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App-less in Sacramento? Uber and Lyft Allowed to Postpone California Departure

On August 20, an appeals court in California allowed Uber and Lyft to halt their plans to flee the Golden State, John Galt-style, rather than comply with the state’s AB5 law. The court’s ruling was a relief to the companies and, one suspects, California politicians as well. Both sides are at the awkward stage of having to follow through on threats they previously made—threats that would be as harmful to them as to the other side, not to mention the state and its inhabitants.

While nobody wants to see further economic turmoil right now, there is an argument to be made that the showdown might have been forced after all. It would have at least given a case study of whether laws like AB5 really are practical.

AB5 would require the rideshare companies to classify all of their drivers as employees rather than contractors, as the companies claim. California officials, including Governor Gavin Newsom, say the rideshare companies are being greedy by trying to get around having to contribute to unemployment, pay for overtime, provide health insurance, or any  other responsibilities employers owe their employees.

Uber and Lyft contend that the flexibility inherent in contract work is key to their entire “gig economy” business model and they cannot operate without it. Most of their drivers don’t want to be classified as employees anyway, Uber claimed, since most only drive for 10 or fewer hours a week.

Both rideshare companies have fought AB5 in court throughout the year. A lower court ruling had set Friday as the deadline for them to comply but on August 20 an appeals court granted a stay of that order. Uber and Lyft had previously warned they would be forced to suspend operations completely in California if AB5 was fully enforced. Newsom and others refused to budge.

In all likelihood, one side or the other would have backed down evenually had the court not intervened. Uber and Lyft would rather not have to stop doing business in the largest state in the union. California lawmakers, having assumed that no company can afford not to do business in their state, would rather not have to explain to voters why they forced two of the most popular app-based companies to go away.

If the companies had  stayed and submitted to the state law, we would have seen what being forced to operate like more traditional rideshare companies—you know, taxi cab companies—would have actually done to their businesses and how it would affect consumers.

If the companies had refused to submit to AB5 and suspended operations in the state, we would have had a good economics lesson for progressive lawmakers: Businesses need to be allowed to operate as businesses in order to stay in business.

That day of reckoning may still happen. The issue of whether AB5 be should remain is on the fall ballot in California and the issue will remain active in the courts. We may yet see whether Atlas Shrugs.