court, it’s a savvy political move to buy time as the company deals with public pressure over its labor practices.

“If nothing else — whether or not it passes the smell test — it buys them the time and buys them leverage,” said Bradley Tusk, an early Uber investor and regulatory adviser who has worked with the company in the past. “If you say, ‘Yep, we’re gonna sue the hell out of Uber,’ that could take three, four, [or] five years to take place.”

Regardless of the timeline, Uber and Lyft are facing an uphill legal battle against AB 5.

“[Uber and Lyft] are making the claim — which is preposterous — that they’re more like Craigslist, that they provide a space for buyers and sellers to meet,” said Rebecca Givan, a professor of labor relations at Rutgers University. “But in fact, they set the prices, what car you can use, all kinds of things. They’re not more like Craigslist; they’re an employer,” she said.

A prominent gig worker rights labor lawyer, Shannon Liss-Riordan, who has been battling Uber around employee misclassification since 2013, has already filed a class action lawsuit against Uber for misclassifying drivers as workers instead of employees, including a request for an injunction that would force Uber to reclassify its workforce right away.

“Uber and other gig economy companies are thumbing their nose at the law and refusing to do it,” said Liss-Riordan. “So we are asking the court to immediately require these companies to reclassify their drivers.”

And thanks to a last-minute addition by legislators, city and state attorneys can also take legal action against Uber and Lyft for not following AB 5’s classification rules. San Francisco City Attorney Dennis Herrera has signaled that he’s willing to do that.

But these new legal threats are just part of such challenges for Uber and Lyft, which have both faced class action lawsuits from drivers over their labor practices. (As Uber’s Tony West said during a recent press call, “Uber is no stranger to legal battles.”) So far, there is some precedent to suggest Uber’s case isn’t entirely preposterous, at least based on several decisions in arbitration, a form of private court often used by companies to resolve employment disputes.

In one case from 2018 that Uber specifically pointed to, an arbitrator ruled that an Uber driver was not entitled to employee pay and benefits.

“Uber was not, precisely speaking, in the business of providing rides, any more than a broker is in the business of providing property,” wrote the arbitrator in his ruling. “It provided, instead, only exposure (albeit, very effective exposure) to the possibility that a rider will find a driver willing to provide a ride, and a driver will find a rider willing to be driven. The distinction is material.”

Uber noted in its S-1 filing back in April that it faces over 60,000 arbitration cases from drivers over employment classification issues. Since the rulings around those cases are largely private, it’s hard to say if there’s a true legal consensus or if Uber has chosen to highlight a few cases where it’s been successful.

But in public court rulings, judges have been less than favorable to Uber. A judge in California stated in 2015 that Uber’s argument that drivers aren’t a central part of its business “strains credulity,” and another in New York expressed similar skepticism, according to the New York Times.

Regardless of how the courts end up ruling, whether for or against Uber and Lyft, this could be a drawn-out legal battle. And that leaves plenty of time for the ride-hail companies to play politics in the meantime.

While Uber’s argument may not end up be a winning one, it is strategic in the short term.

“I think from a political and practical standpoint, the path Uber is taking is smart,” said Tusk. “While [Uber] ultimately may lose in court by saying our drivers are not a normal part of our business, they may forestall having to deal with this issue for a couple of years, at a time when their share prices are really suffering. More importantly, I think it gives them leverage to reopen legislation negotiations with California politicians.”

Tusk has openly criticized Uber’s CEO Dara Khosrowshahi, who has taken a more outwardly cautious approach to leading the company, as compared to the “act first and beg for forgiveness later” strategy of the company’s former CEO and founder Travis Kalanick. (Kalanick resigned in 2017 under pressure from investors.)

“It’s the first time we’ve seen Uber be aggressive about anything in a while,” said Tusk. “I’m happy to see that side of the company coming out for once.”

In the meantime, Uber and Lyft are actively trying to work with politicians and labor groups to write a follow-up piece of legislation that would undo or modify AB 5 by giving drivers some protections, such as the right to bargain collectively (although not necessarily as a union), and a minimum wage — in exchange for not being considered employees. That’s in addition to the $90 million dollar ballot initiative that the companies are funding with DoorDash, which they characterize as a last resort if the companies can’t reach a legislative deal with politicians.

It makes sense that Uber’s showing its teeth again — even if part of that strategy is downplaying the potential impact of AB 5. The law is expected to be game-changing for Uber and Lyft, as well as other gig economy companies like DoorDash and Postmates. It could allow millions of workers across industries (not just the app-based gig economy) to get the benefits they say they’ve been cheated out of for years, and the precedents it sets could spread to other states that are closely watching California’s leadership on labor rights.

If companies like Uber and Lyft are forced to treat hundreds of thousands of workers as full-time employees, they’ll have to do the opposite of what their investors are calling for. Instead of cutting labor costs, companies will have to drastically add to these expenses as they try to become profitable. That might explain why Uber is pushing the limits of reason to avoid a radical restructuring of its business model.

Another potential side effect of Uber’s bold argument against AB 5 is that it risks further alienating labor leaders, politicians, and the general public, especially at a time when the company is trying to improve its favorability and regain trust with customers after the string of public scandals that have tainted its past.