LYFT Lyft Inc

California court grants stay on state law that would have required reclassification Friday

By Preetika Rana 

This article is being republished as part of our daily reproduction of WSJ.com articles that also appeared in the U.S. print edition of The Wall Street Journal (August 21, 2020).

Uber Technologies Inc. and Lyft Inc. will be able to continue conducting business as usual in California for now, after a state appeals court on Thursday paused a lower-court ruling that required the ride-hailing companies to reclassify their drivers as employees.

The reprieve means both companies can continue operating while they fight a high-stakes legal battle with their home state.

The court's decision followed a flurry of public messaging by the companies earlier Thursday, capping a week of threats that they would shutter their services in California if the courts compelled them to reclassify their workers. Lyft posted an announcement on its website Thursday morning saying it would halt its business there as of midnight. Uber put up what appeared to be a placeholder post on its site, with the heading, "Important Information About California Ridesharing Shutdown," which it later removed.

Lyft confirmed it no longer plans to halt ride-hailing service in the state.

A state judge last week gave Uber and Lyft until Friday to reclassify their drivers as employees, after California sued the companies in May alleging they were violating a new state law.

California's so-called gig-worker law that went into effect on Jan. 1 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 they are technology platforms that connect riders with drivers, not transportation companies, so the drivers aren't part of their usual course of business.

California's Department of Justice, which is suing the companies, said in a statement Thursday, "We're confident in the facts of our case and we look forward to continuing our fight to defend the rights of workers across the state."

While Thursday's stay opens the door for Uber and Lyft to continue operating in a key market -- California accounted for 16% of Lyft's rides in this year's second quarter and 9% of Uber's gross bookings before the pandemic -- the prospect of reclassifying drivers in the future would undermine the economics of ride-hailing at a time the companies are already struggling to turn a profit.

After the lower court ruling, Uber and Lyft bargained for more time in legal filings to the appeals court that granted the stay. Uber said, for instance, that it would take several months to build a framework to reclassify drivers, including a system to monitor their meals and rest breaks, and would need additional staff to oversee day-to-day operations. Lyft, too, said it lacked the infrastructure necessary to upend its business "at the flip of a switch."

The companies have their sights on a November ballot initiative, in which voters in California can decide whether to exempt them from the state law at the heart of the dispute. The outcome of the vote would supersede any pending litigation.

The court gave Uber and Lyft's chief executives until Sept. 4 to submit sworn testimony saying they had developed the infrastructure needed for such a reclassification should their ballot measure and appeal fail.

Uber and Lyft have said reclassifying drivers would require them to work prescheduled shifts, robbing them of flexibility. For the reclassification to be economically viable, the companies say they would be forced to consolidate their fleet to fewer drivers who work 40 hours a week, the standard for full-time employees; drastically reduce their footprint in cities where demand is spotty; and raise prices for rides to offset the new costs associated with managing driver operations.

Uber, for instance, said it would be able to hire just a quarter of its more than 200,000 drivers in California and raise prices for rides as much as 120% to account for the millions of dollars it would need to invest to manage drivers as employees.

Bruce Schaller, a former deputy commissioner at the New York City Department of Transportation, said the California law doesn't require drivers to work fixed hours or full time. "Many people work as part-time employees and still have flexibility," he said. "It's ludicrous for them to hide behind that argument when they have leeway to structure this the way they want."

He also said the companies were exaggerating the potential costs and fare increases as a way to rally public support for their cause. "They already do those things. Are they saying they don't have a computer system with drivers' names in it, or a team to onboard and check backgrounds, or that they don't process payments to drivers or track their movements? They do everything and more."

California Assemblywoman Lorena Gonzalez, who wrote the law at the heart of the dispute, tweeted: " Uber & Lyft can quit crying now & work on reclassifying their drivers as employees.... Shame on them with their scare tactics!"

If the November ballot succeeds, the companies say they will guarantee new protections for workers, 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.

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

Write to Preetika Rana at preetika.rana@wsj.com

(END) Dow Jones Newswires

August 21, 2020 02:47 ET (06:47 GMT)

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