Uber Technologies Inc. and Lyft Inc. were ordered to convert their California drivers from independent contractors to employees with benefits, an early loss in a court battle that is key to the gig industry's future.
A judge's ruling Monday won't be the last word, as Uber and Lyft vowed to immediately appeal the preliminary injunction. If the companies are forced to reclassify their California drivers as employees, they would be on the hook for overtime, health care and other costly benefits.
The case brought by California officials to enforce a state labor law that took effect this year is the most serious legal threat yet to the gig economy -- and comes at a particularly difficult time for the ride-hailing businesses. Decimated by travel restrictions related to the coronavirus, Uber widened its losses and reported a 67% decline in ride revenue during the second quarter.
San Francisco Superior Court Judge Ethan Schulman agreed with California Attorney General Xavier Becerra that Uber and Lyft are violating the state law, Assembly Bill 5, but paused the injunction for 10 days so the companies can appeal his decision. If it stands, the ruling could spur ride-hailing companies to halt their services in the most populous U.S. state while they adjust their business model to comply with it.
As other judges in California have done, Schulman cast doubt on the companies' defense of keeping drivers classified as contractors, saying it "flies in the face of economic reality and common sense."
Their "insistence that their businesses are 'multi-sided platforms' rather than transportation companies is flatly inconsistent with the statutory provisions that govern their businesses as transportation network companies," Schulman wrote.
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Uber and Lyft both said in response that most of their drivers prefer to be classified as contractors.
"The vast majority of drivers want to work independently," an Uber spokesperson said in an emailed statement. "When over 3 million Californians are without a job, our elected leaders should be focused on creating work, not trying to shut down an entire industry during an economic depression."
Uber and Lyft's yearslong history of resistance to changing their labor models has included a fight against the California law, which says workers can generally only be considered contractors if they perform duties outside the usual course of a company's business.
A law professor who has followed the saga said Monday's ruling is a significant turning point.
"Uber and Lyft often imply that employee status is incompatible with driver flexibility -- but California law does not preclude flexible employment," said Charlotte Garden at Seattle University.