Uber and Lyft Threaten California Shutdown: Here’s What’s at Stake

A California state judge gave Uber Technologies and Lyft until Friday to reclassify their drivers as employees.

Photo: Bing Guan/Bloomberg News

Uber Technologies Inc. UBER -2.19% and Lyft LYFT 0.72% Inc. have said they may suspend their ride-hailing operations in California as soon as Friday, escalating a high-stakes battle with their home state over how their drivers should be classified.

California sued the companies in May, alleging they were violating a new state law that requires companies to treat workers as employees rather than independent contractors if they are controlled by their employer and contribute to its usual course of business, among other things. As employees, drivers would be eligible for sick days and other benefits, issues that have become more pressing during the coronavirus pandemic.

Uber and Lyft, both based in San Francisco, have argued that they are technology platforms connecting riders with drivers, not transportation companies, so the drivers aren’t part of their usual course of business.

A state judge agreed with California last week and gave the companies until Friday to reclassify their drivers as employees. The companies appealed the decision and requested the judgment be paused while it is being challenged. But unless an appeals court decides to stay the ruling, the deadline stands.

Uber Chief Executive Dara Khosrowshahi and Lyft President John Zimmer have said they would rather suspend operations in the state than upend their businesses overnight. Residents of California will be able to express their opinion through a ballot initiative in the November election that asks voters to exempt Uber and Lyft from the law at the heart of the continuing dispute.

Ride-share drivers earlier this month in Los Angeles protested against a coming ballot measure that would exempt Uber and Lyft from a new state law requiring them to classify their workers as employees.

Photo: lucy nicholson/Reuters

Both companies argue that the reclassification will require drivers to work prescheduled shifts, robbing them of the flexibility they currently enjoy. The companies say they would be forced to consolidate their fleet to fewer drivers who work more hours a week; drastically reduce their footprint in the suburbs, where demand is spotty; and raise prices for rides to offset the new costs associated with recruiting, monitoring and managing driver operations.

The stakes are high either way. Suspending ride-share in California, which accounted for 9% of Uber’s rides world-wide and 16% of Lyft’s before the coronavirus pandemic, would deal another blow to a business ravaged by the health crisis. Uber reported a 75% year-over-year drop in rides in its second quarter; Lyft’s active riders fell by more than half over the same period.

Complying with the order, though, would undermine the economics of ride-hailing, transforming Uber and Lyft into traditional taxi operators at a time when they are struggling to turn a profit. It could also set a precedent for legal battles playing out elsewhere in the U.S. and around the world. Massachusetts is suing Uber and Lyft over alleged driver misclassification, and Uber drivers in Europe have filed legal complaints seeking broader employment benefits.

Uber and Lyft assert that shifting to an employment model would force them to pick fewer drivers who conform to a 40-hour workweek, the standard for full-time U.S. employees. Uber says fewer than 2% of its more than 200,000 drivers in California use its app for 40 hours or more a week; Lyft says 86% of its more than 300,000 drivers in the state drive fewer than 20 hours a week.

For the reclassification to be economically viable, Uber would be able to hire just over 50,000 drivers, or one-quarter of its existing drivers, according to company economist Alison Stein. At the same time, the company estimates that it would need to spend millions of dollars to build a framework to monitor drivers, including tracking their meals and rest breaks, and hire additional staff to oversee day-to-day operations. Those costs, the company said in a legal filing, would push prices for rides to increase between 20% and 120%.

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Uber added that it would need several months to build such a framework, making such a reclassification impossible this week. Lyft also said that it “cannot restructure its business at the flip of a switch,” pressing the court for a stay as it argues its case.

If the appeals court gives the companies more time, the question will be for how long. Uber and Lyft have their sights set on the November ballot initiative, which would supersede any ongoing litigation if it passes.

Under the ballot measure, the companies also would guarantee certain protections to workers that currently don’t exist, such as giving drivers 30 cents a mile driven to account for gas and other vehicle costs, health-care subsidies for drivers who work 15 hours or more a week and occupational-accident insurance coverage while on the job.

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Critics say those protections fall short compared with the benefits awarded to full-time employees. For instance, the standard Internal Revenue Service mileage rate that employers typically use to reimburse employees is 57.5 cents a mile.

“It doesn’t make any sense why these workers should have to battle it out for each labor protection one by one when we have a full web of protections” for employees, said Shannon Liss-Riordan, a labor attorney who represented drivers in one of the earliest misclassification suits against Uber and Lyft in 2013. “For the companies to say they will need to figure everything from scratch overnight is ridiculous. We’ve been in court for years and when California stepped in with a law this year, they knew the hammer was going to fall on them soon. Why weren’t they prepared for this before?”

Uber and Lyft said they are exploring alternatives that might allow them to circumvent the ruling in the near term. One idea involves licensing their brands to operators of vehicle fleets. Under that model, drivers would earn a predetermined hourly wage. The fleets would monitor and enforce drivers’ activity, allowing the companies to stay at arm’s length.

Uber spokesman Noah Edwardsen said, however, that “we are not sure whether a fleet model would ultimately be viable in California.”

While some drivers have expressed a desire to keep the current model because they can pick up work when they need or want to with no strings attached, others would welcome the protections offered by California’s so-called gig-worker law. Ultimately, many of them say, their livelihoods are on the line.

“They’re playing with people’s lives threatening a shutdown. I’m scared I’ll have to find another source of income,” said Jerome Gage, who drives full-time for Lyft in Los Angeles and is an active member of the Mobile Workers Alliance that is supporting the reclassification of drivers as employees. “They treat us like it’s all about them and their bottom line.”

Write to Preetika Rana at [email protected]

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