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Uber and Lyft Pondering Shift to Franchise Models in California

Uber and Lyft, under pressure in California to label freelance drivers as employees, are pondering brand franchising as a workaround to the state's new gig law.

Uber Technologies (UBER) - Get Uber Technologies, Inc. Report and Lyft  (LYFT) - Get Lyft, Inc. Class A Report, both under pressure in California to classify their freelance drivers as employees, have  considered licensing their brands to vehicle fleet operators as a workaround to a new law that grants gig workers employment benefits.

Citing people with knowledge of the plans, The New York Times reported that both ride-hailing companies are exploring the option as a way to keep an arms-length association with drivers so that they would not need to employ them and pay benefits.

The discussions come on the heels of a new California law, Assembly Bill 5, which grants gig workers employment benefits. While the law went into effect in January, Uber and Lyft have not complied, arguing they are tech platforms and are not transportation businesses

In May, California sued Uber and Lyft to enforce the new law. Earlier this month, a San Francisco Superior Court judge ordered the companies to employ their drivers by Thursday. Executives at Uber and Lyft have both appealed that decision, arguing they cannot meet that deadline and will be forced to turn off their services as early as Friday.

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Lyft has presented the plan to its board of directors, according to the Times. Uber, which already works with fleet operators in Germany and Spain, is also familiar with the business model. Neither company has committed to the franchise-like plans.

Uber and Lyft, both based in San Francisco, have long considered their drivers to be contractors. That means that drivers are responsible for their own vehicle and maintenance costs and that Uber and Lyft do not pay for overtime, unemployment insurance or other expenses.

The companies have argued that this 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 threatened to leave the state until November, when California voters will decide on Prop 22 - backed by a number of gig platforms including Uber, Lyft and DoorDash - that would overturn key provisions of AB5. 

Shares of Uber were up 0.06% at $30.10 in trading on Wednesday, while shares of Lyft were up 1.99% at $28.50.