Uber Hit by California Judge Ruling on Drivers' Employee Status

In a recent escalation over Uber Technologies’ UBER alleged driver misclassification, a California judge granted the state’s request for a preliminary injunction that requires the company to categorize its drivers as employees instead of independent contractors. Following this news, shares of the company dipped 2.2% in after-hour trading on Aug 10.

Uber has been accused of violating Assembly Bill 5 ("AB5"), a new state law requiring companies hiring gig workers to classify them as employees. The law took effect on Jan 1.

Judge Ethan Schulman of San Francisco Superior Court granted a 10-day stay before the injunction is put into effect, in order to allow for appeals. Once the preliminary order goes into effect, Uber would be forced to re-classify its drivers as employees and that would mean paying them worker benefits among other protections. This would inevitably raise labor costs for the company. Under the current scenario where Uber drivers are classified as contractors, the company is not entitled to pay for overtime, or give healthcare, unemployment and workers' compensation.

Wedbush Securities’ analysts estimate that the AB5 law could lead to 30% increase in labor costs for Uber. At a time when the company is already under significant pressure due to coronavirus-related adversities on its mobility business, a reclassification of its drivers can make matters worse for the company by increasing costs.

If the preliminary injunction comes into effect, it would apply to Uber’s rival Lyft LYFT as well, which follows a similar business model of hiring drivers as temporary workers.

In order to defend the independent-contractor status, Uber and Lyft have funded a November ballot initiative that would exempt businesses of similar nature from complying with the new California law.

Both Uber and Lyft carry a Zacks Rank #3 (Hold).

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