Uber CEO Says the Company Might Suspend its California Operations if a Court's Decision Forcing it Classify Drivers as Full-time Employees is Not Overturned
San Francisco-based Uber Technologies Inc, has grown into one of the world's most valuable companies in recent years, as it expanded its app-based ride-hailing business in cities around the world. Uber's market cap exceeds $50 billion and its been a public company since May 2019 after one of the biggest IPOs on Wall Street.
However, to support the company's tremendous growth over the past few years, Uber has relied upon the labor of tens of thousands of driver partners working solely as independent contractors. By being classified as independent contractors, they are not eligible for overtime pay, health benefits, or other federal employee protections, which has created a tremendous public backlash for Uber, but it has also saved the company a lot of money.
Now that the coronavirus decimated Uber's core ride-hailing business over the past few month's and its home state has ordered Uber to reclassify most driver partners as full-time employees, Uber is in a tough position, which could lead to the company temporarily suspending its ride-sharing service in California.
Uber CEO Dara Khosrowshahi made the remarks while speaking with MSNBC's Stephanie Ruhle on Wednesday. He said that Uber would likely shut down temporarily for several months if a court does not overturn its recent ruling.
"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," Khosrowshahi said.
Uber, along with its biggest rival Lyft, which is also based in San Francisco, have about a week left to appeal a preliminary injunction granted by a California judge on Monday, that will prohibit the companies from continuing to classify their drivers as independent workers.
The court order will require Uber and Lyft to provide benefits and unemployment insurance for its workers, which Uber said could have adverse effects on its profitability.
California's attorney general Xavier Becerra and three city attorneys brought the lawsuit against the companies under the state's new law, Assembly Bill 5 (AB5), which was approved by voters last year and took effect on Jan 1, 2020.
AB5 was designed to provide basic employee benefits such as healthcare, paid sick days and overtime for gig workers core to a company's business by classifying them as employees, which is the case with Uber.
In a court decision granting Uber's preliminary injunction, the judge rejected the notion that drivers should be considered outside the course of the companies' businesses, calling the logic "a classic example of circular reasoning."
Uber and Lyft both said they would appeal the ruling during the 10-day period before it goes into effect.
Khosrowshahi said on Wednesday that if Uber can't win on appeal, its plan would be to temporarily pause its ride-hailing service in California during the coronavirus pandemic. Although Uber plans to eventually resume services in its home state, it would likely be scaled back and more focused in cities such as San Francisco and Los Angeles, meaning there may be less availability in the suburbs.
However, Khosrowshahi is proposing another option that would better benefit Uber.
In an op-ed written by Khosrowshahi and published in the New York Times on Monday, he advocated for what he calls a "third way" that would maintain drivers' independence while allowing companies to provide some kind of employee protections without risking being viewed as full-time employers.
Khosrowshahi said gig companies such as Uber could instead pay into a fund that workers could dip into for paid time off or health-care benefits based on the number of hours they work. It's not clear how that suggestion would sit with Uber's drivers that would still be considered contractors by Uber.
Uber has argued its drivers actually prefer working as independent contractors, but California attorney general Xavier Becerra rejected that claim as a "bogus argument."
"We continue to believe drivers are properly classified as independent, and because we'll continue to be responsive to what the vast majority of drivers tell us they want most, flexibility—drivers will not be automatically reclassified as employees," said Uber's chief legal officer Tony West, last September after California voters passed AB5.
If Uber's appeals don't work out the company will count on California voters to change AB5.
In the meantime, Khosrowshahi said Uber's services would likely shut down in California until November, when residents will vote on an amendment to AB5 called Proposition 22 (Prop 22), which would exempt drivers for app-based transportation and delivery companies from being considered employees in the state.
Prop 22 is a ballot initiative funded by Uber, Lyft, DoorDash, Instacart and Postmates, all of which rely on driver contractors.
The passing of Proposition 22 has received little traction so far in California. California residents opposing Prop 22 argue that the corporations behind the proposition stand to benefit financially.
Becerra said in an interview on CNBC on Tuesday that he was not concerned about the potential for Uber to leave the state as a result of the order.
"Any business model that relies on shortchanging workers in order to make it probably shouldn't be anywhere, whether California or otherwise," he said.
According to a recent UC Berkeley study, Uber and Lyft have avoided paying $413 million in unemployment insurance by allegedly misclassifying their employees as independent contractors.
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