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Tension Builds Up for Uber Over California's Gig Worker Law

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Uber Technologies’ (UBER - Free Report) tussle with California over a new gig worker law is escalating with the state planning to ask a judge to compel the former to re-classify its drivers as employees from their current status of independent contractors.

In a filing in the Superior Court of California in San Francisco, lawyers for California Attorney General Xavier Becerra stated that their office would file a request for a preliminary injunction.

The move falls under San Diego Assembly member Lorena Gonzalez’ Assembly Bill 5, the new law requiring majority of independent contractors (with a few excerptions) to be uplifted to traditional shift employees.
Uber, carrying a Zacks Rank #3 (Hold), defended the independent contractor status it provides to its drivers by saying that most of its drivers prefer the independence of working as contractors. It added that more than 158,000 Uber drivers in California would lose their jobs if the reclassification occurred.

Earlier in May, California sued Uber and its rival Lyft (LYFT - Free Report) , carrying a Zacks Rank #3, for illegally classifying drivers as independent contractors. With things having escalated, Lyft is also under pressure. In the event of a preliminary injunction being ordered, both companies would be forced to pay worker benefits among other protections while the legal battle proceeds. Under the current scenario, Uber and Lyft are not entitled to pay drivers for overtime, or give healthcare, unemployment and workers' compensation.

Hence, classifying drivers as full-time employees would inevitably raise labor costs for these companies. Moreover, the companies had said that the law would reduce the number of drivers and deter flexibility to set their hours.

California’s argument is that the lack of benefits of drivers due to their contractor status makes them turn to government-funded income support programs, which in turn burdens taxpayers.

In a counter move, Uber, Lyft and DoorDash have funded a November ballot initiative that would exempt businesses of similar nature from complying with the new California law.

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