Why California has sued ride-hailing firms Uber and Lyft

California on Tuesday sued ride-share operators Uber and Lyft for "misclassifying" drivers as contractors instead of employees in violation of a state law.

The suit, joined by the state's large municipalities, seeks to require the companies to compensate drivers and pay penalties that could total in hundreds of millions of dollars.

"California has ground rules with rights and protections for workers and their employers," attorney general Xavier Becerra said in a release.

"We intend to make sure that Uber and Lyft play by the rules."

The suit will test a law that took effect in California this year.

The cities of San Francisco, Los Angeles and San Diego joined the state in the complaint.

Officials said the classification requirements would not prevent the ride-hailing operators to offer flexible work arrangements to drivers.

"There is no legal reason why Uber and Lyft can't have a vast pool of employees who decide for themselves when and where they work -- exactly as drivers do now," San Francisco city attorney Dennis Herrera said in a release.

"These companies simply don't want to do it. Uber and Lyft are selling a lie. They are lying to the public and lying to their drivers."

Ride-hailing giant Uber and delivery company Postmates in December challenged the new law that calls for gig-economy freelancers to be considered employees as unconstitutional.

Referendum, court battle

The legislation, known as Assembly Bill 5, means that -- under certain conditions -- independent contractors are classified as employees to be covered under minimum wage and benefit rules.

This would include drivers for Uber, Lyft, Postmates and other internet platforms that use apps to enable people with cars to provide rides or make deliveries to those willing to pay for such services.

Uber and Lyft have each put aside $30 million dollars to organize a referendum that would overturn the law.

Uber said it would challenge the latest court action.

"At a time when California's economy is in crisis with four million people out of work, we need to make it easier, not harder, for people to quickly start earning," Uber said.

"We will contest this action in court, while at the same time pushing to raise the standard of independent work for drivers in California, including with guaranteed minimum earnings and new benefits."

In its response, Lyft did not address the lawsuit directly but said it plans to work with state and city leaders to help the state's "innovation economy" create good jobs.

A website devoted to the ballot measure argued that app-based food and medicine delivery and ridesharing are providing essential services to people hunkering down at home to avoid the deadly coronavirus.

Drivers have been divided between those who want the same security as employees and those who want the flexibility of being able to choose the hours they work.