UPDATE: Oct. 23, 2020: The state appeals court affirmed the lower court's ruling Oct. 22, concluding that Lyft and Uber must reclassify California drivers as employees. The emergency stay temporarily blocking lower court's order will expire 30 days "after issuance of the remittitur in this appeal," the appeals court said. The ruling puts added pressure on a state ballot measure, Proposition 22, which would classify app-based drivers as independent contractors unless certain criteria are met.

UPDATE: Aug. 13, 2020: In an earnings call on Wednesday, Lyft President John Zimmer said it may suspend operations in California if the state forces it to classify drivers as employees, The Verge reports. Uber CEO Dara Khosrowshahi shared similar plans with MSNBC on Wednesday, saying the requirement would force his company to shut down its California operations for several months.

The warnings follow a temporary injunction issued on Aug. 10, which both companies have said they will appeal.

Meanwhile, the companies are funding Prop 22, a ballot measure that would override AB5 by classifying drivers as independent contractors. If the companies' current efforts to overturn the state's ruling fail, California voters would have an opportunity to support Prop 22 in November.

Dive Brief:

• Uber and Lyft must reclassify their drivers in California as employees, a state judge said Aug. 10, issuing a temporary injunction. The order is stayed for 10 days, and Uber told local media it will file an emergency appeal.
• The state had sued, alleging that the companies are in violation of AB-5, a law that took effect Jan. 1, 2020 and assumes workers are employees unless they meet strict criteria. Uber argued that it is exempt from the law, but the judge said that argument was undercut by its attempts to overturn the legislation and its support for a ballot initiative that would add an exemption.
• Finding that the state was likely to prevail on its argument, the judge issued the injunction. The drivers obviously don’t perform work outside the companies’ "usual course" of business, as required by AB-5, the judge said, adding that, "It is high time that they face up to their responsibilities to their workers and to the public."

Dive Insight:

AB-5 codified a state supreme court ruling that said an individual could be classified as an independent contractor only if the worker: a) is free from the control and direction of the hirer in connection with the performance of the work, both under the contract for the performance of such work and in fact; b) performs work that is outside the usual course of the hiring entity’s business; and c) is customarily engaged in an independently established trade, occupation or business of the same nature as the work performed for the hiring entity.

And as the judge’s Aug. 10 order noted, Uber and others have spent significant resources challenging the legislation in court and via ballot initiatives.

When it took effect with the new year, some employers made major changes to their workforces. Vox's SB Nation, for example, ended its contracts with California-based independent contractors.

"That new law makes it impossible for us to continue with our current California team site structure because it restricts contractors from producing more than 35 written content 'submissions' per year," a company official said at the time. SB Nation said it would replace the contractors with full- or part-time employees.

In a statement provided to various media outlets an Uber spokesperson suggested that the Aug. 10 injunction, if allowed to stand, could lead it to shut down in California.