Uber says drivers aren't part of its 'usual course' of business

California lawmakers passed a landmark bill on Wednesday that threatens to reshape how companies like Uber and Lyft do business. The legislation, known as Assembly Bill 5 (AB5), was passed in the state Assembly and now heads to Democratic California Gov. Gavin Newsom's desk.

Shares of Lyft climbed 2.3% on Wednesday afternoon, while Uber was up 1.4%.

AB5 would require gig economy workers to be reclassified as employees instead of contractors. The bill passed in the state Assembly in a 61-16 vote, Assemblywoman Lorena Gonzalez (D-San Diego), the bill's author, said in a statement. That's after the bill passed in the state Senate on Tuesday.

Uber and Lyft maintain that AB5 won't immediately change independent contractors into employees. Tony West, Uber's chief legal officer, said on a call with reporters that the bill builds on legal tests already established in California around how drivers should be classified. West said drivers may not necessarily fall under the new rules laid out in AB5.

"Under that three-part test, arguably the highest bar is that a company must prove that contractors are doing work 'outside the usual course' of its business," West said. "Several previous rulings have found that drivers' work is outside the usual course of Uber's business, which is serving as a technology platform for several different types of digital marketplaces."

West said Uber intends to follow AB5 should it be put into law next year, but that it will continue to try to prove that it doesn't fall under its legal framework. He warned there could be some costs to the company's business should Uber unsuccessfully challenge AB5.

"Uber is no stranger to legal battles, that's for sure," West said. "We operate in a very regulated environment, and we recognize that there will be legal challenges on all fronts much of the time."

Uber and Lyft have both told drivers that they may need to institute shifts if drivers are classified as employees. That would limit when ride-hailing drivers can start and stop accepting rides. In a notice to drivers, Lyft also said drivers might only be allowed to work for one ride-hailing service at a time.

"There would be real changes in the way that drivers interact with the platform and based on what drivers tell us, they are not changes that they would welcome," West said.

He added that he was encouraged by Gov. Newsom's efforts around "negotiating a solution" on the bill. Newsom told The Wall Street Journal on Wednesday that he's still engaged in talks with Uber, Lyft and other gig economy companies about possible negotiations around the bill. Newsom is widely expected to sign the bill, after voicing support for it earlier this month.

Additionally, the bill has received broad support from Democratic presidential candidates including Sens. Elizabeth Warren, D-Mass., Bernie Sanders, I-Vt., and Kamala Harris, D-Calif., as well as South Bend, Indiana, Mayor Pete Buttigieg.

The bill has the potential to change the employment status of more than 1 million low-wage workers in California, not just gig workers at companies like Uber, Lyft, DoorDash, Postmates and Instacart. It will make it harder for gig economy companies to prove that their workers aren't staff, while ensuring key benefits and protections, like minimum wage, insurance and sick days.

AB5 has attracted staunch opposition from gig economy companies, as it could upend their traditional business model of hiring inexpensive contractors. In an effort to push back against the bill, Uber and Lyft proposed establishing a $21-an-hour minimum wage for drivers in California. The ride-hailing companies, as well as Doordash, have also pledged $90 million on a ballot initiative for the 2020 election that would exempt them from AB5.

West said that Uber is open to investing more on the initiative and is working to include other businesses that face similar issues with AB5. The $90 million will be used to "hire the best campaign team and best advisors we possibly can to run a successful ballot initiative," he added.

Lyft spokesperson Adrian Durbin said the bill has the potential to hurt drivers who prefer a flexible work schedule.

"Today, our state's political leadership missed an opportunity to support the overwhelming majority of rideshare drivers who want a thoughtful solution that balances flexibility with an earnings standard and benefits," Durbin said in a statement. "We are fully prepared to take this issue to the voters of California to preserve the freedom and access drivers want and need."

A DoorDash spokesperson said the company was disappointed by the decision, but said it was "committed" to establishing a guaranteed minimum wage, benefits and other protections for its gig workers. Instacart said in a statement that AB5 "missed the mark" and that it has a diversified business model made up of both independent and full-time employees. 

"We remain committed to working with the Governor, legislators, labor advocates, and the voters of California towards a better solution for all Californians," the company added. 

Representatives from Postmates were not immediately available for comment. In a recent blog post, Uber said the bill could lead to it hiring "far fewer drivers than we currently support," among other negatives.

"Uber is ready to do our part. That is why we have been at the table in California — with other rideshare companies, lawmakers, the Governor's office, and labor unions - to propose a truly innovative framework that we believe would preserve Uber's key benefit for drivers (flexibility) and key benefit for riders (reliability), while improving the quality and security of independent work," the company said.

If AB5 is approved, analysts widely expect Uber to pass the costs associated with the bill on to consumers, resulting in fare hikes. The bill is likely to bring the issue of gig economy workers' rights to the national stage, while potentially launching similar legislation in other states around the country.

Read More