The standoff continues between Uber and California Justice. Assembly Bill 5, passed last year by California, forces the company to consider its driver
Uber's CEO Says His Department Is Likely To Close Temporarily In California, Lyft is also threatening to leave the state if Assembly Bill 5 (AB5) is upheld.
The standoff continues between Uber and California Justice. Assembly Bill 5, passed last year by California, forces the company to consider its drivers as employees, but Uber does not agree. The company said Wednesday that it cannot afford such a move and that it will be forced to temporarily close its California operations if the court ruling stands. Lyft, a competitor of Uber, also made the same statement. Both want to keep their drivers as independent contractors.
In 2019, California lawmakers passed the AB5 to force Uber and other companies in the "gig economy" to treat their drivers as employees rather than independent contractors. If implemented, this law could entitle them to minimum wage protection, expense reimbursement, unemployment insurance and other benefits. The AB5 thus marks a significant development in the battle over the status of drivers. However, the companies concerned are reticent about its application.
When the decision was announced, the shares of Uber and Lyft fell by 5.3% and 4.2%, respectively, at the start of trading. AB5 strikes at the heart of the business model of technology platforms like Uber and Lyft, which rely on contract workers whom they pay less. Uber said the law punishes application-based companies and, together with Lyft, they consider AB5 to be wrong. In June, a Lyft spokesman also reported that the majority of drivers want to remain independent, even in the current Covid-19 environment.
On Wednesday, the state filed an application for an injunction with a judge, preventing Uber and rival Lyft from continuing to classify their drivers as independent contractors rather than employees. The judge gave Uber and Lyft 10 days to comply with the ruling. However, both companies said they would appeal the decision during this period before it came into effect. In addition, Uber hopes that a court of appeal will block the enforcement of the order while the case is pending, otherwise it would be forced to close its doors in the state.
It would appear that both companies consider this order as a coercive measure on the part of the Californian authorities. Indeed, when AB5 was passed last year, Uber, Lyft and DoorDash spent over $100 million to collect signatures for a voter initiative that would overturn the AB5 law. The initiative is expected to appear on the ballot in November. Dara Khosrowshahi, CEO of Uber, warned that if the ordinance is not rescinded the company would be forced to close its California operation until November.
"We believe we are in compliance with the laws," Khosrowshahi told MSNBC. "But if the judge and the court find that this is not the case, and they don't give us a stay to get to November, then we will essentially have to shut down Uber until November, when the voters will decide," he said. He said that if the court does not reconsider its decision, then in California it is hard to believe that Uber will be able to move quickly to full-time employment. Lyft also made the same announcement.
In an appeal to investors on Wednesday, Lyft's CEO said the company would close its California operations if it was forced to requalify drivers as employees. "If our efforts here fail, it will force us to suspend our operations in California," Lyft CEO John Zimmer said yesterday. "Luckily, California voters can make their voices heard by voting yes to Proposition 22 in November," he continued. Lyft therefore joins Uber in threatening to pull out of one of its largest U.S. markets.
The two companies' position could be justified by the current state of the economy, which has been shaken by the Covid-19 crisis. As an illustration, Lyft's revenues would be $339 million in the second quarter, a significant 61% decrease compared to the same period last year. The number of active users of Lyft also decreased by 60%, from 21.8 million last year to 8.7 million this quarter. Lyft earns money from bicycle and scooter travel and new car rental business.
Unlike its rival Uber, Lyft has no real food delivery and grocery business to rely on to deal with the decline in its core carpooling business.