Uber, Lyft ordered to classify drivers as employees

A California judge ordered Uber and Lyft to classify its drivers as employees.Yahoo Finance's Alexis Keenan joins The First Trade with Alexis Christoforous and Brian Sozzi to discuss.

Video Transcript

BRIAN SOZZI: A California judge is ruling that Uber and Lyft have to take a major detour in their business models. Companies are being ordered to classify drivers as employees and not independent contractors. Yahoo Finance's Alexis Keenan is here with the details. Alexis.

ALEXIS KEENAN: Hey, Brian. So at least temporarily this order, this ruling, is on the books. It's really a preliminary injunction that this California judge issued telling the companies Uber and Lyft that this hotly contested AB5 law, that went into effect January 1 of this year, that they must under that law classify their drivers as employees and not as independent contractors-- not as, rather, independent contractors, which is what the companies want. They have long both fought, along with other gig worker employers, if you will, for these employees to remain independent contractors and not employees.

Also the judge said, nope, they have to be for 10 days, they will have an opportunity to appeal this ruling. So right now, nothing's going to happen immediately for these companies. The expenses are expected to be quite high. I've seen estimates as high as 35% added costs for both of these ride hailing companies added on to their costs if this law does stick.

Now, Lyft did issue a statement to Yahoo Finance in response to the decision, and they said this. They said, "Drivers do not want to be employees, full stop. We'll immediately appeal this ruling and continue to fight for their independence. Ultimately, we believe this issue will be decided by California voters and that they will side with the drivers."

And that's exactly what these companies intend to do on top of their expression that they will appeal this decision, they both say that they will go forward with this ballot measure that is expected in November. They both spent about $100 million collectively on this measure to take it to the voters. The dispute, of course, comes at a really challenging time for both the companies that have seen revenue slip as well as for the drivers that are out of work because of the lack of travel.

ALEXIS CHRISTOFOROUS: Do you think if this were actually to become law, and that's a big if, right? It has a lot of hurdles to jump through, Alexis, but do you think it might ultimately result in fewer Ubers and Lyfts on the streets of California?

ALEXIS KEENAN: You know, it's possible. Now, AB5 is already law in California. It's on the books, and what these companies were disputing is the interpretation of it.

Lyft and Uber, they have long said, well, you know, we're a technology company. The drivers are not at the core of our business, which is a really challenging argument to make, so they're fighting an uphill battle as far as the law goes. But as far as seeing less drivers, that's another argument that both companies make. They say, look, we're going to have all these added costs that would entitle workers to, you know, labor benefits, worker's compensation, paid time off, and that by doing that, costs certainly might go up for consumers, because they'd be passing them along to the folks that want to use the services.

BRIAN SOZZI: Alexis, is there any chance that Uber and Lyft simply pull out of California, as crazy as that may sound?

ALEXIS KEENAN: You know, I think that would be a stretch. I would hope that the companies would give it a shot and see if they could adjust their margins appropriately to get to where they need to be. I've heard estimates say that they'd have to raise their fares about 20%, so maybe they would take a chance to see if customers would bite at that in California.

But look, you know, California has long been a bellwether for these types of protections being passed along to workers for really upping the ante. And you know, there are laws that kind of mimic this AB5 in New York, in Illinois and New Jersey. So we'll see how this goes, but pulling out right away? I don't know.