Uber challenge to California contractor law revived by U.S. appeals court

© Reuters. FILE PHOTO: The logo of Uber is seen at a temporary showroom at the Promenade road during the World Economic Forum (WEF) 2023, in the Alpine resort of Davos, Switzerland, January 20, 2023. REUTERS/Arnd Wiegmann

By Daniel Wiessner

(Reuters) -A U.S. appeals court on Friday revived a lawsuit by Uber Technologies (NYSE:UBER) Inc and subsidiary Postmates Inc challenging a California law that would require them to provide more proof that workers are independent contractors, a classification that helps the companies save millions.

In a major win for app-based services that heavily rely on contractors, the San Francisco-based 9th U.S. Circuit Court of Appeals said the state must face claims that the law known as AB5 is unconstitutional because it improperly singles out app-based transportation businesses while exempting many other industries.

Uber hailed the 9th Circuit decision in a statement.

"This is yet another signal that efforts to take away drivers' independence and flexibility will ultimately fail," the company said.

The office of California Attorney General Rob Bonta, a Democrat, said in a statement that it was reviewing the decision and assessing its next steps.

"We will continue to defend laws that are designed to protect workers and ensure fair labor and business practices," Bonta's office said.

AB5, which took effect in 2020, imposes a higher bar to show that workers are independent contractors rather than employees, who have greater legal protections and can cost companies up to 30% more.

California lawmakers exempted many jobs and businesses from AB5's reach, including "referral agencies" that connect workers and customers, but explicitly did not exempt app-based transportation and delivery services.

That means Uber is subject to the law while pet-sitting service Wag, which has been called "Uber for dogs," is not.

A three-judge 9th Circuit panel on Friday said the "piecemeal fashion" of the exemptions to the law was enough to keep Uber's lawsuit alive.

"The exclusion of thousands of workers from the mandates of AB5 is starkly inconsistent with the bill's stated purpose of affording workers the 'basic rights and protections they deserve,'" Circuit Judge Johnnie Rawlinson wrote for then court.

The court said the federal judge in Los Angeles who dismissed the case must also reconsider her earlier ruling declining to block AB5 pending the outcome of the lawsuit.

The decision comes after a California state appeals court on Monday revived a ballot measure passed by nearly 60% of voters in 2020 that exempts app-based transportation services such as Uber and rival Lyft Inc (NASDAQ:LYFT) from the scope of AB5. The ballot measure had been struck down by a judge.

The 9th Circuit decision and the ruling reviving Prop 22 may not have an immediate effect, as the state and a labor union that challenged the ballot measure are likely to appeal them.