OAKLAND, Calif. >> Uber and Lyft, which are facing mounting pressure to classify their freelance drivers as full-time employees in California, are looking for another way.
One option that both companies are seriously discussing is licensing their brands to operators of vehicle fleets in California, according to three people with knowledge of the plans. The change would resemble an independently operated franchise, allowing Uber and Lyft to keep an arms-length association with drivers so that the companies would not need to employ them and pay their benefits.
The idea would effectively be a return to the days of how groups of black cars were run. Lyft has presented the plan to its board of directors, one person said. Uber, which already works with fleet operators in Germany and Spain, is also familiar with the business model.
The companies have not committed to the franchiselike plans, said the people with knowledge of the discussions, who asked to remain anonymous because the details are confidential. Uber and Lyft are waiting to see how California’s legal situation around drivers, who have been treated as independent contractors, plays out first, they said.
Matt Kallman, an Uber spokesman, said that the work on establishing fleets was “exploratory” and that the company was “not sure whether a fleet model would ultimately be viable in California.”
A Lyft spokeswoman, Julie Wood, said the company had looked at alternative models but favored an approach in which drivers “remain independent and can work whenever they want while also receiving additional health care benefits and an earnings guarantee.”
The ride-hailing giants are considering how to retool their businesses as they grapple with a new California law, Assembly Bill 5, which could upend their services. The law, which was designed to grant employment benefits to gig workers, could force Uber and Lyft to categorize drivers as employees if it was shown that the drivers’ jobs were part of the companies’ core business, among other criteria.
Although the law went into effect in January, Uber and Lyft have not complied with it, arguing that they are simply tech platforms and are not transportation businesses. In May, California sued Uber and Lyft to enforce the new law.
Their clash with the state is set to come to a head this week. This month, a San Francisco Superior Court judge ordered the companies to employ their drivers by Thursday. Executives at Uber and Lyft, who have argued that they cannot meet that deadline, have appealed the decision and warned that they would be forced to shut down their services as soon as Friday if the order was not reversed.
“If our efforts here are not successful, it would force us to suspend operations in California,” John Zimmer, Lyft’s president, said in an earnings call last week.
California accounts for about 16% of Lyft’s business, he said.
Dara Khosrowshahi, Uber’s chief executive, also said last week in an MSNBC interview that the company’s ride-hailing services in California would stop, at least temporarily, if the order was not changed.
“It’s a fork-in-the-road situation,” said Dan Ives, a managing director at Wedbush Securities who tracks the ride-hailing industry. “These are some of the tough decisions they need to make to save their business model.”
Uber and Lyft, which are based in San Francisco, have long considered their drivers to be contractors. That means that drivers are responsible for their own vehicle and maintenance costs and that Uber and Lyft do not pay for overtime, unemployment insurance or other expenses.
The companies have argued that this freelance model allows drivers to drive only when they want to. But critics have said it places unreasonable financial burdens on drivers and gives Uber and Lyft unfair advantages over businesses that follow employment laws.
Uber and Lyft have strenuously objected to AB 5 and have been fighting its reach. The companies have poured tens of millions of dollars into a ballot measure that would exempt them from the state law. Uber has also made changes to its product, such as showing fares to drivers upfront and allowing them to decline rides without facing penalties, to reinforce their status as independent contractors.
But behind the scenes, officials at Uber and Lyft also began discussing just-in-case options for their California businesses last year, the people with knowledge of the plans said.
At Uber, many of the proposed ideas were code-named with the names of characters from the Mario Bros. video game, like Luigi, the people said. The Washington Post reported earlier on Project Luigi, which included the changes to Uber’s app that give drivers more control over fares.
Another option that policy teams at both of the companies floated was the franchiselike model, the people with knowledge of the plans said.
Under the proposal, Uber and Lyft would invite other businesses to establish ride-hailing fleets using their platforms. That could bolster the companies’ claims that they were simply tech companies that built sophisticated dispatch services and that providing transportation was outside their core business, protecting them from AB 5’s requirements.
At Uber, the effort drew inspiration from the company’s operations in Germany and Spain, where transportation rules have already forced it to work with fleets, Kallman said.
Lyft based its plan on FedEx, which franchises some of its delivery routes to local operators, current and former employees said.
Uber and Lyft employees said the companies did not collaborate or share information about their plans with each other.
A franchiselike business can be challenging. Working with a fleet operator could increase costs because it introduces a third party who needs to be paid, potentially forcing Uber and Lyft to raise fares or reduce their service fees, current and former employees said. The companies would also likely have to surrender some control over driver behavior, leaving them more vulnerable to reputational damage if a driver harassed a passenger or a car was dirty.
Another hurdle is that few fleet operators in California are large enough to absorb Uber’s and Lyft’s business, partly because Uber and Lyft previously disrupted taxis, black cars and similar operations.
For now, the companies have staked their primary hopes on the ballot measure that would exempt them from AB 5, employees and financial analysts said. The initiative, Proposition 22, proposes minimum-wage standards and limited health benefits for drivers. It will appear on California’s ballot in November.
Whatever changes Uber and Lyft make to their businesses to comply with AB 5 will ultimately be expensive, said Ives of Wedbush Securities. He estimated that it would cost Uber $500 million a year and Lyft $200 million a year. Both companies are already unprofitable and have lost much of their ridership during the coronavirus pandemic.
“This legislation could really be a backbreaker,” Ives said.