Just hours before Uber and Lyft planned to suspend operations in California in a bid to evade an injunction ordering the companies to classify their drivers as employees, a California appeals court halted the order, averting the shutdown.
On August 10, a California court issued an injunction ordering Uber and Lyft to reclassify their drivers as employees. The order followed an extended legal battle between the ride-sharing companies and the state of California over AB 5 (Assembly Bill 5), a state law that requires gig economy companies like Uber and Lyft to grant their drivers employee status.
In May, California attorney general Xavier Becerra sued Uber and Lyft, arguing that the companies were violating the law by misclassifying their drivers as independent contractors (Uber Eats, the company’s food business, is not covered by the injunction, and can continue operating). With employee status would come labor law protections, with drivers entitled to health insurance, overtime pay, sick pay, and other benefits.
The judge gave the companies ten days to comply with the ruling.
For Uber and Lyft, such reclassification threatens the foundations of their business model. Despite the companies’ claims to innovation, their operations are based on a brazen flouting of labor law, in the United States and abroad. Classifying drivers as independent contractors allows the companies to transfer risk onto drivers, freeing them of the liabilities — and costs — that come with employing a vast workforce, and providing a competitive advantage over other private companies. Despite such regulatory arbitrage, Uber and Lyft don’t turn a profit, regularly losing billions of dollars per year.
In response to the August 10 injunction, Uber and Lyft filed an appeal, which was dismissed last Thursday. “I am unconvinced that any extension of the 10 day stay is required. Both applications are denied,” said Judge Ethan Schulman of the San Francisco Superior Court of California. In response to Uber’s’ description of itself as a technology company, Schulman wrote that Uber’s “entire business is that of transporting passengers with compensation.”
In the wake of last week’s injunction, both Uber and Lyft threatened to engage in a capital strike by suspending operations in California, a development that would’ve left thousands of drivers in the lurch, abruptly depriving them of their source of income in the midst of an economic crisis. Such a move would’ve been costly for the companies — California is a significant market for both — but was deemed necessary to evade regulations. Both companies were expected to shut down at midnight tonight.
Today’s appeals court ruling orders the CEOs of Uber and Lyft to submit implementation plans for complying with the law within thirty days if the court upholds the earlier injunction, with oral arguments scheduled for October 13. As Reuters reports, following today’s last-minute ruling, Lyft shares were up almost 9 percent, and Uber shares were up 6.4 percent.
Regardless of what comes next in the appeals process, both sides of the fight have their sights set on Proposition 22, a ballot initiative California voters will weigh in on in November. Prop 22, as it’s known, would allow the ride-sharing companies a carve-out from AB 5, enabling them to continue classifying drivers as independent contractors. So far, gig economy companies have spent a combined $110 million on their campaign in support of the ballot initiative.
In an interview this week on New York Magazine’s “Pivot” podcast, Scott Galloway, one of the show’s hosts, told Uber CEO Dara Khosrowshahi that “Uber is literally ground zero for income inequality,” contrasting the exorbitant salaries of Uber employees with the barely livable incomes of the company’s drivers. Khosrowshahi rejected the premise. Drivers aren’t employees, he argued, so the notion of extreme inequality at Uber is false.
Khosrowshahi’s response was more than a defensive dismissal of an uncomfortable question. The entire future of ride-sharing companies like Uber hangs on his claim.