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Judge Orders Uber, Lyft to Stop Classifying Drivers as Independent Contractors

Ruling finds that drivers are "central" to Uber and Lyft ridehailing business.

A California judge issued a preliminary injunction on Monday requiring Uber and Lyft to stop classifying their drivers as independent contractors, and potentially setting the stage for a major shift in their business models. 

Judge Ethan Schulman of San Francisco Superior Court granted a 10-day stay before the preliminary order takes effect. If the order is upheld, Uber and Lyft could be required to reclassify drivers as employees eligible for certain benefits and protections, rather than as contractors who work for themselves.

Uber  (UBER) - Get Uber Technologies, Inc. Report shares fell 1.6% and Lyft  (LYFT) - Get Lyft Inc Class A Report shares fell 1.9% on the news. 

Judge Schulman opined that Uber and Lyft use "circular" reasoning in arguing that their tech developers are employees, while their drivers are not. 

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"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," Schulman wrote in the order. "To state the obvious, drivers are central, not tangential, to Uber and Lyft’s entire ride-hailing business."

Uber and Lyft are very likely to appeal the order. 

Demand for ridehailing has taken a major hit in the COVID-19 pandemic, with Uber reporting a 75% drop in ridehail gross bookings in the second quarter. Schulman suggested that the companies could use the time to conform to California worker classification laws with as little impact as possible on their driver base. 

For Uber, Lyft and potentially other gig marketplaces, the stakes in the worker classification debate are high. Analysts at Wedbush Securities estimated last year that AB5, a California law that reclassified drivers as employees, could translate into 30% higher labor costs for Uber and Lyft -- an expense they can ill afford at a time when rides are down considerably.

Uber and Lyft are jointly challenging AB5 with a California ballot measure, up for a vote in November, that would establish new, more favorable rules for ridehail and delivery drivers.