Uber, Postmates Fail To Block California Gig Worker Law In Court

Uber Technologies Inc UBER and LYFT Inc LYFT are off to hot starts to 2020, but the ride-hailing leaders received a blow in court this week.

On Monday, a judged blocked a request made by Uber and the food delivery service Postmates to prevent California’s AB5 labor law from going into effect while the companies sue over the merits of the new law.

What Is AB5?

California’s Assembly Bill 5 is a new law aimed at giving independent contractors in California wage and benefit protections.

Uber is part of a group suing the state of California and claiming that AB5 is unconstitutional “biased and overly political.”

What’s At Stake For Uber, Lyft

Uber and Lyft have struggled to prove their business models are viable since going public last year, and the massive potential costs associated with providing benefits to their workers could make their path to profitability much more difficult.

“The balance of equities and the public interest weigh in favor of permitting the state to enforce this legislation,” Judge Dolly Gee ruled on Monday.

In a statement, Gig Workers United said Uber’s claims that AB5 harms worker protections are baseless.

“The company is trying every trick in the book to get away with not treating drivers with the dignity and respect they deserve,” the group said.

Uber Analyst Weighs In

On Tuesday, Bank of America analyst Justin Post said Monday was a difficult news day for Uber.

Given that Gee had previously indicated an AB5 injunction was unlikely, the ruling wasn’t a surprise, the analyst said in a note.

“This federal case is just one of several paths Uber is taking to achieve a favorable resolution in California, with a federal injunction likely having a lower probability of a positive outcome than Uber’s other pursuits that include: ballot initiative, legislative lobbying, and app modifications,” he said.

Despite the potential near-term headwinds, Bank of America has a Buy rating on Uber with a $49 price target.

Benzinga's Take

For now, it appears Uber and Lyft must deal with the initial costs associated with AB5 until a compromise or other solution is reached either inside or outside the courtroom.

Investors will be watching to see how these companies handle the higher costs associated with AB5.

They may choose to eat the costs by enduring heavier losses, pass that cost on to customers by raising rates, cut costs elsewhere by reducing their number of drivers or opt for a potential combination of solutions.

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Photo courtesy of Uber.