Uber, Lyft shares surge after court decision to treat drivers as contractors

Uber and Lyft rideshare drivers participate in a protest against California Proposition 22 that would classify app-based drivers as independent contractors and not employees or agents, during the coronavirus disease (COVID-19) outbreak, in Los Angeles
Uber and Lyft rideshare drivers participate in a protest against California Proposition 22 that would classify app-based drivers as independent contractors and not employees or agents, during the coronavirus disease (COVID-19) outbreak, in Los Angeles, California, U.S., October 14, 2020. REUTERS/Lucy Nicholson

March 14 (Reuters) - Shares of Uber Technologies (UBER.N) and Lyft Inc (LYFT.O) rose on Tuesday after a California court ruled that drivers can be treated as independent contractors rather than employees, removing some future regulatory risks for the rideshare companies.

Analysts expect the decision will likely be challenged before the California Supreme Court, which could take months to decide whether to accept the case, and over a year to issue a ruling. For now, though, the ruling means companies like Lyft, DoorDash (DASH.N) and Uber have avoided a substantial hit to their earnings.

Shares of Lyft, which on Monday hit a record low, were up 6%. Uber and DoorDash rose 7% and 6%, respectively.

A three-judge panel of the state appeals court on Monday reversed a lower court ruling in 2021 that the ballot measure, known as Proposition 22, was unconstitutional.

"The ruling clears the path for Uber's continued stock outperformance," Jefferies analyst John Colantuoni said. Jefferies estimated Uber, Lyft and DoorDash would have seen a combined hit of between $20 million and $170 million to their 2024 core earnings.

Prop 22 was approved in November 2020 and exempted app-based drivers from a 2019 state law known as AB5 that makes it difficult to classify workers as independent contractors rather than employees.

The companies have been battling with regulators over how they compensate and grant more benefits including insurance and sick leave to their gig workers, who have the flexibility of working for any app they choose to but do not receive the same legal protection as employees.

If Prop22 is repealed, it will be replaced by AB5, which would require the companies to reclassify drivers as employees and provide full benefits and hourly pay rather than just trip time.

The latest ruling could also pave the way for other states to follow, analysts said.

Uber has dominated the rideshare and food delivery space thanks to massive scale, flexibility and presence in multiple global markets, crushing rivals Lyft and DoorDash.

Reporting by Nivedita Balu in Bengaluru; Editing by Shailesh Kuber

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