Will Uber and Lyft shut down in California?

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Good morning, Data Sheet readers. Tech writer Danielle Abril here filling in for Adam.

Uber and Lyft may temporarily shut down their ride-hailing services in California as soon as this week.

The move depends on whether a state judge grants them an appeal or more time to reclassify their drivers from contractors to employees, as has been required by law since January. If they lose or if no ruling is made by Thursday, the services said they would go dark in the state until they have the systems in place to pay and track drivers as employees. The services say they’re not ready for the switch, even though they’ve had almost a year to prepare.

“At first I thought this was an empty threat,” said Mark Shmulik, an analyst at brokerage firm AB Bernstein. “But assuming appeals court says ‘no’, I actually do believe Uber and Lyft will shut down temporarily in California.”

This wouldn’t be the first time the ride-hailing giants have halted services based on regional regulatory issues. Both companies spent much of their early years fighting taxi lobbyists and trying to explain to city governments why they should be allowed to operate under different rules.

Historically speaking, that strategy has served Uber and Lyft well.

Uber and Lyft left Austin in 2016 after the city rejected a proposal that would have allowed the services to perform their own background checks on drivers. But one year later, after the public complained to get the services back, the state overrode local regulations in favor of Uber and Lyft.

But the fight in California may not mirror previous battles. 

First, the state is already well familiar with Uber and Lyft, which began operating in California in 2010 and 2012, respectively. This debate focuses specifically on driver pay and benefits, not on whether the services are useful for consumers. And on this particular issue, it’s unclear whether consumers side with the companies, Shmulik said.

So what happens if the judge rules against Uber and Lyft? 

Uber and Lyft will heavily lean on voters to pass Proposition 22, the November ballot initiative backed by the companies that would improve some working conditions for drivers but keep them as contractors. Meanwhile, a temporary shutdown may help the companies twofold. It could drum up support for Prop 22 from voters inconvenienced by the pause, and it could save the companies money at a time when ridership is down. Both companies are losing money every quarter.

“Shutting down in a pandemic, when you have 30% or 40% the volume—you won’t lose too much,” Shmulik said.

If voters don’t pass Prop 22, Uber and Lyft likely would pull out of rural areas, which typically have low demand, and raise prices in the state’s urban areas to offset the extra costs. Uber may also try to push more drivers to work for both its rides and food delivery services to reduce costs, Shmulik said. 

Though the California judge’s decision will only impact ride-hailing services, delivery service DoorDash is watching closely from the wings. Last week, San Francisco District Attorney Chesa Boudin singled out DoorDash in a preliminary injunction similar to the one filed by California Attorney General Xavier Becerra against the ride-hailing giants. The judge’s decision on the requested injunction is expected on Oct. 5.

Uber and Lyft are used to big legal regulatory battles. But they may have met their match in the state of California. 

Danielle Abril



This edition of Data Sheet was curated by Aaron Pressman.