Uber and Lyft faced tough questions from California judges as they seek to keep classifying drivers as contractors

• A California appeals court heard arguments on Tuesday from Uber and Lyft as they appeal a recent ruling that would force the companies to reclassify drivers as employees.
• A lower court determined in August that Uber and Lyft drivers are employees, not contractors, under the state's gig work law, AB-5, but delayed enforcing the ruling while the companies appeal it.
• Uber, Lyft, and other gig companies have fought AB-5 aggressively, pouring more than $180 million into a ballot measure aimed at California voters that would permanently exempt them from the law.
• The companies argue reclassifying drivers as employees will reduce their flexibility, while proponents of AB-5 say Uber and Lyft's business models rely on underpaying drivers and skirting labor laws.

A California appeals court heard oral arguments Tuesday from Uber, Lyft, and the state over whether a lower court reached the right conclusion in August when it ruled that the companies' drivers are employees under the state's gig work law, AB-5.

Judges from California's first district Court of Appeal pressed lawyers for Uber and Lyft over drivers' wages and autonomy, and questioned the companies' arguments that AB-5 would require them to reduce drivers' flexibility, according to The Washington Post and The New York Times reporter Kate Conger.

The judges also asked a lawyer for the state about potential harms to Uber and Lyft and drivers' preferences around their employment status, according to reports.

The landmark case could fundamentally alter the contractor-based business model that Uber and Lyft have relied on, and the companies are aggressively fighting the law in court and via a ballot measure that California voters will decide on in November.

AB-5, which went into effect at the beginning of this year, allows companies to treat workers as independent contractors instead of employees only if workers meet three criteria: they're "free from the control and direction" of the company; they perform work "outside the usual course" of the company's business; and they're "customarily engaged" in their own independent business.

California state and city attorneys general sued Uber and Lyft in May over their refusal to comply with the law, arguing that ride-hailing drivers don't pass that test. San Francisco Superior Court Judge Ethan Schulman sided with the state in August, ruling that Uber and Lyft must reclassify drivers as employees, but the ruling was stayed by Schulman and again by the appellate court while the companies appeal.

In Tuesday's oral arguments, Uber lawyer Theodore Boutrous Jr. argued the ruling would cause "irreparable harm" and that "Uber would have to turn into a different company" and cut jobs if the ruling is upheld, The Washington Post reported.

But according to Conger, Judge Brown questioned Uber on that claim, asking what part of AB-5 would require the company to reduce drivers' flexibility.

Uber and Lyft have focused heavily on flexibility in their opposition to the law, citing drivers' alleged preference to work as contractors, but critics of the business model say it allows the companies to cut costs by depriving drivers of protections like minimum wage, health insurance, and unemployment insurance that other California workers are entitled to.

Matthew Goldberg, a lawyer from the San Francisco city attorney's office, responded to a question about drivers' preferences by saying "employees should not have the right to work without those underlying benefits. ... You are not permitted to work for less than the minimum wage, even if you want to."

When pressed by the judges on potential harms to Uber and Lyft, Goldberg responded that every other company follows the law and so Uber and Lyft should have to as well, The New York Times' Kate Conger tweeted. He also said Uber and Lyft were causing harm to drivers: "This is dollars and wages and money that is being stolen from drivers by virtue of the misclassification."

Uber and Lyft have repeatedly claimed that the law doesn't apply to them in the first place — an argument Lyft lawyer Rohit Singla brought up again Tuesday, while Boutrous cited changes Uber has made to its app that should exempt its drivers, according to The Washington Post.

But the judges appeared skeptical, Conger reported, pointing out that Uber still sets the base fare for drivers.

They also cast doubt on Lyft's claim that underpayment of drivers' wages isn't irreparable harm, according to The Washington Post, with one asking: "Are you suggesting that the specter of thousands of individual claims for back wages is something that is insignificant and something that need not be considered in balancing the appropriateness of an injunction at this point?"

California's Labor Commission brought a separate lawsuit against Uber and Lyft over the same issue in August, alleging they've been committing wage theft by classifying drivers as contractors.

Uber and Lyft have sought to head off a potential loss in court by pouring more than $180 million into a ballot measure, Proposition 22, that would exempt ride-hail and food delivery workers from AB-5. That's the most money ever used to back a ballot measure in the state, according to Ballotpedia.

Uber and Lyft also came under fire earlier this week after SF Gate reported that the companies indirectly funded ballot guides sent to California voters urging them to vote for Proposition 22 by falsely claiming to be affiliated with Sen. Bernie Sanders and other "progressive" groups.

Both Sen. Sanders and the California Democratic Party have opposed the measure.