California plans to go to court to compel Uber and Lyft to reclassify their drivers as employees in a matter of weeks. The companies said that could jeopardize their businesses, possibly forcing them to shut down service in California or raise prices dramatically.
Attorney General Xavier Becerra and the city attorneys of San Francisco, Los Angeles and San Diego sued Uber and Lyft in May, saying their drivers were misclassified as independent contractors when they should be employees under AB5, the state’s gig-work law that took effect Jan. 1.
As part of that suit, Becerra and the city attorneys said Wednesday they now plan to seek a preliminary injunction forcing Uber and Lyft to treat drivers as employees before the case is heard. The judge on the case set a hearing on that motion for Aug. 6.
The lawsuit says that keeping drivers as freelancers robs them of critical workplace protections, such as minimum wage, overtime and workers’ compensation insurance, and gives the companies an unfair competitive advantage, as they can duck the costs of providing those benefits, which can add 30% to an employer’s labor costs.
Uber and Lyft, which have never turned a profit, can ill afford any additional expenses. Both saw their shares drop almost 8% Wednesday, falling more than the stock markets overall.
“Misclassifying your workers as ‘consultants’ or ‘independent contractors’ simply means you want your workers or taxpayers to foot the bill for obligations you have as an employer — whether it’s paying a legal wage or overtime, providing sick leave, or providing unemployment insurance,” Becerra said in a statement. “We’re seeking a court order to force Uber and Lyft to play by the rules.”
Uber and Lyft maintain that the flexibility of a nonemployee structure is key to their business models, and point to surveys that most drivers prefer staying independent. The two San Francisco companies, along with DoorDash, Instacart and Postmates, are spending $110 million on a November ballot measure asking California voters to keep their drivers and couriers independent but with some benefits and wage floors.
“We believe the courts should let the voters decide,” said Lyft spokeswoman Julie Wood in a statement. “Trying to force drivers to give up their independence 100 days before the election threatens to put a million more people out of work at the worst possible time.”
The ballot campaign commissioned a study that said the companies would hire only about 10% to 20% of current drivers under an employee model, with the huge numbers who work part time being jettisoned.
“The vast majority of drivers want to work independently, and we’ve already made significant changes to our app to ensure that remains the case under California law,” Uber said. In January, Uber began allowing drivers to reject rides without penalties and made fares more transparent, although it still sets the fares. “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.”
Organized labor backed AB5, and now a broad coalition of unions are battling the gig companies’ ballot measure, saying that the contractor model exploits workers.
The state’s legal filing “is another strong signal to voters that these companies will do anything — including breaking the law — in order to boost their profits, said Bob Schoonover, president of SEIU California, in a statement.
Uber, which has 158,000 California drivers, said most would lose work under an employee model. “We estimate that rider prices would need to increase 25-111% across different parts of California to cover increased costs,” wrote Alison Stein, an economist at Uber, in a Medium post on the potential impact.
Bill Hamm, a former California legislative analyst whom the pro-gig-work campaign hired to analyze the effects of employment, said he estimates it would increase ride fares by 26%.
Arun Sundararajan, an NYU business professor who studies the on-demand economy, agreed that ride prices would rise if drivers were employees.
In addition, “I think service availability is bound to suffer because this is a market that works very well,” he said. “The extreme flexibility that Uber and Lyft provide workers now makes it much easier to cover the high-demand periods.”
An employment model, in which companies have to keep drivers busy 8 to 10 hours a day, “favors the bigger player (Uber) and over time will lead to Uber having a monopoly,” he said.
Sung Won Sohn, an economics and finance professor at Loyola Marymount, echoed that. “The end result would be fewer rides at higher costs,” he said. “That’s what economics would dictate.”
AB5, which codifies and clarifies a 2018 California Supreme Court decision called Dynamex, makes it much harder for companies to claim that workers are independent contractors.
The law has had massive ripple effects, with many freelancers saying it destroys their livelihoods. In terms of government enforcement, the primary targets have been truck driving and the new generation of on-demand, app-based services.
The San Francisco district attorney sued delivery company DoorDash this month, saying it is defying AB5.
San Diego’s city attorney sued Instacart over the classification of drivers and shoppers in September. In February, a judge granted the city’s request for a preliminary injunction to force reclassification, but then stayed his order while Instacart’s appeal is pending. The ruling was limited to workers within San Diego, although the city had sought an order for the whole state.
Uber and Postmates sued California in December, requesting a halt to enforcement of AB5 against them. In February, a federal judge denied their request for a preliminary injunction that would have immediately halted enforcement in that case, which is still pending.
Carolyn Said is a San Francisco Chronicle staff writer. Email: firstname.lastname@example.org Twitter: @csaid