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Uber, Lyft Must Classify Drivers As Employees, California Appeals Court Rules

In a setback for ride-hailing companies Uber Technologies Inc (NASDAQ: UBER) and LYFT Inc (NASDAQ: LYFT), a California appeals court ruled on Thursday that the companies must comply with August's injunction order requiring them to reclassify the drivers as their employees, reports the Wall Street Journal.

The order will not go into effect right away and the Proposition 22 ballot measure on Nov. 3 could still exempt the companies from this order.

What Happened: The California Assembly Bill 5 (AB5) extends employee classification status to gig economy workers. It requires companies that hire independent contractors to reclassify them as employees. The law went into effect on Jan. 1 and affects more than one million gig economy workers hired by companies like Uber, Lyft, and Doordash, according to the New York Times.

California’s attorney general and a coalition of city attorneys in the state sued Uber and Lyft, claiming they wrongfully classified workers as independent contractors. In August, a judge granted a preliminary injunction, requiring the companies to stop classifying the drivers as independent contractors.

The companies had appealed against the injunction but a unanimous decision in the appeals court on Thursday upheld the ruling.

Both Uber and Lyft have threatened to suspend their service in California if they are forced to reclassify the workers.

Reportedly, Uber has sent in-app notifications to drivers saying it would be able to hire only three out of 10 workers as employees.

Parallelly, the ride-hailing companies and its allies have sponsored a ballot measure called the proposition 22, asking voters to exempt them from reclassifying the gig economy workers. It is the most expensive proposition in California's history, as per the WSJ.

"This ruling makes it more urgent than ever for voters to stand with drivers and vote yes on Prop. 22," a Lyft spokesperson said in a statement.

"Today’s ruling means that if the voters don’t say Yes on Proposition 22, rideshare drivers will be prevented from continuing to work as independent contractors, putting hundreds of thousands of Californians out of work and likely shutting down ridesharing throughout much of the state," an Uber spokesperson said in a statement.

Why It Matters: Though Uber and Lyft are considering options of appealing to the California Supreme Court, a positive vote in favor of companies in the proposition 22 ballots could supersede any ruling.

Most ride-hailing companies have suffered during the pandemic. If they were forced to reclassify workers as employees, it will have to pay benefits such as paid sick days and health insurance at a time when they are already struggling to make a profit, WSJ noted.

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