Lyft will continue operating in California after appeals court grants reprieve

Lyft reversed a decision to suspend service in California Thursday after a California appeals court extended the length of time the company and Uber have until they need to comply with an order to reclassify drivers as employees. The company would suspend service in the state as of midnight. Both the company and Uber now have until 5 p.m. on August 25th to file written statements agreeing to expedited procedures required by the order.

If Lyft and Uber agree to the terms, the stay will remain in place until the appeal is resolved. While the company will not have to suspend operations tonight, it does need to continue fighting for independence plus benefits for drivers. That is the solution on the ballot in November, and it is the solution drivers want because it preserves their ability to earn and to use the platform as they do now, whenever they want, while also getting historic new benefits.

Without it, 80-90% of Californians who earn on app-based platforms will lose that opportunity. The court granted a preliminary injunction last week but stayed it until Friday while the companies appealed. Top executives at Lyft and Uber 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 the company and Uber skirted expenses for workers by falsely classifying them as contractors rather than employees.

A judge granted the state’s request for an injunction as 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. California is home to millions of businesses and millions of workers. Every day, companies protect their workers’ rights and benefits.

California is America’s economic engine because innovation and worker rights go hand in hand. Any company that suggests otherwise is peddling a false choice. Uber had planned to continue operating its food delivery service in California even during the suspension period. 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.

Lyft and Uber have a chance to avoid further legal action under AB5 with a November ballot measure they are supporting.

If voters support Proposition 22, Lyft, Uber, 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 October 1st, the company had about 305,000 drivers in California who completed trips within the past year, though that number is likely far lower now as the covid pandemic has kept many riders from traveling.

Uber’s 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. He does not want to see more people going without income, particularly when he knows that there is a negotiated solution. He advocated for “portable” benefits along the lines of what Uber Chief Executive Officer 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 covid pandemic. Still, a similar situation played out in Austin in 2016 when Lyft and Uber 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.

The company encouraged voters to support Proposition 22 and said Californians could still use the Lyft app for bike, scooter, and car rentals. The company reported second-quarter earnings, which showed a 61% revenue drop versus the same period last year, but a glimmer of hope for its core ride-hailing business with monthly rides increasing 78% in July, as compared to April. The company may need to suspend its ride-hailing operations in California starting on August 21st if a court does not overturn its recent ruling which requires the company to classify drivers as employees eligible for benefits, not independent contractors.

California makes up about 16% of total rides for Lyft. Shares traded as high as 6% following the report’s release, but went negative after the company said it may have to suspend operations in California. The company’s announcement followed a similar one from Uber that it might have to stop service in California if the court does not overturn its ruling. Net losses for the company amounted to $437.1 million during the second quarter, compared to $644.2 million in the same period last year.

Lyft is on track to achieve profitability on an adjusted basis during the fourth quarter of next year.

Lyft expects to become profitable with 20% to 25% fewer rides than it had predicted as of October 2019. The company makes money through ride-hailing, scooter- and bike-sharing, and its relatively new vehicle rentals business. Unlike the company’s primary competitor, Uber, it does not have a food delivery, freight, or investments and operations overseas to help it make up for losses in travel and transportation.

To try to make drivers and rides feel comfortable with ride-hailing again, despite the persistence of covid in the United States, Lyft made it a requirement for riders and drivers to wear a mask during trips starting in May, and after that began to distribute masks and hand sanitizer to drivers. Last month, the company was distributing tens of thousands of vehicle partition shields to its top drivers as a protection against covid. California state regulators want the company to do even more for drivers, to treat them like employees, not freelancers.

Lyft and Uber are facing multiple lawsuits in the United States over alleged misclassification of drivers and wage theft. The company and Uber have previously treated drivers strictly as independent contractors. Like others in the gig economy, including Doordash and Instacart, the company and Uber have argued that workers want freedom and flexibility that they cannot get if they are classified as employees.

Critics say that a desire for flexibility should not to be confused with a desire to remain an independent contractor. Drivers overwhelmingly wanted employee benefits, even as they feared how companies might behave as employers.