Tech

Uber and Lyft are threatening to suspend service in California if they have to classify drivers as employees — that tactic may backfire

Key Points
  • Uber and Lyft are turning to voters as a last resort to maintain their status as contractors for drivers in California after a judge granted a preliminary injunction requiring the companies to reclassify drivers as employees.
  • Both companies have said they'd be forced to suspend service in the state to reshape their companies around the new model. Once they return, they've said they'd likely only be able to hire back a fraction of their workforce under more rigid schedules.
  • Labor and business experts and Silicon Valley's congressman said nothing is stopping Uber and Lyft from providing flexible work even while treating drivers as employees.
Dara Khosrowshahi, chief executive officer of Uber Technologies Inc., listens during a panel discussion at the Bloomberg Global Business Forum in New York, U.S., on Wednesday, Sept. 26, 2018.
Mark Kauzlarich | Bloomberg | Getty Images

Uber and Lyft are running out of options in California.

The companies have been fighting to continue classifying their drivers as independent workers, avoiding expenses like healthcare and unemployment insurance for hundreds of thousands of drivers in the state. Last year, they failed to block a bill aimed at classifying gig workers as employees from becoming state law, and then, as of Monday, failed to convince a court the law should not apply to them.

Now, while pledging to appeal the court's ruling on a preliminary injunction requiring them to reclassify drivers, Uber and Lyft are turning to voters as a last resort. On Wednesday, executives at both companies raised the stakes by threatening to suspend service in California if they can't get their way. Both stated in court filings that outcome would be practically inevitable in order to restructure their operations if enforcement of the injunction isn't further postponed.

The companies would likely come back eventually, but it could take until at least November when voters decide their fate at the polls.

Uber and Lyft have each poured $30 million into a ballot measure called Proposition 22, which would exempt drivers for app-based ride-hailing and food delivery services from the employee classification required under the new state law, Assembly Bill 5 (AB5).

That's a risky move for the money-losing ride-hailing companies whose revenue has suffered during the coronavirus pandemic.

On the one hand, Uber and Lyft may stand to gain from a temporary shutdown if voters realize how much they miss their services by November and vote yes on the proposition. With ridership already down, the companies won't miss out on their usual revenue, anyway.

On the other hand, Californians who are already fed up with corporate tactics, and have a newfound appreciation for workers laboring through the pandemic, may decide Uber and Lyft should just follow the law as written. Riders and drivers could direct their anger toward the companies if they view them as abandoning the state in the midst of crisis.

Analysts already see drivers as one of the biggest obstacles keeping Uber and Lyft from reaching profitability. If voters decide the companies should compensate workers as employees and become subject to other employer costs like payroll taxes, Uber and Lyft will have to rethink their entire business models or be forced to leave the biggest state in the country.

Uber and Lyft did not provide statements directly on this article but pointed to court filings asking a judge to delay the reclassification for at least the extent of their appeal. The trial judge rejected that request, leaving the companies with about a week left on the stay unless the appellate court says otherwise.

Uber also pointed to a past statement on the preliminary injunction and blog posts about the likely impact of the reclassification. Lyft pointed to an email it sent to drivers Thursday outlining similar points as well as comments by drivers advocating for voters to support the ballot measure to help them maintain flexible work hours.

Driver preference

When challenged over their classification of drivers as contractors, the first line of defense Uber and Lyft often invoke is that drivers prefer it that way. 

A 2020 survey of 734 app-based drivers conducted by the independent blog the Rideshare Guy found that more than 71% preferred being classified as independent workers. That's high, but not as high as a survey the same blog conducted prior to the pandemic, when more than 81% of the nearly 1,000 respondents said they preferred to be independent workers. 

But critics, including Silicon Valley Rep. Ro Khanna, D-Calif., say drivers really want the flexibility that Uber and Lyft have unfairly claimed would be diminished under an employee model.

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"The reality is that you can be a part-time driver and still be an employee. You can have flexibility and still be an employee," Khanna said in a phone interview Thursday. "There's no justification for not treating these drivers as employees."

In the earlier Rideshare Guy survey, pay and flexibility were most important to drivers. But labor experts say there's no reason flexibility and employment status should be diametrically opposed.

"They kind of use this rhetoric to create a zero sum equation," said Erin Hatton, a sociology professor at the University of Buffalo who has studied labor and the gig economy. "We can construct all sorts of jobs to give workers more autonomy in the workplace. You don't have to be an independent contractor to do so. You don't have to be an independent contractor to have some flexibility in hours that you work. They're using this rhetoric to really kind of skirt unemployment law and decrease their obligation to workers and to the state."

While Uber and Lyft provide a way for workers to earn extra cash on their own schedule, Hatton said it doesn't afford the level of freedom many initially expect.

"Yes, many workers do crave to be entrepreneurs, and they may very well be lured by the promise of that, but what we tend to see is that over time, they realize that that is sort of a false promise," she said. "In order to support families, these jobs don't actually offer the control and autonomy and decent wages they seem to promise."

When Nicole Moore began driving for Lyft a couple nights a week, she began to incur additional costs, like replacement tires and insurance for her now high-mileage car.

"The cash in your pocket is not what you're actually making," said Moore, who's an activist with Rideshare Drivers United, which has pushed for Uber and Lyft to reclassify drivers.

Uber and Lyft have said reclassifying drivers as employees would place a large burden on their operations and therefore limit their ability to provide drivers with the same flexible schedules they do now. 

The ballot measure Lyft and Uber are supporting would entitle workers to some protections like healthcare subsidies, vehicle insurance and minimum earnings. In arguments before the court prior to the injunction, Lyft's lawyer said the protections under Proposition 22 do not place the same burden on businesses as employment status because the latter requires huge administrative changes including processing employment documents, hiring human resources staff, and implementing a system to manage and track hours worked.

"Employment status is not just ... about how much you pay people;" the lawyer said, according to a court transcript, "employment status has enormous regulatory regimes, state and federal, that requires all kinds of administrative things that Prop 22 does not require."

An Uber spokesperson pointed to a May blog post where the company said reclassification "would put pressure on Uber to consolidate working hours across fewer workers in order to manage costs that are fixed per employee. Under an employment model, it is likely that the new norm for Uber drivers would conform with the 40-hour work week which is the standard for full time U.S. employees."

Across the state, Uber estimated, the number of active drivers per quarter would fall from 209,000 to 51,000, with the greatest impact on less urban markets that have fewer transportation alternatives.

A Lyft spokesperson shared an email sent to drivers Thursday that said Lyft would aim to hire 10-20% of current California drivers if forced to comply with AB5. It would likely preference full-time workers over the 80% of drivers it said work fewer than 20 hours a week. Lyft told drivers it would likely need to plan their hours in advance and cap earnings at a set hourly wage, rather than allow them to choose more lucrative rides as they can under the current model.

But this reasoning does not directly address one of the biggest draws for many drivers to Uber and Lyft's services, which is the ability to choose their hours and work as much or as little as they want. The companies would still likely face pressure from these drivers to maintain some level of flexibility in their service or lose out on a large potential workforce.

"Many many of us need and count on the flexibility. I don't know a driver that doesn't see the flexibility as one of the reasons they work in rideshare," Moore said. "If they were to change that, many, many drivers would leave because [if] that's what we want is flexibility, we would find another industry that provided us the flexibility we need. They know that."

A 'third way'?

Uber CEO Dara Khosrowshahi has also turned to the federal government to try to solve his predicament in California. In a letter to President Donald Trump and conversations with members of Congress, Khosrowshahi has encouraged the formation of a "third way" to classify workers to be built into labor laws.

In a New York Times op-ed published prior to the court's ruling on the preliminary injunction, Khosrowshahi elaborated on that idea, saying gig companies could pay into a fund available to independent workers for healthcare and paid time off commensurate with their hours worked.

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Khanna and the academics interviewed for this article said current labor law does not prevent Uber from providing such benefits while offering flexible hours under as an employer. 

"I do not see why they would suddenly have to impose work schedules on workers or mandatory work times," said Hatton, the University of Buffalo professor. "And the fact of the matter is, so many of these gig companies are already kind of controlling the time that their workers work in different ways indirectly."

Alternatively, she said, it could be a reason to consider decoupling healthcare from all employers, which could help lift a heavy payment burden.

Following publication of this article, an Uber spokesperson pointed to a blog post published Friday explaining why it believes it won't be able to offer the same level of flexibility to drivers as an employer. It gave the example of other service industry workers, like a barista or restaurant server, saying that while their employers are already allowed to provide workers with more flexible hours, they don't because it would be too difficult to complete the work.

In the example of a restaurant, Uber wrote, "anytime their employees decided to be on-shift, they would have to be paid, whether they had any work to do or the restaurant was closed. Why should anyone believe this same logic wouldn't also apply to companies like Uber?"

As an employer, Uber said, its incentives would be to limit the number of workers it hires to get the most out of their time without allowing them to work overtime, which it said would have the greatest impact on part-time drivers.

Pitting workers against everyone else

Dara Khosrowshahi, CEO of Uber, appears on CNBC's Squawk Box at the 2020 World Economic Forum in Davos, Switzerland on Jan,. 22nd, 2020.
Adam Galici | CNBC

For Uber and Lyft to be successful in November, they must convince consumers of their threats of higher prices and limited service if forced to comply with California labor law.

"What businesses often do is they pit workers against everyone else and they insist that if we have to pay them a penny more that will be translated into more costs for consumers," Hatton said. "They drive this wedge between workers on the one hand and consumers on the other hand. But the truth of the matter is, workers and consumers are one and the same. There is no wedge between them. They are the same people. And so more money in their pockets always helps the economy."

Companies have taken a similar tactic in fighting minimum wage laws, arguing they would be so burdensome they'd have to scale back. 

"By and large companies have not been successful in saying our business model is new and successful and therefore we shouldn't have to pay the minimum wage or comply with OSHA," said University of Michigan business professor Erik Gordon, referring to worker safety protections provided by the Occupational Safety and Health Act. A 2019 review of available research on the minimum wage across the U.S., U.K. and other developed nations, a University of Massachusetts Amherst economist found minimal impact on employment when wages were raised. 

Still, there are legitimate fears consumers may have about Uber and Lyft pulling out of the state. Even if they were to simply scale back, Uber's CEO already indicated more sparsely populated areas would likely feel the greatest effects, leaving them with few other options.

But Khanna is unconcerned that consumers will be left stranded, saying Uber and Lyft were telling "bluffs" and said "Californians don't respond well to threats." He gave the example of Tesla CEO Elon Musk threatening to relocate its headquarters from California earlier this year while fighting local officials over reopening its factory during Covid-19 shutdown measures.

"They care very deeply about workers," Khanna said of Californians.

Even if Uber and Lyft follow through, as they insist in court filings they would almost certainly have to, Gordon said a permanent retreat would be untenable.

"I think at that point their shareholders say, 'Actually, we need a new CEO. There is no way we are giving up California,'" he said. "Did the car companies give up California when California imposed its special pollution requirements on cars? No, because you can't give up the California market."

Wherever Uber and Lyft pull back in California, Khanna said it would simply create room for a new competitor.

"If they can't figure it out, I'm confident other entrepreneurs will," he said. "I think it would be foolish for these companies to give up their market share if that's the way they go, but that's their choice."

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