The fight over turning gig workers into gig employees

The gig economy model powering a number of key tech giants threatens to break down in California, in a battle that may spill out across the country over whether gig workers should be considered employees.

Why it matters: Treating gig companies' workers as employees would guarantee them benefits and other rights they don't necessarily get as independent contractors. But the prospect presents an existential threat to the firms' business models.

What's happening: Uber and Lyft on Thursday backed off threats to suspend ride-hailing services across California after an appeals court stayed an injunction ordering them to reclassify their drivers in the state as employees. The court halted it from taking effect as long as the companies' appeal of the order remains pending.

Yes, but: It's a temporary victory for the companies. The broader court battle still looms, and California is sure to keep the pressure up. The injunction represented the state's latest attempt to enforce its new law codifying stricter requirements for classifying workers as contractors rather than employees.

The big picture: Gig economy companies view themselves as two-sided markets, connecting customers looking for, say, a ride or overnight stay with people selling that service. Labor groups and Democratic officials see them as conventional employers who have figured out a business model that lets them dodge the obligations and liabilities of employing people.

California is the battleground for those two opposing camps, as gig companies in the state look to avoid complying with the new law and increasingly end up in court. It's not just Uber and Lyft:

• San Francisco's district attorney, who sued food delivery company DoorDash over the reclassification law in June, requested a preliminary injunction last week that could similarly force the company to immediately reclassify workers.
• San Diego's city attorney sued grocery delivery company Instacart last year over the same issue.
• Between the lines: The companies' legal battles until now have centered around lawsuits filed by individual drivers over owed wages or expenses, many of which have been forced into arbitration. These classification fights mark a new era.

More significant for the companies is the very real possibility of other states—or even the federal government—following California’s lead.

• Last month, Massachusetts' attorney general filed her own lawsuit against Uber and Lyft to enforce a 2004 state law similar to California's.
• The U.S. House of Representatives earlier this year passed a labor rights bill almost entirely on party lines that included similar provisions to California's law — a messaging exercise indicating national Democratic priorities.
• Meanwhile, both Joe Biden and running mate Kamala Harris have expressed support for California's law (as Donald Trump's campaign pointed out in a Thursday email to press, calling the law an "all-out assault on workers who are just trying to earn money for themselves and their families").

The big question: What would companies like Uber and Lyft do if they exhaust all options to keep drivers as contractors?

• Uber says classifying California drivers as employees would lead to a 25–111% increase in prices and a 23–59% decrease in trips, and that the number active drivers in a quarter would fall from 209,000 to 51,000.
• Under the stay granted Thursday, both companies will have to certify that they do in fact have a plan to comply with reclassifying drivers, though it's unclear whether they'll make those plans public before November.
• They’ve also considered alternative models like franchising their business out to standalone fleets, similar to Uber’s early black car service and its operations in some countries.

What’s next: Uber, Lyft and their peers are headed to the California ballot box in November, pushing Proposition 22, which would let them keep classifying workers as independent contractors while, for the first time, providing them a limited set of benefits.

• The companies have contributed $90 million out of a $110 million total that several firms have unleashed on the ballot campaign.