Uber May Suspend Rides in California After Unfavorable Court Ruling

California accounts for about 9% of Uber's total gross bookings.
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In the wake of an adverse court ruling in California, Uber CEO Dara Khosrowshahi said that the company may shut down rides in the state until the November election, when voters will weigh in on an alternative driver-classification structure proposed by gig firms. 

Uber  (UBER) - Get Report shares were down 1.3% on Wednesday to $30.80. 

Khosrowshahi made the remarks in an interview on MSNBC, saying that "if the court doesn't reconsider, then in California, it's hard to believe we'll be able to switch our model to full-time employment quickly."

Earlier this week, Judge Ethan Schulman of San Francisco Superior Court issued a temporary injunction against Uber and Lyft  (LYFT) - Get Report, ordering the companies to stop classifying their drivers as independent contractors. He granted a 10-day stay, which allows the two firms time to respond before the order takes effect. 

In the strongly-worded opinion, Schulman cited their lack of compliance with AB5, a law enacted this year that reclassified many gig workers as employees, writing that: “to state the obvious, drivers are central, not tangential, to Uber and Lyft’s entire ride-hailing business.” 

The injunction applies only to Uber's rides business, and not delivery. 

In November, California voters will decide on a ballot measure, written by Uber, Lyft and other gig work firms, which seeks to overturn AB5. Schulman rejected Uber's pleas to hold off on the ruling until the election. 

"The Court believes that the impact of the injunction on Uber and Lyft’s businesses would likely be mitigated by the drastically low demand for ride hailing services" because of the coronavirus pandemic," explained Mizuho analyst James Lee in a note on Wednesday. "Therefore, this may be the best time to change business practices,"  

Uber is expected to appeal the ruling, and the judge will then determine if the injunction is prohibitive -- meaning that Uber would need to reclassify its drivers right away, during the appeals process. In that scenario, Uber may pull the trigger on suspending rides in California. 

Lee noted that approximately 9% of gross bookings are in the state of California, and leaving the state temporarily would have a "minimal" impact to profitability. The ruling reflects a near- to medium-term headwind, however.  

For Uber, Lyft and other gig firms, worker-misclassification challenges are also underway in other jurisdictions, including New York and Massachusetts. 

In its second quarter earnings last week, Uber reported a 73% drop in Rides (now dubbed Mobility) bookings. Total gross bookings were $10.2 billion, down 35% year over year, and the company lost $1.02 per share.