Uber and Lyft are threatening to shut down their operations in California, and experts warn that 'drivers are the ones who get screwed'

Come Friday, Californians may be facing a new transportation reality — one that doesn't include Uber or Lyft. 

The ride-hailing companies have threatened to shut down their operations in the state of California rather than comply with a state law that requires them to classify their drivers as employees. Both companies have until Thursday to adhere to the regulation. 

Experts told Business Insider that not only do they expect Uber and Lyft to make good on their threats to suspend operations, but that the outcome won't hurt either company's business — it'll only hurt drivers. 

A years-long labor fight is coming to a head

Uber and Lyft are fighting a law known as AB5, which went into effect in January. It stipulated that gig-economy companies like Uber and Lyft would need to reclassify their workers and provide benefits like sick pay and health insurance. The passage of the law was seen as a victory for labor rights activists, but both companies argued that their position as a technology platform doesn't require them to treat their workers as employees. 

When Uber and Lyft refused to comply with the law, California's attorney general sued them and won

Both companies are now contending that it won't be possible for them to reconfigure their business models to meet the deadline, and that they may have no choice but to shut down

"Lyft cannot comply with the injunction at the flip of a switch," John Zimmer, Lyft's president, said last week during an earnings call. "Reclassifying tens of thousands of self-employed drivers would be a significant challenge in normal times. And in the current pandemic environment, that would be nearly impossible."

Uber CEO Dara Khosrowshahi told MSNBC on Wednesday that "it's hard to believe we'll be able to switch our model to full-time employment quickly." 

The companies are hoping to get a ballot measure known as Proposition 22 passed in November, which would continue to classify drivers as contractors. It's the possibility of this ballot measure getting passed that's stopping either company from complying with AB5, according to Harry Campbell, a ride-hailing expert and founder of the blog The Rideshare Guy

"If they did have to convert drivers to employees and then they won the ballot initiative in two months, it doesn't make a whole lot of sense for the flip-flop," Campbell said. "I think from a business point of view, it just doesn't make sense for them to do it, even if they wanted to do it at this point."

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In 2016, Uber and Lyft fought Austin regulations that required them to impose stricter background checks on drivers.
Reuters/Jon Herskovitz

What happened in Austin

Campbell likened the current situation to one that played out in Austin, Texas, in 2016.

In May of that year, Uber and Lyft shut down in the city after voters upheld strict regulations on the companies and their drivers, particularly around more stringent background checks. 

But when Uber and Lyft left town, a ride-hailing cottage industry sprung up in their place. In the aftermath of their departure, residents and drivers created a Facebook group for sourcing rides, "an open marketplace where riders connect directly with drivers," as it described itself at the time. There was no surge pricing, no need to give the company a cut, the option to schedule a ride well in advance, and the ability for drivers to set their own prices. 

At the same time, no less than seven new ride-hailing startups popped up in the city, all hoping to nab a piece of the market share Uber and Lyft had left behind. 

Uber and Lyft have since made nice with Austin and re-entered the market. But Campbell said he expects the California situation to play out in a similar way. Although the reasons behind their departure from Austin were different, the stakes are similar. 

"Everyone was shocked that Uber and Lyft pulled out and it basically happened overnight. And I think the same thing is going to happen here," Campbell said. "If you look at the companies' history, there's certain issues that are kind of like cornerstone issues for them, where they feel it would have a huge, material, negative impact on the business or set a bad precedent." 

Adhering to the law in California, he said, could "open the floodgates" for other states to impose the same measures. 

Edan Alva, a Lyft driver based in the San Francisco Bay Area, told Business Insider that if Uber and Lyft do shut down, he expects other startups will attempt to take their place, much like what happened in Austin. 

"I'm looking forward to other companies getting into the market and replacing them, I can tell you that," Alva said. 

uber lyft driver protest ab5
A driver wears a face mask and gloves as Uber and Lyft drivers with Rideshare Drivers United and the
 Transport Workers Union of America conduct a ‘caravan protest’ outside the California Labor Commissioner’s office amidst the coronavirus pandemic on April 16, 2020 in Los Angeles, California.
Mario Tama/Getty Images

'Drivers are the ones who get screwed'

If Uber and Lyft do shut down on Thursday, it's drivers that will feel the brunt of that decision, Alva said. As the deadline looms, he said he's feeling "somewhere between hopeful and outraged and uncertain."

"Essentially, I feel like someone who is almost getting justice, but in the meantime, getting blackmailed for it," Alva said. "What they're essentially doing is telling drivers, 'You don't deserve us following the law for you. If you force us to do that, we will make sure that you suffer even more.'" 

Alva said he's concerned about what a shut-down would mean for workers who don't have the option to stop working, even for a short period of time. 

"We are talking about the most vulnerable population out there," Alva said. "For some people here, stopping to work for a couple of weeks can mean becoming homeless. And these companies just play with it as a tool to get what they want."

Campbell said he doesn't expect a shut-down to have as big of an effect on Uber and Lyft as it might have before the coronavirus outbreak. With ridership down across the board, he argued, a shut-down isn't as meaningful given the current state of the world. 

But while Uber and Lyft are seeing fewer rides these days, the rides they are seeing are meaningful, Campbell said. Riders right now tend to be frontline workers or essential workers, people that need to get to the grocery store, or people who just don't feel safe using public transportation. 

Still, at the end of the day, riders have more options to get around. Drivers, on the other hand, have fewer options for employment. Campbell said he's been trying to warn drivers to prepare for "the worst-case scenario," and to have a backup plan in place. He's been urging drivers to sign up to drive for Uber Eats, since Uber's food delivery service won't be affected by a shut-down. 

"I don't think it's hit a lot of drivers yet — I'm surprised that we haven't gotten more worried emails from drivers," Campbell said. "But drivers are the ones who get screwed in the meantime while they figure this stuff out."