(CNN Business)When faced with tough legislation over the years, Lyft and especially Uber relied on a tried and tested playbook: threaten to suspend service in the area. The threat, which the companies would sometimes follow through on, appeared designed to rile up customers and drivers, and put more pressure on lawmakers.
Now Uber (UBER) and Lyft (LYFT) are once again betting on a version of this playbook as they confront a heated legal battle in their home state over a new law impacting how much of the on-demand economy classifies its workers.
The two companies have said they may suspend their operations in California as soon as this week while simultaneously pushing for a referendum in November to exempt them from the law, known as AB-5. But industry watchers say the shutdown may not have the same impact on residents now as it once did in earlier fights because of their steep drop in ridership from the pandemic.
"If a tree falls in the forest and no one's there to hear it, then did it really happen?" said Bradley Tusk, a venture capitalist, political strategist and former regulatory adviser to Uber. "If voters couldn't get an Uber or a Lyft when they wanted it, that's one thing. But ridership is down so drastically, if this does prompt a political outcry, it'll come from the drivers, not the riders."
The threats from Uber and Lyft to halt their businesses came after a California court ordered them last Monday to reclassify their drivers in the state as employees in 10 days. This reclassification would represent a radical shift for the two businesses. They built up massive fleets of drivers by treating them as independent contractors. That way they were not entitled to benefits like minimum wage, overtime pay, workers' compensation, unemployment insurance and paid sick leave.
Uber CEO Dara Khosrowshahi said last week that it would be "really, really unfortunate," but the company would "essentially shut down Uber until November when the voters decide" if it cannot delay the order until the referendum vote. Not long after, Lyft cofounder John Zimmer said on the company's quarterly earnings call that it would also be "forced to suspend rideshare operations in California."
"Lyft cannot comply with the injunction at a flip of the switch," Zimmer added.
At a time when Uber and Lyft arguably have the least leverage with riders, the stakes are the highest for the companies to mobilize support for a more favorable solution. Both companies are grappling with sharp revenue declines from the pandemic and have histories of steep losses. Now they risk losing access to a state whose economy is larger than most countries -- or else overhauling their business models.
Moreover, if they lose the battle in their home state, it may only add momentum for other states to rethink legislation for the gig economy.
Under AB-5, which went into effect January 1, companies must prove workers are free from company control and perform work outside the usual course of the company's business in order to classify workers as independent contractors rather than employees. Last week's injunction is part of an ongoing lawsuit brought in May by California Attorney General Xavier Becerra and a coalition of city attorneys.
In their ideal world, Uber and Lyft would delay the enforcement until California residents vote on the referendum, known as Prop 22, that the companies have each backed with tens of millions of dollars. If passed, it would exempt Uber, Lyft, Instacart, DoorDash and Uber-owned Postmates from the law while providing drivers with some additional benefits. (The other companies are not part of the ongoing lawsuit so are not facing the same deadline.)
But their initial attempt at an appeal proved unsuccessful. On Thursday, a California judge denied them. Uber said it plans to again appeal the order; Lyft filed an appeal Friday with a California appellate court.
In the absence of a legal victory, shutting down is one way for Uber and Lyft to attempt to wield the power of their apps in order to sway public opinion. And there is certainly precedent for it. The companies have threatened to leave, or have left, a number of cities, including Chicago, Houston and Austin. In 2015, in New York City, the company put a tab on its app to show New York riders what it would be like to need to wait 25 minutes for a car if the city's mayor's proposed regulations went through.
But multiple industry watchers noted that Uber and Lyft may be in a weaker position this time. Uber's ride-hailing revenue for the second quarter of this year declined 67% from the same period a year earlier. Lyft's business similarly shrank during the second quarter ending in June, with its revenue falling 61% and ridership falling by nearly the same amount.
A sharp drop in ridership from the public health crisis may only be one part of their problem in this fight. Bruce Schaller, a transportation consultant and a former New York City transportation official, said the public is "far more sympathetic to worker rights issues now with respect to these companies than they were five or six years ago," citing the recession and pandemic, which have drawn increased attention to the plight of essential workers.
California is hardly the only legal challenge Uber and Lyft are facing. Massachusetts has a similar law to AB-5 and the attorney general there recently sued the companies over worker misclassification. Decisions in Pennsylvania and New York around unemployment insurance also go against the companies' stance on employment. Last year, the New Jersey Labor Commissioner determined Uber owed $649 million in unpaid unemployment insurance contributions as a result of driver misclassification.
Terri Gerstein of the Harvard Labor and Worklife Program and Economic Policy Institute questioned if the companies may also eventually withdraw from other markets where their business model is similarly in limbo: "What's the long term plan?"
