Uber Technologies Inc. and Lyft Inc. pulled back from a threat to suspend operations in California after an appeals court granted their request to halt an order that would have forced the two ride-hailing companies to classify drivers as employees in their home state.
The California appeals court has granted the request by both Uber (UBER) and Lyft for a further stay, so that their rideshare operations can continue uninterrupted, for now. The decision blocked an injunction order to treat drivers as employees instead of independent contractors, which would have otherwise come into effect from Thursday midnight.
The appeals court has now put the order under review to study Uber’s and Lyft’s (LYFT) appeal with oral arguments in the case scheduled for Oct. 13.
“Thanks to the tens of thousands of drivers, riders, and public officials who urged California to keep rideshare available for so many people who depend on it,” Lyft said in a statement.
Ahead of the appeals court decision, Lyft and Uber had threatened to seize operations in California if their appeal would have been rejected saying that reclassifying their drivers as employees, rather than independent contractors would involve an overhaul of their entire business model. Wedbush analysts estimate that reclassification of current drivers as employees would increase labor costs by 30%.
“We don’t want to suspend operations,” Lyft said before the appeals court decision. “We are going to keep up the fight for a benefits model that works for all drivers and our riders. We’ve spent hundreds of hours meeting with policymakers and labor leaders to craft an alternative proposal for drivers that includes a minimum earnings guarantee, mileage reimbursement, a health care subsidy, and occupational accident insurance, without the negative consequences.”
Earlier this month, the Superior Court of California granted a preliminary injunction motion filed by the state, to force Uber and Lyft to reclassify drivers as employees in California.
Meanwhile, Lyft has also initiated a ballot initiative on Nov. 22 for California residents to cast their vote on their proposal model for drivers.
Shares in Lyft have dived some 33% so far this year as stay-at-home orders curtailed demand for its ride-sharing services. Looking ahead, the $42.75 average price target implies 48% upside potential in the shares in the coming 12 months.
Wedbush analyst Daniel Ives said that the appeals court decision “temporarily removes a major black cloud for ridesharing names” and delays the battle into Oct./Nov.
“Lyft is focused on the ballot initiative above all else, and while not necessarily the final say, the voice of California residents would go a long way towards enacting the middle-ground approach Lyft is vying for significantly harder to overturn,” Ives wrote in a note to investors. “In this game of high stakes poker we believe this is a smart move by Lyft with Uber and the court ruling was a major victory lap for both players.”
Ives added that California represented about 16% of total rides for Lyft in 2Q, which is down from the more “typical” 20% as demand in California remains more depressed than Lyft’s average.
The analyst has a Buy rating on the stock with a $37 price target. The rest of the Street has a cautiously optimistic outlook on the stock with 15 analysts recommending to buy the stock, while 8 say hold the stock, adding up to a Moderate Buy consensus. (See Lyft stock analysis on TipRanks).
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