The economy continues to show signs of weakness. Jobless claims climbed back above the 1 million mark this week, reversing a downward trend and reminding investors that millions of people are still on the ropes financially. Yet the stock market just kept ignoring those signs of trouble. After a late-day drop Wednesday afternoon, markets rebounded, with the Nasdaq leading the way higher. Gains for the Dow Jones Industrial Average (^DJI 0.01%) and S&P 500 (^GSPC 0.70%) were more modest but still notable.

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Data source: Yahoo! Finance.

For much of the day, investors in ride-hailing specialists Uber (UBER 1.04%) and Lyft (LYFT 1.36%) were bracing for extremely bad news. However, the afternoon brought a pleasant surprise. The two companies still face considerable uncertainty, but the immediate threat of a business-crushing blow is gone at least for a short time. That sent their stocks up 6% to 7%.

The battle over work status

As recently as the early afternoon on the East Coast, it appeared that Uber and Lyft would suspend their operations within the state of California. The strategic decision came as a result of legislation that took effect in the Golden State in January. The new law would force companies like the ride-hailing services to provide the same benefits to the independent contractors on which they rely that full-time employees get. For more than six months, Uber and Lyft continued operations without incident, but a state court judge last week found that the ride-hailing services are indeed subject to the law and must comply with its provisions.

The companies argued that even the independent contractors that the law intends to protect don't want to be treated as employees. Moreover, they've been looking at ways to offer at least some of the benefits that full-time employees would expect from a job while still leaving the service cost-effective for riders.

View of car dashboard from backseat, with driver's hand on wheel and clear sunny day outside.

Image source: Getty Images.

Indeed, many contract workers within California have had similar difficulties in dealing with what they see as an unwanted law. Even companies that have been willing to accommodate their independent contractors have had to jump through big hoops in order to work within the law.

A stay of execution for the ride-sharing industry in California

It now looks as though Lyft and Uber will keep operating in California, however, at least in the short run. A judge in a California state appeals court granted an emergency stay to the two companies, delaying the effective date of the preliminary injunction that would've forced them to categorize their workers as employees.

In all likelihood, the decision will take Uber and Lyft through the end of 2020. Oral arguments aren't even expected to be heard until mid-October, and it's far from certain whether the appellate court will be able to act quickly. With court case backlogs extremely high due to COVID-19-related disruptions, further delays are possible.

The two companies hope that a ballot measure will make all of this moot by then. Proposition 22 would characterize ride-hailing service drivers as independent contractors under California law, effectively amending the prior legislation to carve out Lyft and Uber.

For now, California riders can breathe easier, knowing that they can still get an Uber or Lyft ride if they need it. That was enough to send the stocks of the two tech companies higher on Thursday, but they're still well below where they were before the pandemic hit.