A California judge granted a preliminary injunction Monday requiring Uber and Lyft to stop classifying their drivers as independent contractors pending further action by the court. The order will take effect after 10 days, as the companies requested a brief stay during the appeals process.
If upheld, the ruling could have serious implications for Uber and Lyft, both of which are not yet profitable and have seen their ride-hailing businesses suffer during the pandemic. By classifying their drivers as independent workers, rather than employees, the companies have not had to pay for costly benefits that come with a full-time staff.
California Attorney General Xavier Becerra requested the injunction as part of a lawsuit he brought in May along with city attorneys from San Francisco, Los Angeles and San Diego. The suit, filed in San Francisco Superior Court, alleged Uber and Lyft violated the state’s new law known as Assembly Bill 5 (AB5), which was created as a way to classify gig workers as full employees and ensure benefits from their employers. Uber and Lyft were among a group of tech companies that have previously opposed the bill, arguing their workers enjoy the flexibility of creating their own schedules as contractors.
California officials sought an injunction on the alleged misclassification and restitution for workers and civil penalties worth up to hundreds of millions of dollars.
Shares of Uber were down 0.8% during extended trading Monday and Lyft shares were down 1.7%.
Both companies said they would appeal the ruling immediately.
“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,” an Uber spokesperson said. “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 during an economic depression.”
“Drivers do not want to be employees, full stop,” Lyft said in a statement. “We’ll immediately appeal this ruling and continue to fight for their independence. Ultimately, we believe this issue will be decided by California voters and that they will side with drivers.”
“Our state and workers shouldn’t have to foot the bill when big businesses try to skip out on their responsibilities,” a spokesperson for Becerra’s office said. “We’re going to keep working to make sure Uber and Lyft play by the rules.”
Uber CEO Dara Khosrowshahi advocated for a “third way” to classify workers in a letter to President Donald Trump in March as the first round of coronavirus relief measures were being negotiated. He argued there should be a way for workers to gain protections without sacrificing the flexibility of contract work.
In the ruling, Judge Ethan Schulman recognized the value of flexibility offered by Uber and Lyft, writing, “The Court does not take lightly Defendants’ showing that a preliminary injunction may also have an adverse effect on some of their drivers, many of whom desire the flexibility to continue working as they have in the past, and may have commitments that make it difficult if not impossible for them to become full-time employees.”
But Schulman wrote that Uber and Lyft’s concerns that the injunction would have “far-reaching effects” had “only been exacerbated by Defendants’ prolonged and brazen refusal to comply with California law. Defendants may not evade legislative mandates merely because their businesses are so large that they affect the lives of many thousands of people.”
Schulman wrote that any impact of the injunction on Uber and Lyft’s businesses would likely be mitigated by the fact that both have said the “vast majority of their drivers work on a casual or sporadic basis” and the reality that the coronavirus pandemic has “drastically reduced the demand for Defendants’ services.”
“Now, when Defendants’ ridership is at an all-time low, may be the best time (or the least worst time) for Defendants to change their business practices to conform to California law without causing widespread adverse effects on their drivers,” Schulman wrote.
Uber and Lyft sought to delay the ruling until there was a ruling on Uber’s constitutional challenge of AB5 or until voters weighed in on a ballot measure they sponsored to exempt them from the law. The Court dismissed those requests.
Schulman said Uber’s arguments that drivers’ work was outside the ordinary course of its business, as the standard requires, was “a classic example of circular reasoning.” He summarized the argument as saying that since Uber views itself as a tech company, only its tech workers are its employees.
“Were this reasoning to be accepted, the rapidly expanding majority of industries that rely heavily on technology could with impunity deprive legions of workers of the basic protections afforded to employees by state labor and employment laws,” the judge wrote.
The ruling does not end the legal battles for Uber and Lyft, however. Last week, California’s Labor Commissioner announced lawsuits against the companies alleging wage theft due to misclassification. The commission seeks to recover wages it believes were owed to drivers currently classified as contractors. The suits were filed in Alameda County Superior Court.
This story is developing. Check back for updates.
-CNBC’s Deirdre Bosa contributed to this report.