Why Uber and Lyft Almost Shut Down in CA — And They’re Not Clear Yet

A man waits for his ride share in this illustration.
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Uber and Lyft, the two largest ride-sharing companies, were hours away from halting services in their home state of California, announcing they would do so on Thursday, Aug. 20 at midnight Pacific time.

Earlier in August, a California court ordered the companies to reclassify their gig workers, who are independent contractors, as employees by Aug 21. They couldn’t meet that deadline, so they planned to shut down in the state instead. Uber Eats services were not part of the plan.

Hours before the scheduled shutdown, the California Court of Appeals granted a stay, effectively buying Uber and Lyft more time and allowing them to continue operations.

“The California court has granted our request for a further stay, so our rideshare operations can continue uninterrupted, for now,” Lyft stated in an update to its shutdown announcement.

There is a condition: By Aug. 25, both companies have to submit a plan to the court on how they will reclassify their drivers as employees should the order be upheld. If they miss that deadline, they may end up shutting down while the remainder of the process plays out in court.

In the long run, Uber and Lyft’s independent-contractor model for drivers is still at risk in the state, as the stay is temporary and a major lawsuit is ongoing.

The Legal Battle Over California Ride-Share Drivers

How Uber and Lyft classify ride-share drivers is the focal point of a lawsuit that embroils both companies. On Jan. 1, a new labor law called AB-5 went into effect. This law sets new criteria for businesses that rely on independent contractors.

The law is far-reaching and affects a variety of industries. Gig app companies, in particular Uber and Lyft, have come under increased scrutiny as they have largely ignored it.

Here’s how to tell if you’re an independent contractor under AB-5:

  • You are free from the control of the hiring company in regards to how you perform your work.
  • You perform work that is outside the “core operations” of the hiring company. For example, the core operations of a restaurant would be to cook and sell food. Under the law, the restaurant shouldn’t be hiring servers or chefs as independent contractors because their jobs are central to the business.
  • You work in an independently established trade, occupation, or business in the same field as the work you’re performing for the hiring company.

If all three stipulations apply, you are an independent contractor. Even if one doesn’t apply, you should be considered an employee of the company and eligible for minimum wage, overtime pay, health-care benefits, workers compensation, Unemployment Insurance, the right to unionize and more.

California’s attorney general and several major-city attorneys general in the state argue gig workers for Uber and Lyft should be employees. The companies disagree.

The outcome of the lawsuit is expected to have major implications on the entire state’s gig economy and beyond, as other states consider similar laws to protect gig workers.

Why Uber and Lyft Oppose Reclassification

Uber and Lyft have long opposed this reclassification law and did not comply with AB-5 when it went into effect earlier this year. Before it was approved by lawmakers, the companies spent nearly $100 million campaigning against it.

When the law passed in September 2019, Uber’s chief legal officer Tony West argued that AB-5 doesn’t apply to Uber. Since the law has gone into effect, Uber has made many changes to give California drivers more autonomy — ostensibly to strengthen its legal case.

But that wasn’t enough. In May, California’s attorney general sued Uber and Lyft for failing to comply with the new law, setting into motion a heated legal battle that has both companies appealing to customers, drivers — even voters.

For customers, the companies argue that the reclassification will cause service hiccups and higher fees. For drivers, they say becoming a W-2 employee will take away from their flexibility and independence.

Both companies, along with DoorDash, which is equally dependent on independent contractors, raised another $100 million to fund a ballot initiative called Proposition 22. The measure allows for exemptions from the AB-5 law, granted that the companies provide boosted benefits to their gig workers — but not full benefits like regular W-2 employees.

Pleas to vote yes on Prop 22 were included in both companies’ shutdown announcements. California voters will decide on it in the November elections.

In the meantime, as the lawsuit rages on, Uber and Lyft may choose to shut services down again in October if they aren’t able to appeal the court order to reclassify their workers. And if things don’t pan out in November, Uber floated the idea that the future of ride-sharing in the state could look a lot like a franchise-business model from the company’s infancy.

Adam Hardy is a staff writer at The Penny Hoarder. He covers the gig economy, entrepreneurship and unique ways to make money. Read his ​latest articles here, or say hi on Twitter @hardyjournalism.