Lyft suspending California service after being ordered to classify drivers as employees

A driver adjusts his face mask as Uber and Lyft drivers with Rideshare Drivers United and the Transport Workers Union of America conduct a ‘caravan protest’ outside the California Labor Commissioner’s office amidst the coronavirus pandemic on April 16, 2020 in Los Angeles, California. (Photo by Mario Tama/Getty Images)

Mario Tama

Lyft said Thursday it is suspending service in California as of midnight PT because a court allowed a requirement that it reclassify drivers as employees.

The court granted a preliminary injunction last week but stayed it until Friday while the companies appealed.

Top executives at Uber and Lyft warned last week they would likely have to suspend service to comply with the order, which meant restructuring their operations and rehiring workers. 

Uber has not made a formal announcement yet about suspending service in California, but it is expected to do so.

Lyft’s stock tumbled 8.5% at one point Thursday following the news but regained about half the losses. Uber shares were up slightly after falling 3.2%.

The injunction was part of a lawsuit filed by California’s attorney general and three city attorneys claiming Uber and Lyft skirted expenses for workers by falsely classifying them as contractors rather than employees. A judge granted the state’s request for an injunction, saying he was unconvinced the companies met one of the key standards of the new state labor law, Assembly Bill 5, which says contractors must do work outside the normal course of the hiring firm’s business. 

Uber had planned to continue operating its food delivery service in California even during the suspension period, an Uber executive told the website Eater last week. The injunction targets ride-hailing drivers, but scrutiny on food delivery services has already ramped up under AB5, with San Francisco’s district attorney suing the app-based delivery service DoorDash, claiming it misclassified workers.

Uber and Lyft have a chance to avoid further legal action under AB5 with a November ballot measure they’re supporting. If voters support Proposition 22, Uber, Lyft and other app-based ride-hailing and food delivery services will be exempted from AB5. The measure also provides for additional benefits for gig workers at such services.

As of Oct. 1, Lyft had about 305,000 drivers in California who completed trips within the past year, though that number is likely far lower now as the coronavirus pandemic has kept many riders from traveling. A spokesperson did not immediately respond to a request for more recent figures.

Uber said in a recent blog post that its number of active drivers per quarter in California is about 209,000.

San Jose Mayor Sam Liccardo, a Democrat, said the outcome of Lyft leaving the state was disappointing.

“We simply don’t want to see more people going without income, particularly when we know that there is a negotiated solution that we have here,” Liccardo said in an interview on CNBC’s “The Exchange” Thursday. He advocated for “portable” benefits along the lines of what Uber CEO Dara Khosrowshahi has labeled a “third way.” Under the model, drivers working for multiple app-based businesses could accumulate benefits based on the number of hours they work no matter if they stick to one platform or not.

While a suspension could drum up support for the ballot measure if riders miss the services, it will also present the opportunity for competitors to swoop in. Two start-ups, Alto and Arcade City, have accelerated plans to enter California amid the legal battle. Even existing services and taxi drivers could seize the opportunity to gain back market share. Ridership across the board is already low, however, as travel has stalled during the coronavirus pandemic. 

Still, a similar situation played out in Austin in 2016 when Uber and Lyft suspended service there over a new background check law they said would prolong their process of signing up drivers. While several new services took hold, the two giants regained much of their customer base when they returned after the state reversed the law.

In its announcement Thursday, Lyft encouraged voters to support Prop 22 and said Californians could still use the Lyft app for bike, scooter and car rentals.

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WATCH: Uber and Lyft respond to California injunction ruling

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