Uber and Lyft Downshift Following California Driver Ruling

Uber and Lyft both trade lower after an appeals court rules they must treat their drivers in California as employees instead of independent gig workers.

Uber Technologies  (UBER) - Get Report and Lyft  (LYFT) - Get Report both traded lower Friday after an appeals court ruled they must treat their drivers in California as employees instead of independent gig workers, a significant blow that could lead both companies to shut down operations in their home state.

The ruling, handed down late Thursday, upheld a lower court’s order that the companies comply with Assembly Bill 5 and provide drivers with health and other work benefits that typically come with full-time employment status.

While Assembly Bill 5 went into effect in January, Uber and Lyft have not complied, arguing they are tech platforms and are not transportation businesses.

In August, a San Francisco Superior Court judge ordered the companies to employ their drivers. Executives at Uber and Lyft appealed that decision, arguing the injunction was “radical” or “unprecedented,” and that they could not meet that deadline.

In their ruling against that appeal, the three-judge panel said the injunction "was properly issued in accordance with enduring principles of equity.” 

"It is broad in scope, no doubt, but so too is the scale of the alleged violations,” the judges said.

The decision comes less than two weeks before an election in which the ride-hailing companies are banking on California voters to approve a ballot measure that would partially exempt them from the labor law. 

Proposition 22, which is set for a vote Nov. 3, exempts Uber and Lyft from paying full benefits that employees currently get under California law, such as unemployment insurance and workers compensation, while requiring a pay guarantee for drivers’ time on trips, health care contributions and medical and disability coverage.

Uber and Lyft have long argued that their freelance model allows drivers to drive only when they want to. But critics have said it places unreasonable financial burdens on drivers and gives Uber and Lyft unfair advantages over businesses that follow employment laws.

Both companies have said they may need to leave California if Proposition 22 doesn't pass, though both companies have also explored other options, including licensing their brands to vehicle fleet operators.

Shares of Uber were down 1.23% at $36.25 in premarket trading on Friday, while shares of Lyft were down 1.08% $25.30.