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Uber and Lyft May Suspend Operations in California

Tomorrow Marks an Important Deadline

Uber (UBER) and Lyft (LYFT) have been battling with the state of California for most of this year. Now, the conflict is coming to a head. In January, California enacted Assembly Bill 5, a law designed to give gig workers employment benefits. Since the law took effect, Uber and Lyft have continued to treat their drivers like contractors, rather than like employees.

On August 10, a California judge mandated that the companies classify their drivers as employees, and gave them 10 days to appeal the decision. Uber and Lyft’s leadership warned that they might temporarily stop their business in California, starting tomorrow, if the order stays in place.

Contractors or Employees?

Uber and Lyft have long classified their drivers as contractors. Drivers cover their own vehicle upkeep costs, and do not receive unemployment insurance, overtime pay, or other benefits. The rideshare companies said this model gives drivers flexibility to make their own schedules. Uber and Lyft also argue that they are tech platforms used to connect drivers and passengers, not transportation companies employing drivers.

The companies have made changes to their business models to give drivers more power, like letting them see fares and decline rides before picking up passengers. These kinds of moves solidify drivers’ independence, but also make them more like contractors than employees.

Critics of the companies say their contractor models place unfair burdens on drivers and make it difficult for transportation businesses that follow employment laws to compete with them.

Looking Ahead

Though Uber and Lyft are fighting California’s regulations, they are also beginning to make plans for how to adapt their businesses if they are required to treat drivers as employees.

They are considering adopting a franchise-like business model. This way, other companies could develop transportation fleets using their technology. Independent companies would handle employee benefits, and Uber and Lyft would be purely technology providers. FedEx (FDX) uses a similar franchise model for some of its delivery operations, and Uber already shifted to this structure in Germany and Spain due to regulations.

The companies are also looking toward November when a law exempting them from AB-5 will be on ballots in California. For now, however, it’s a tense week for Uber and Lyft. The companies’ investors, as well as drivers and passengers who use the platforms, will be closely following what happens in California.

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