Uber (UBER) and Lyft (LYFT) have a few weeks to comply with a California regulator’s ruling that their drivers in the state must be classified as employees, rather than independent contractors.

Under the state’s AB5 labor law, the California Public Utilities Commission ruled Tuesday that it would consider drivers of Uber and Lyft to be employees. The body is responsible for overseeing “transportation networking companies” (TNCs) in the state.

Companies have until July 1 to provide the state with employee compensation and classification data. If they miss the deadline, the commission can revoke authorization to operate in California.

The ruling could cripple Uber and Lyft in the state. A recent study from Berkeley Research Group Analysis found that classifying rideshare drivers as full-time employees amounts to an 80%-90% reduction in the number of drivers currently working in that state today.

Uber and Lyft have long contended that their drivers do not meet the requirements to be classified as full-time employees. While both rideshare firms initially refused to comply with AB5, Uber later made minor modifications to its platform to give drivers access to more benefits like paid sick leave.

“Uber remains committed to expanded benefits and protections to drivers,” the company said in a statement to NBC News. “If California regulators force rideshare companies to change their business model, it would affect our ability to provide reliable and affordable services.”

‘Gut Punch’ For Uber, Lyft

The ruling is seen as another shot in the battle over California’s controversial AB5 labor law. The gig economy legislation mandates that companies reclassify many independent contractors as full-time employees eligible for health benefits, minimum wage guarantees, workers’ compensation and a slew of other labor protections.

IBD outlined the unintended consequences of the law on the state’s 1.5 million freelancers in May.

Daniel Ives of Wedbush Securities told IBD that California’s AB5 gig economy law continues to be an albatross around the future profitability of Lyft and Uber stock.

“It’s a gut punch for Uber and Lyft while navigating a once-in-a-century pandemic,” said Ives. “We believe if implemented this issue will add between $400 million to $500 million of annual expenses to Uber.”

Battle Over Gig Economy Goes To Ballot Box

Uber and Lyft plan to spend an estimated $110 million on a November ballot measure to overturn AB5.

The Protect App-Based Driver and Services Act, would protect the right of app-based drivers and couriers to work as independent contractors. It would also require ride-share and delivery companies to offer new benefits, including health and paid sick leave.

“Forcing an employment model will result in the elimination of 900,000 jobs at a time when 4 million Californians are out of work and we have record unemployment of 15.5%. That’s insanity,” said Stacey Wells, a spokeswoman for the ballot initiative.

“The commission’s decision is another example of why we need to pass this ballot measure, which will once and for all give app-based rideshare and delivery drivers a clear path ahead that benefits the overwhelming majority of drivers and those who rely on these services.”

Lyft, Uber Stocks Drop

Shares of Lyft are down 8.5% so far this week and Uber stock has fallen more than 16% as fears of a resurgent Covid-19 slammed markets overall.

Uber stock had already taken a hit earlier this week after a failed merger attempt with food delivery service Grubhub (GRUB). Shares of Uber stock fell almost 5% on Wednesday after Grubhub announced a $7.3 billion deal with European-based competitor Just Eat Takeaway.

*by Alexis Garcia via Investor’s Business Daily*

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